I don't know about you, but I think we've come a long way since then and it's all for the better. On to the point at hand, there seems to be a serious crisis with these enormous profits being announced by the larger oil companies. These so-called "windfall profits" have brought about accusations that the conglomerates are unfairly hiking prices and reaping the benefits on the backs of the hurricane victims. Now there's a bill (S. 1631) in front of the Senate introduced by Sen. Byron Dorgan (D-ND) that would impose a temporary tax on these windfall profits in an attempt to refund the money to consumers he alleges have been ripped off.
This brings me to a scenario described by Walter Williams, John M. Olin Distinguished Professor of Economics at George Mason University in Fairfax, VA:
Suppose there's a disaster wiping out food resources in Harrisburg, Pa., and I live in Philadelphia. Prior to the disaster, bread prices in both cities were $2 a loaf. I buy a truckload of bread, cart it to Harrisburg and sell it for $20 a loaf, earning huge windfall profits. When the word gets out that there are profits to be made, what do you think happens? If you said other people will start carting bread to Harrisburg, bakers will start working overtime to produce more bread, people who formerly used their oven to bake cakes and pies will switch to baking bread, there'll be bread conservation in Philadelphia and elsewhere and eventually bread prices will start to fall in Harrisburg and windfall profits would vanish, go to the head of the class. While some might find people earning windfall profits objectionable, the result of their actions, getting more bread to Harrisburg, is precisely what's desired.This scenario is in the mold of a John Stossel scenario I mentioned nearly two months ago. In a market ruled by prices, letting the market work freely is the best way to ensure that supplies get to where they're most needed by allocating resources efficiently. As described above, the resources would go where producers feel they can gain the largest profits. In time, enough producers will enter the market and force the market price back down to an acceptable level.
What if politicians said, "People are profiting from the misery of others, and we're going to impose a bread windfall profits tax"? Say they legislated a 100 percent tax, taking all of the $18 of windfall profits. Would you expect to see people making all those efforts to get bread to Harrisburg? Suppose there were huge startup costs for companies to expand their operation or onerous regulations for people to get into the bread business, would that be good news or bad news for people in Harrisburg?
Broaching the subject of the supply and demand argument has caused liberals to give the same response in recent months. They have been citing a survey by University of Wisconsin economist Don Nichols that correlated the price of gasoline and the price of crude oil. He found that for gas prices to average $3.00/gallon here, crude oil would have to cost $95/barrel. I contended that he failed to take into account the effects of a breakdown in refining capacity due to a 20% shortage caused by Hurricane Katrina, which forced several large-scale refineries to shut down during the catastrophe.
There never was a shortage of crude oil, which is why the study was so bogus. Supplies of crude oil were hardly affected by the hurricanes. The effects on refining capacity, however, caused the shortage in GASOLINE. Crude oil does not equal gasoline. It goes to refineries where it is converted into its several byproducts which include natural gas, heating oil, and gasoline. If these refineries aren't in operation, there arises a shortage of gasoline being supplied to gas stations. This doesn't mean that demand is going to fall accordingly. People still needed to get to work every morning, and home every evening.
Basic Economics 101 Lesson: on a price-quantity graph with supply and demand curves, when supply (sloping upward from the origin) shifts to the left, equilibrium in the market goes up along the demand curve (sloping downward). As price is on the Y-axis and quantity on the X-axis, this leftward shift in supply and move upward along the demand curve will equate to a lower equilibrium quantity and a higher equilibrium price.
In this case, we have a supply shortage in the gasoline market. As the market seeks a new equilibrium level, the price has to increase as quantity decreases. The oil companies recognized this and Lee Raymond, Exxon Mobil chairman, explained, "[I]f we kept the price too low we would quickly run out (of fuel) at the service stations." See, if equilibrium is not sought in the market, supply keeps decreasing but by not changing prices, demand will not change. In this event, consumers would anticipate a future price hike and buy up all the reserves in no time flat.
Back on the topic of windfall profits, is a tax really necessary? We've already seen a huge price drop since Hurricane Rita. Prices nationwide (as of 11/7) have fallen from a high a peak of $3.07 in early September to $2.38 per gallon. Furthermore, crude oil futures are still below $60/barrel and have been steadily dipping since September. Waiting a few more months will undoubtedly reveal a much lower profit margin for the big oil companies and by that time prices should be settling back to a pre-crisis level.
The federal government is and always has been the most dangerous impediment to a free market economy. Greedy politicians seeking to please the special interests have instituted so many regulations that the Code of Regulations in the General Accountability Office now takes up more than 76,000 pages. Frederic Bastiat understood the danger of the state when he said, "The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else." Hopefully, American voters will begin to realize it as well and start holding their elected representatives accountable.
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