Reacting to record third quarter energy industry profits, the senate called executives from five major oil companies to testify during a joint meeting of the Senate last week. The Commerce, Science, and Transportation Committee and the Senate Energy and Natural Resources Committee came together to look at what could be done about what some called obscene profits. Senators mulled a number of options including passage of a new federal price-gouging law, a windfall profits tax, and a reworking of this year’s energy bill to remove tax incentives to oil production companies. While the executives valiantly defended their behavior citing supply/demand pressures and the need to invest the additional profits in new exploration in order to relieve the pressure, liberal Senators went forward with Senate Bill S.1631 which calls for a 50 percent tax on profits earned on oil over $40 a barrel. Perhaps the Senators have forgotten the lessons of supply and demand offered by Adam Smith, in “The Wealth of Nations”, 1776: “…for if a producer made excessive profits, others would enter the same field, and the mutual competition would keep prices and profits within fair limits.” As I’ve pointed out in earlier blog entries: Our current oil supply/demand imbalance is mainly due to increased worldwide demand versus production. So long as that imbalance continues, oil and gasoline prices will remain high. Faced with the obvious need to increase investment in order to increase production industry executives are right to seek more profit…it is needed. “Since 2002, our company has invested $32 billion in our business. During that same time period, our earnings were $32 billion. In other words, we invested what we earned,” said Chevron Corp. CEO David O’Reilly.
A large share of the costs of drilling for new oil and gas in the US is born by independent drillers, most of whom are funded by individual investors who join together to purchase a working interest in individual drilling projects. Personally, I’ve observed a significant increase of interest on the part of individual investors considering the idea of participating in domestic oil and gas drilling projects. What could possibly cause this spike in interest if not the opportunity to make greater profits? Supply and demand is alive and well…and will remain so, at least so long as Congress gives it the opportunity to work itself out.
