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Bob Murphy on oil prices and scapegoats

A few days ago, Bob Murphy asked his readers at Crash Landing what they’d like to see more of on the blag. I responded with: more clear, simple, step-by-step examples of how markets work and how governmental solutions to perceived market problems (or problems created by prior State interference) lead to disruptions in the market, and how the government fixes for those problems lead to yet more problems, etc. I’m a nearly exclusively left-brained thinker, which means I think in series and not in parallel, so I like very clearly stated, step-by-step explanations of how cause leads to effect leads to another effect leads to another effect… It’s just more clear, to me.

At the end of my comment, I said this might apply more to opinion columns than to blag posts, and Bob agreed. Well, he gave me what I wanted in his latest TownHall.com column. I’m pretty sure he was thinking of me personally when he wrote it. It is about how economically ignorant Americans and their trusted leaders are wrong in their assignations of blame to the various scapegoats in the national debate on oil prices. Here was the money quote, for me:

Finally we come to the easiest scapegoat, domestic oil companies. Politicians have been threatening to impose a windfall profits tax, and Maxine Waters infamously suggested outright nationalization at a recent hearing. As with speculators, the theory here is that oil companies can set whatever price they want, and the hapless motorist has no choice but to pony up at the pump. Only by taking away those excess profits can justice be restored, say our politicians and pundits.

Even on its face, this strategy is absurd. If the oil companies really can decide, “Well, we’d like to make $45 billion in profits this year, so let’s set the price of a barrel at $130,” then the last thing the government should do is tax away a large percentage of those profits. Why wouldn’t the fat cat companies respond by jacking up prices even more to recover their profit objective?

In reality, the price of oil is set on the world market. Even though U.S. oil companies are huge, they can’t unilaterally set prices. If the federal government slaps on a windfall profits tax, it will only apply to domestic producers. Their after-tax returns will drop, and they will cut back on investment in future output. With reduced supplies, the world oil price will go up, not down. What’s even crazier, Americans would become more reliant on foreign oil producers, as these state-run companies would have a competitive advantage once U.S.-based firms are slapped with a new tax.

False assumption (oil companies set prices at whatever they want to earn whatever profit they want) — proposed State interference (profit tax) — oil companies simply increase prices more to meet their target profit (if they really are omnipotent) — consumer suffers more, not less. Also, complementarily or alternatively: Higher taxes on American companies — lower revenue for them but not for foreign oil companies — cutbacks in investment and R&D — lower future output by American companies — lower global oil production — lower supply, and a larger percentage of which comes from foreign producers — higher prices and greater dependence by Americans on foreign oil companies instead of American ones.

Politicians really are stupid and so are the people who look to them for answers. It is willfully ignorant to think politicians and their government programs to “help” do anything of the sort for the average person.