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The Anti-Energy Congress

February 2, 2007

Tags Free MarketsInterventionismOther Schools of Thought

In response to the government-created "energy crises" that we have experienced in the past few years (more on the their "crisis" nature later), Congress, the courts, and the executive branch of the US government are united in their belief that energy futures must be administered futures. Whatever pretense the Republican administration has given to the free market in energy has disappeared into a storm of subsidies and rhetoric. Indeed, it seems that the real race is to see which political party can offer the most statist brand of energy.

As part of its 100-hour blitz, the new Democrat-controlled Congress has announced that it wants to seek lower fuel prices by forcing up fuel prices. That is not a misprint. Congress seeks to saddle the oil industry with $15 billion in new taxes, fees, and other punitive measures; at the same time, members of Congress tell us that we as consumers "deserve" lower gasoline prices. Here is how this forcing-higher-prices-to-force-lower-prices nonsense works:

  • Congress forces up royalties for oil and gas that is extracted from government-owned lands;

  • Congress imposes a $9 a barrel "resource conservation" fee on oil, and a $1.25 per million BTU fee on natural gas, for production in the Gulf as long as market prices remain at more than $34.73 a barrel for oil and $4.34 per million BTU for gas;

  • Congress increases taxes on energy companies.

As Charles Rangel, the new chairman of the House Ways and Means Committee, says, "We are rolling back subsidies for Big Oil to invest in alternative energy and find solutions to our nation's energy problem." And while the new Speaker of the House Nancy Pelosi promises that all of these new revenues will go into a fund to promote alternative energy, so far the 100 hours has not produced any such legislation. Perhaps we should hope that the money is spent elsewhere.

Before going into what Congress sees as our "energy futures," perhaps it might do well to examine the upcoming legislation to gain a sense of the real damage that it will do. Once upon a time, Congress was in bed with the oil lobby, but now that Congress seeks to give us energy "alternatives," one wishes that someone would warm up those bed sheets again.

The issue of royalties is one that free-market advocates should love. First, and most important, the government should not be in the business of renting land that oil companies should own. Ownership changes the equation for economic calculation, and one can be sure that oil companies will behave differently with land they own, as opposed to renting from the state, something I pointed out in a piece on the Arctic National Wildlife Reserve (ANWR) five years ago.

Second, the oil companies are not breaking any contracts; the government wants to rewrite them as a punitive measure:

Lawmakers of both parties have expressed anger at the refusal of oil and gas companies to rework the 1998–99 leases that were issued without a provision that required royalty payments if oil and gas prices soared — as they have in recent years.

Congressional auditors have said the government has already lost some $2 billion in royalties and could lose as much as $10 billion over the life of the leases because of the mistake.

The bill "will address the broken royalties system," said Rep. Nick Rahall, D-W.Va., chairman of the Natural Resources Committee, adding that it will "put these (lost royalty) payments right back where they belong — in the federal Treasury."

One hardly can blame oil companies for not wanting to rework contracts that now work in their favor, especially given the volatility of oil prices, which can go down as easily as they go up. Furthermore, if I have to choose between increases in government "revenue" versus increases in profitability by private firms, I will choose the profitability every time, as it creates the more positive results.

The idea, however, that the government is "losing" money it never had and for which it never contracted is not exactly a loss. It is like my saying that because I have not re-negotiated downward my contract with my employer, I am causing Frostburg State University to "lose money." Such a contention is downright silly.

The "resource conservation fee" is another misnomer. Instead, the purpose is to discourage oil companies from pulling oil out of the ground — or to purchase it from abroad, since the US government has never found a very good way to tax people in other countries for the oil they produce. (The USA simply invades some of those countries, which I suppose one could assume is a form of a tax. An invasion certainly could be construed as a punitive measure, and this Congress seems to want to punish anyone who engages in the oil business.)

Granted, such a "fee" would make it less feasible for oil companies to invest in domestic wells, putting, in effect, an onerous tax of at least 20 percent at the current prices. Furthermore, the idea that Congress should discourage the use of fossil fuels in order to subsidize the more expensive (and less efficient) alcohol fuels is to turn economic logic on its head, although I cannot recall any time that Congress has engaged in economic logic in recent years, so while I am disappointed, I am hardly  shocked at this latest outburst of economic illiteracy.

Furthermore, the idea of punishing oil companies because they were profitable is further to turn economic logic on its head. As I have pointed out elsewhere, profits are not the cause of high prices. Profits are made, as Murray Rothbard has noted, because of temporarily under-priced factors of production. In the case of oil and gasoline, the price of the products went up quickly — more quickly than did the prices oil companies paid for various factors, which meant the companies earned large — but very temporary — profits.

If Congress is trying to make oil companies unprofitable, that will mean less gasoline (and higher prices) in the future. Furthermore, the grandiose energy schemes that always seem to come from Washington do not and cannot succeed. Socialism cannot outperform private enterprise no matter what kind of rhetoric politicians might give us.

Right now, the new Congress cannot do anything wrong, at least politically speaking. Yet, the blizzard of anti-energy legislation that is coming from this lawmaking body is ominous and will do real economic damage if the bills become law. Furthermore, with some in Congress calling for price-gouging laws, one can only hope that we do not see a repeat of the 1970s energy madness of shortages, long lines, and chaos in the markets.

By discouraging the production and use of oil, Congress and its allies insist that they are doing us a favor. They believe that ethanol and other "green" energy futures are the way to go, yet the only way that we can pay for them is to pay more taxes to support the heavy subsidies these industries require. Thus, we are left with the prospect of Congress forcing us to use less fossil-based fuels (which are cost-effective and efficient) and replace those fuels with government-approved fuels, which are prohibitively expensive and inefficient. And, Congress in the end tells us that such an arrangement is in our economic interest.

 


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