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Our crude knowledge of oil economics

Our crude knowledge of oil economics

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Recently Congress attempted to pass a “windfall” tax that would have demanded an enormous sum of money from oil companies who, we are told, earned more profits than any previous venture in human history. A “gazillion” dollars, one mathematically challenged senator claimed. Like other election-year proposals it did not pass, but the effort itself is indicative of several issues far more frightening than any rise in gas prices.

The first troubling issue is a widespread lack of economic knowledge. In my teaching experience, students understand very little of simple economic concepts like supply, demand and the price mechanism. This is a critical issue since the 21st century will require young adults to be more economically knowledgeable than previous generations.

Worse, while many students haven’t the foggiest understanding of these concepts, they have no shortage of opinions on economic issues such as high gas prices. They instinctively expect and demand that government “fix” whatever “problem” or “crisis” that politicians and interest groups insist “needs fixing.” Students are then routinely indignant that “something” has not already been done after which they inevitably conclude that an injustice has been perpetrated by “rich” companies upon “average working people.”

Although popular and easily understood, this vision is both wrong and damaging to those who hold it (as well as those who don’t). This “rich vs. poor” framework is too crude and misleading to allow young people to understand the complexity of their own economic circumstances as well as important economic issues at the national and international levels. Sadly, students go on to become one of many millions of adults who share this economic illiteracy. The result? A recent CNN poll reports that 62 percent of Americans believe that high gas prices are due to “unethical” behavior by oil companies.

But does that poll suggest any reason to be alarmed? Very much so, and this is the second troubling issue.

It is this general economic illiteracy that allows gimmicks like “windfall” taxes to get any traction because without a more accurate economic understanding, dangerous gimmicks come to be seen as legitimate “cures” to our ailments: “big” oil companies making “big” profits should give some back to the public.

But snake oil is not medic ine. Indeed, sometimes it’s poisonous.

Today, more than at any point in the past, the oil industry is subject to market forces and tight margins so when supply dwindles or demand surges, both profits and losses are recorded in the terms of billions.

A windfall tax essentially says: “Risk billions of your dollars. If you lose billions, too bad, but if you make billions then we want it.”

Perhaps to be consistent, Congress ought to propose a “shortfall” tax to be levied upon taxpayers to compensate oil companies for the billions that are lost when markets turn down or exploration and regulation imposes billions in costs. Or perhaps when small businesses have a “windfall” year selling sandwiches or T-shirts, the government should demand their earnings as well. Make sense? Of course not.

Also, “windfall” taxes destroy incentives because without these additional earnings companies cannot invest to bring new sources online, thereby insuring rising energy prices well into the future.

Moreover, it’s a tax on motorists themselves. A “windfall” tax placed upon oil companies will be passed onto drivers That means that they will still pay more at the pump, but the money will go to the government. No part of the proposed “windfall” tax actually suggested that drivers would get a refund.

None of these things is beneficial to the public. So why do politicians sponsor these proposals with the full knowledge that in the long run a “windfall” tax will cause more damage to the public than if not taken at all? Because what is economically irrational might be quite rational politically, particularly in an election year when the long-term economic interests of the nation are typically subordinated to the short-term political interests of those seeking office. And without the economic understanding to figure this all out, such political tricks, like “windfall” taxes, will go undetected.

Perhaps we should do more to educate students and adults alike on the basics of economics so that they might understand more accurately: why oil prices go up; why this rise might lead to new efforts at conservation, declines in fossil fuel emissions, and a serious look at fuel alternatives whose consumption does not heat the planet nor fund our nation’s enemies; what “speculation” is and why prices will come down.

Perhaps we should invest in an economic literacy program so that in the future more individuals will be able to detect such poisonous gimmicks like “windfall” taxes thereby preserving the public’s economic health, as well as their own. That is, so that they might see the snake oil for what it is.

(Liscano is a political science professor at Napa Valley College.)琬

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