Oil and Gas Windfall Profits Tax

In an effort for lawmakers to get reelected Bush and the Republican congress seem to be kowtowing to Democratic demagoguery by looking at an oil windfall profits tax and looking into charges of price gouging. Once again, the economic ignorance on display by politicians is astounding. These measures will cause shortages and lines for gas. The real problem is we don't have the refining capacity to keep up with demand and the oil companies have to charge more because of the scarcity of refined gas. Without the pricing signals of the market, we will all be a party to waiting in line for gas.

As the WSJ editorial board points out today, politicians could go a long way to alleviating some of the problem.

Beyond the ethanol fiasco, the oil markets are once again providing a tutorial in supply and demand in a global commodity market. Strong economic growth from the U.S. to China is driving up demand, even as political uncertainty in oil-producing countries such as Venezuela and Iran is leading to supply worries and some speculation. The Federal Reserve has also played a role by flooding the market with dollar liquidity that has produced higher prices across all commodity markets.

Congress could help a little in the short term if it asked the Bush Administration to end the 54-cent-a-gallon tariff on imported ethanol. That would especially help drivers in coastal states suffering from spot shortages. Naturally, however, the domestic ethanol industry is threatening retribution against any Member who suggests such a thing; so much for industry gratitude.

The GOP might also refocus its attention on legislation the House passed last year to reduce the number of "boutique fuels" to six from 17. These special gasoline blends are required in different parts of the country in the name of reducing pollution. Their primary effect, however, is to raise gas prices and make it difficult to move gas around the country during shortfalls. The Environmental Protection Agency could also ease environmental rules for those parts of the country suffering shortages.

Meanwhile, we're also hearing more about the country's reliance on "foreign oil." But if Congress wants to ease that dependence, it will have to open more of the U.S. up to oil and gas exploration. Had the Senate opened up the Arctic National Wildlife Refuge to exploration when the Bush Administration requested it in 2001, some of this oil might now be joining American supplies. The same goes for natural gas drilling along the Outer Continental Shelf. Yet the very Democrats who deplore foreign supplies and shout about high prices vote again and again to block domestic oil exploration.

The last time the U.S. had a gasoline panic, in the wake of Katrina, some quick Bush Administration action and private ingenuity eased the problem in record time. Gasoline prices that had climbed above $3 a gallon quickly settled back closer to $2. Markets will make the same adjustments today if they are allowed to send price signals without Congress getting in the way. Republicans can blame business all they want for high prices, but sounding like liberal Democrats won't save them in November.

Let the markets react. With the increase in gas prices, more people will switch to more fuel economy cars, oil companies will invest in more exploration like in the oil sands of Canada, meaning more oil will be supplied while less is demanded. Longer term solutions or alternative energies will emerge if oil prices keep rising. But, lawmakers discouraging profits in energy production will only hamper efforts.

Another elephant in the room is the increasing wackiness of Venezuelan President Chavez.

Venezuela's Congress, made up entirely of Mr. Chávez's allies, is considering sharply raising taxes and royalties on foreign companies' operations in the Orinoco River basin, the country's richest oil deposit. Major oil companies like Exxon Mobil Corp. and ConocoPhillips of the U.S. and Total SA of France have invested billions of dollars there to turn the basin's characteristically tar-like oil into some 600,000 barrels a day of lighter, synthetic crude.

Mr. Chávez, a left-wing populist who favors greater state control of the economy, also wants to seize majority control of the four Orinoco projects and force private companies who run them to accept a minority stake, according to a top executive at state-run oil company Petróleos de Venezuela SA, known as PdVSA.

The moves would up the ante in Mr. Chávez's long-running battle with foreign oil companies, which he accuses of making outsize profits amid high oil prices at the expense of a poor nation. The stakes are high because Venezuela, the world's fifth-largest oil exporter, holds the world's biggest oil reserves outside the Middle East and is the third-biggest supplier of crude to the U.S.

The Orinoco plan mirrors the terms of a recent takeover by PdVSA of some 32 smaller conventional oil-production projects previously run by private companies. That effort culminated in the seizure of two fields run by Total and Italy's ENI SpA. Yesterday, Oil Minister Rafael Ramirez said Venezuela has no plans to compensate Total and ENI for the lost fields.

If the latest initiative succeeds, it would eliminate the country's remaining privately managed oil fields.

"We would like all of the [Orinoco] associations to migrate to mixed companies," said Eulogio del Pino, the executive in charge of PdVSA's relations with private companies, in an interview published Saturday in Venezuelan newspaper El Universal. Mixed company is the government's term for an enterprise in which it owns 51%.

Under terms of the government's plan, oil royalties in the Orinoco region also would rise to 30% from the current 16.7% and taxes would jump to 50% from 34%. Higher royalties translate into less revenue for private companies and taxes take a bite out of their remaining profits.

Chavez is going to suck out any profitability for the oil companies in that part of the world and Venezuela will be sitting on tough to extract oil with no partners with the ability to extract it, which, of course, leads to a more reduced supply.

I'm sure we're going to have very high gas prices over the months to come, but the market will eventually alleviate the demand and supply pressures and offer alternative solutions. Certainly government taxes and tariffs are not going to alleviate any of the price signals.