Economic Illiteracy in the Capitol

According to the Albuquerque Journal today (subscription) New Mexico’s two senators are not in favor of implementing a “windfall” profits tax on oil companies. This is good news. Our senators are not joining the illiteracy stampede.
I nonetheless sent them both a letter today. Here it is:
Dear Senator
I encourage you not to make matters worse for oil and gasoline consumers by imposing a “windfall” profits tax on oil production. I am a consumer of gasoline; and I am as unhappy as anyone else about higher prices. But a windfall profits tax would make me unhappier, since it would insure that oil and gasoline prices would be higher than without such a tax. The reason: it would undermine the roll of profits in that sector of our market economy.
Seeking profits (and avoiding losses) is what drives all sectors of our prosperous economy; and it is why we are prosperous. When we see rising profits we can be sure that more resources will be devoted to the profit generating activity. It may come about a bit slower in the case of oil and gasoline (compared, say, to Microsoft) because of the difficulties of bringing new wells into production or of building and expanding refineries. The high prices associated with high profits should be viewed as our friend. This friend encourages economizing on the part of buyers and more production on the part of sellers. That is just what we want to reduce the scarcity of oil and gasoline and what we cannot accomplish with windfall profits taxes and price gouging laws. Unfortunately we seem to forget how bad the results were when government last felt it had to do something about prices. The roll of price in making good things happen in a market economy seems to be universally misunderstood by the public; and I am always amazed by the vilification of profits.
Profits have recently been analyzed and compared by my good friends at the Tax Foundation. They have found that oil companies’ profits may be a little higher than their long-term average; but those profits are not unreasonable compared to other industries. They have a good point that helps put recent energy trends in perspective; but that point tends to deflect attention from the crucial roll of profits (and prices) in guiding the behavior of buyers and sellers in energy (or any other) markets.
There is a change in energy policy that would be helpful. It seems to me that you could strike a better balance between benefits and costs when it comes to regulation. Why not allow the building of new refineries? Why not allow transportation of gasoline between geographic areas of the country? Why not relax restrictions on drilling and exploration for oil? All of these actions would reduce the costs and risks for producers, benefiting us all.
Harry Messenheimer, Ph.D.
President and Co-Founder, Rio Grande Foundation