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Windfall taxing big oil: how to make the gas crisis worse

Election crowd pleasing = higher pump prices?

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Simply put (and the real theory has a number of caveats) there's a general idea of a natural rate of profits. This is risk adjusted though, so that people in riskier ventures do make more money until they don't. If people are making more than this (so called "excess profits") then all those other greedy capitalists out there will see this, after a time, at least. So they'll invest more of their own money in that sector, making that extra cash. This will, again in time, increase the supply of whatever it was making that extra, and thus bring prices down and profits back to that natural level. Writing here for a technical site the most obvious example would be the PC business: there are so many players now that it's not really where you want to be to make those big profits - while it most certainly was way back when in the days of only a few box makers.

So theory (and that theory has been around a long time, Adam Smith remarked upon it when he published in 1776) tells us that excess profits attract the competition that wipes them out... and do so by lowering the prices of those things which were in short supply. Which is, I think, exactly what we all want to happen, no? Let's make gas cheap again! So confiscating those extra profits will mean that first, no one making them has the money left to look for more and, secondly, no one is going to dive into the industry if they think that they won't be allowed to keep the profits they might make.

So, umm, a windfall tax on profits means that, umm, gas prices will stay higher in the future than they would have been without the tax. Which, if I've understood this thing properly, isn't in fact what the general public is baying out for. (Please note that I am indeed leaving out the Green arguments about fossil fuels: I don't think they've got much to do with these cries for higher profit taxes anyway.)

Now the letters page of The Guardian might not be all that well known over the Pond, just think of it as a home for all those ideas too stupid to make it into The Nation or Prospect. Like this one. Yes, it is (to the practised English eye at least) the usual bunch of nutters calling for that, as I argue above, entirely silly idea of a windfall tax on the energy companies. I'm not surprised to see it there, I'm not surprised at the level of intellectual effort that has been avoided by their not getting to grips with the realities of markets.

However, I am in fact rather surprised by this from Obama:

"Repeating his call for a windfall profits tax on companies like Exxon-Mobil, which he singled out in his speech on Monday, Mr. Obama said he would use part of the tax to provide consumers with an 'emergency energy rebate' of $1,000 per family."

I know the man is more intelligent than I am (I'm not going to be offered a Chicago Chair, not in this lifetime) so why is he offering something so blindingly stupid? Yes, I know, politics is all about pandering to the prejudices of the populace, but really, this is going much too far. As I said here earlier, both parts of the plan are silly and I had hoped that he had been misquoted:

"But rebates on utility bills? That's nonsense: what we've now got is a large and complex (and expensive don't forget) system whereby we discourage people from using energy by taxing it and then encourage them to use energy by subsidising them to do so. Quite insane."

Apparently not: something of a pity of course. As a foreigner who gets elected in the US is nothing to do with me but I have to admit that I wasn't exactly against an Obama victory.

Having said that these plans, whether they are being proposed by British twits or an American Presidential candidate, are silly, I'm left with only one important question: who are the fools here?

Is it that those politicians, with their groups of extremely expensive and presumably highly intelligent advisors, are not intelligent enough to see that their plans are entirely counter-productive? Or is it that they know they are, but think that we the voters are too stupid to understand it ourselves? ®

Tim Worstall knows more about rare metals than most might think wise, and writes for himself at timworstall.com, and for The Business, among others. He is a Fellow of the Adam Smith Institute.

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