NCPA - National Center for Policy Analysis


October 31, 2005

With profits on track to exceed a record $80 billion this year, Sen. Hillary Clinton wants to slap a $20 billion-a-year tax on America's oil companies and reinvest it "in a better energy future."

According to Investor's Business Daily (IBD), such a tax would ruin U.S. oil markets -- forcing companies to curb exploration, cutting into supply and driving prices up, not down. In short, it's a recipe for a '70s-style energy disaster. Consider:

  • After decades of subsidies and tax credits for solar energy and wind power, they still supply less than 3 percent of our energy.
  • During the 1970s, we taxed windfall profits, controlled imports and capped prices on domestically produced energy which all contributed to the biggest run-up in energy prices in the nation's history.
  • Even as late as 1980, some sought draconian new taxes on oil company profits; fortunately, President Reagan dismantled what remained of price and output controls, actively encouraged oil companies to produce more and the result was ample oil, lower prices and the end of '70s-era inflation.

As energy expert Daniel Yergin noted, the oil business is governed by the "law of long lead times." It takes years for changes in prices and demand to translate into more supply. When prices are high, oil companies bank their profits and explore for more oil. In lean times, they cut back.

Just six years ago, the oil industry was hit hard when prices suddenly and surprisingly plunged to $10 a barrel. Many companies reported losses. No one called then for oil company subsidies; why punish them now that they are back in the black?

Energy prices are self-correcting, if Congress gets out of the way and lets markets work, says IBD.

Source: Editorial, "Back to the '70s?" Investor's Business Daily, October 26, 2005.


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