Record Profits for Oil Companies...What Does it Mean?

With oil companies earning record profits, there have been calls for a "windfall profits" tax to be placed on them by the government. From an economic point of view, this totally ignores the meaning of profits and losses.

Oil company profits are a signal...If the marketplace could speak, it would say:

• "Increase the supply of oil!"
• "Remove your resources from losing ventures and invest them here!"
• "This is where the demand is!"

If oil companies were experiencing losses, the marketplace would say something different:

• "Decrease your output of oil."
• "Your customers are well supplied."
• "Apply your resources elsewhere, where the demand is higher."

It's actually a beautiful setup...and it's all natural...central planners need not apply.

So record profits are a signal. However, instead of increasing supplies of oil, I've read (over and over) how investment has to take place in alternative fuels.

But does it?

Possibly...if alternative fuels are something people desire, then entrepreneurs would be wise to test the waters. However, like everything else, such an investment is risky. And without a doubt, private entrepreneurs, and not politicians, need to make the decision as to whether or not the risk is worth it.

Do alternative fuels have a future? Only the market can tell us...and it will do so with profits and losses.

But what about oil? After all, oil companies are the ones earning record profits. We know this is where the demand exists. 

So isn't it silly to talk of an arbitrary "windfall profits" tax? Does it make sense to hinder those who are hearing cries from their customers (via record profits) that supplies need to be increased? Instead, the government needs to get out of the way and let the marketplace operate. Profits and Losses are signals...It's much wiser to listen to them, then to try to fight them.