In Defense of "Gouging"

Big oil companies like Exxon and Shell have reaped enormous profits over the past few quarters in response to higher gas prices, prompting many in Washington (particularly Democrats led by Senator Clinton, but some Republicans too) to call for a "windfall profits tax" on firms making over what they perceive to be a "fair" amount.

This is a great move politically; unfortunately it makes no sense economically.

Profits are the rewards that firms receive for taking risks. Tax those profits, and those firms will have less incentive to pull more oil out of the ground, making oil prices rise even further. Is this what we want?

Many on the left claim that oil companies are charging high prices for gas simply because they're greedy. Greedy they may be -- who isn't? But the fact of the matter is these firms have no control over the price of gasoline. Over the past 3 weeks, gas has dropped about 50 cents or so. Why is this? Are they just all of a sudden "less greedy" now than they were last month? How about in January of 1999, the month I started driving, when oil was at $12 per barrel, and 88 cents at the pump. Were the now-greedy oil firms just deciding to "be nice" back then? In September, after the hurricane cut refining capacity, gas skyrocketed to $4. Next September, assuming there's no hurricane, will firms raise the price to $4 again? NO, because there'll be too much oil flowing around relative to demand. They can try to raise the price, but it won't work.

Two simple words decide the prices we pay at the pump: supply and demand. High prices and high profits are what make companies drill more, find more supplies, and, ultimately, give us more gas, which lowers prices. Unfortunately, thanks to government regulations, the last time a refinery was built in this country was 1976, and we're not allowed to drill in Alaska. Thanks Sierra Club. Thanks John Kerry. Thanks for simultaneously preventing companies from increasing output while at the same time bashing high prices that are the very result of those restrictions. Thanks for doing what your party has done best since the Great Depression: passing illogical legislation that hurts the people it intends to help.

"The first lesson of economics is scarcity: there is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics." - Thomas Sowell