Today Exxon-Mobil reported quarterly PROFIT of $15 billion USD, a rise of $4 billion over their last record, $11 billion, recorded last quarter.
Obama proposes a windfall profit tax.
Is this the right solution ? Follow me after the fold...
A windfall profit tax as a mechanism to contain and constrain retail pricing of gasoline is a flawed approach. It has merit in that yes, this would produce an immediate revenue stream which an Obama administration would most likely direct into funding research and development of our green energy infrastructure.
Thats a great plus, but it is not the core intent of the windfall profit tax. If the core intent is to protect consumers from volatile prices, and gas prices marching up and down in lockstep, Oil Co to Oil Co, gas station to gas station, a windfall profit tax is not going to do the job.
Why ? Without specific controls being put in place on prices (unlikely as this initiative is focused on top line reported profit, not product pricing per gallon), a windfall profit tax will simply be factored into the product cost of each gallon by the Oil Cos. Meaning, each gallon will be marked up to cover this cost and preserve the original profit margin.
As a result, company profits will not be affected, instead this becomes a hidden tax on the consumer. Now some in here may think this is a good thing, and that argument is beyond the scope of what I want to cover here (its tantamount to increasing sales taxes at the gas pump and funneling the revenue into alternative fuels). However useful the revenue stream, again, this does not protect the consumer from rising prices - indeed, a windfall profit tax would likely do the opposite - it would increase the price of gasoline.
So we have established that the windfall profit tax concept has merit, but not for the reasons the Obama campaign has been stating. It would provide a revenue stream to fund green energy, it would likely push up the price of gasoline, and indirectly, it would likely reduce demand for gasoline conversely.
To get at the originally stated objective by the Obama campaign - give relief to consumers from exorbitant gas prices, a different approach must be taken. One of the primary causes of high gas prices is collusion in the Oil industry. Why does the price of gas move up and down in lockstep supplier to supplier, gas station to gas station ? Why does the price at the pump go up immediately that there is news that the price of unrefined crude oil is going up on the commodities market ? (considering it takes that crude several weeks at a minimum to reach a gas pump) ?
Why when a barrel of gas drops markedly in price does it take a week or so for the price of gasoline at the pump to react ? What we see here is speculation, sticky pricing, and a lack of competition or unwillingness for "rival" Oil companies to compete competively on the open market.
Why is this the case ? We have seen a substantial consolidation of Oil companies over the past several decades, and a significant increase in trading partnerships between supposed competitors. Without formerly forming a Western OPEC, Western Oil companies exhibit the telling behaviors of an industry rife with anti-competitive and anti-consumer behavior.
Case in point - when Hurricane Ike hit several weeks ago prices of gasoline at several stations in Kansas jumped up over $1 / gallon overnight. The Governor and Attorney General probed this incredible increase in pricing as potential price gouging and found two things - 1. Almost all of the gasoline sold in Kansas that month was sourced from crude oil that does not come from the Gulk of Mexico or refined in the Gulf Coast, hence no direct connection to the impact of Ike. 2. Within hours of the price gouging investigation becoming public knowledge, prices dropped on average by 60c / gallon at the pump.
Clearly, price gouging occurred in Kansas. This was rampant, and consistent across many gas stations operated by all the large Oil Cos. Again, direct evidence of collusion and anti-competitive behavior.
So we have established anti-competitive behavior is occurring, we have established that the industry has consolidated and this is further reducing competitive pressure. The only solution I see it is to subject this industry to a full review by an empowered Monopolies & Mergers Commission. Specifically all recent mergers should be reconsidered. Trade parternships / joint ventures between supposed rivals should be audited carefully. Price movement and anti-competitive price fixing should be tracked and punitively prosecuted.
I strongly believe we need to break up Big Oil into smaller competitive units, this industry needs to compete against each other to deliver products at a competive price to consumers.