How to help gas prices? Sim­ply in­crease sup­ply

The Washington Times Weekly - - Commentary - ED FEUL­NER

With fill-ups rou­tinely cost­ing $60 or more, cost-con­scious driv­ers nat­u­rally look for some­one to blame. And just as nat­u­rally, politi­cians are happy to blame oth­ers.

En­ter “Big Oil,” the dem­a­gogues’ fa­vorite vil­lain. Gas prices soar­ing? It’s be­cause oil com­pa­nies want “ex­cess prof­its,” as Barack Obama puts it. Right? Wrong. The truth is more com­pli­cated.

Let’s look to Cal­i­for­nia, driv­ing cap­i­tal of the world. Of­fi­cials there watch gas prices care­fully. Dur­ing March and April, a state anal­y­sis found “dis­tri­bu­tion costs, mar­ket­ing costs and prof­its” made up about 10 cents of the cost of a gal­lon of gaso­line, which ranged from $3.46 to $3.89. No­tice that dime is less than 3 per­cent of the to­tal re­tail cost, and prof­its ac­count for only part of it. So those “ex­cess prof­its” are ac­tu­ally well be­low 3 per­cent of re­tail costs.

Of course, that’s lit­tle com­fort to tapped-out driv­ers. And the big oil com­pa­nies are cer­tainly mak­ing big money — Exxon Mo­bil alone earned $40.6 bil­lion last year. But such prof­its fol­low nat­u­rally when a com­pany sells a prod­uct so many peo­ple want to buy. Some re­cent his­tory of­fers us a bit of per­spec­tive.

In 1998, a re­ces­sion in Asia cre­ated an oil glut. Prices plunged to his­toric lows (near $10 a bar­rel), and Amer­i­can driv­ers reaped the ben­e­fits, with gas dip­ping be­low $1 per gal­lon. So how did Exxon fare in those days of low prices?

Ac­cord­ing to Forbes mag­a­zine, Exxon earned more in prof­its than any other Amer­i­can com­pany in 1998. Sales in­creased 3 per­cent over 1997 and prof­its jumped 12.6 per­cent, to $8.4 bil­lion. Again, re­mem­ber: Oil was re­mark­ably cheap that year, yet Exxon earned dou­ble-digit prof­its. Few com­plained then.

The les­son is sim­ple: When a com­pany sells a prod­uct peo­ple want, it tends to make money, in good times and bad. For years, oil has re­mained a prod­uct Amer­i­cans want — and to­day’s high prices have done lit­tle to change that.

(Full dis­clo­sure: Yes, “Big Oil” gave to the Her­itage Foun­da­tion last year. Their com­bined do­na­tions ac­counted for one-quar­ter of 1 per­cent of our rev­enues.)

It’s also worth not­ing that oil com­pa­nies are prob­a­bly the most in­ves­ti­gated com­pa­nies in Amer­ica. Ev­ery few years, ou­traged leg­is­la­tors de­mand that the Fed­eral Trade Com­mis­sion de­ter­mine whether oil com­pa­nies are col­lud­ing to in­flate prices. Re­peat­edly, fed­eral reg­u­la­tors find that they aren’t.

A few months ago, the FTC said this about high gas prices: “All of the in­crease can be at­trib­uted to in­creased crude oil costs, be­cause gaso­line in­ven­to­ries are as am­ple as they have been for sev­eral years, gaso­line con­sump­tion is de­clin­ing to a near-record ex­tent, and re­fin­ing mar­gins — the dif­fer­ence be­tween the cost of crude oil and the whole­sale price of gaso­line — have fallen.”

So who is mak­ing the big money? The coun­tries that pro­duce crude oil. Crude rep­re­sents more than half of the cost of each gal­lon of gaso­line sold. Fed­eral, state and lo­cal taxes rep­re­sent an­other fifth.

Yet some in­sist we pun­ish “Big Oil.” Dur­ing one pres­i­den­tial de­bate, Hil­lary Clin­ton an­nounced “the oil com­pa­nies re­ported the high­est prof­its in the his­tory of the world. I want to take those prof­its, and I want to put them into a strate­gic en­ergy fund.”

But con­fis­cat­ing oil com­pany prof­its is a lousy idea. Prof­its are what keep them in busi­ness. It al­lows them to in­vest in re­fin­ing and de­liv­ery sys­tems, and search for new de­posits of pe­tro­leum.

Prof­its fuel our cap­i­tal­ist sys­tem as surely as pe­tro­leum fu­els our na­tional econ­omy. Plus, “Big Oil” re­turns bil­lions to stock­hold­ers through div­i­dends, and mil­lions of Amer­i­cans own its stock through their mu­tual funds and 401(k)s.

The best way to cut prices in the long run would be to in­crease sup­plies. Pol­i­cy­mak­ers could help do so if they would al­low drilling off-shore and in a tiny sec­tion of Alaska‘s bar­ren Arc­tic Na­tional Wildlife Refuge.

It makes no sense to keep so much do­mes­tic oil off-lim­its, es­pe­cially with prices climb­ing. As long as we do it, we’ll pay more than we need to for each gal­lon of gaso­line and keep send­ing big prof­its over­seas. Let’s stop stalling — and start drilling.

Ed Feul­ner is pres­i­dent of the Her­itage Foun­da­tion.

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