Presidential candidate Barack Obama has released a new ad that contains a lot of rhetoric designed to appeal to the masses, yet whose underlying economics is pure nonsense.
Obama seeks to impose a taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on the windfall profits of oil companies, which he implies in the advertisement is the cause of the high prices at the pump. The fact of the matter is that it doesn’t work that way. The CEO of Shell doesn’t get up one morning wanting to raise gas prices and say “I’m going to screw the American consumer today so my company’s shareholders will get a greater return.” And then the next morning when he wants to lower prices say, “I slept well last night and feel good this morning so I’m going to lower prices for the American people even if it cost my shareholders.”
The oil companies have reaped a lot of gain from the recent rise in oil prices. There is no disputing that. And a windfall profits taxA windfall profits tax is a one-time surtax levied on a company or industry when economic conditions result in large and unexpected profits. Inheritance taxes and taxes levied on lottery winnings can also be considered windfall taxes on individual profits. in the short-run would do little to change the price of gasoline, and would push money into government’s coffers. However, in the long-run, by telling the oil companies that if they have higher than average profits in any given period they will be taxed extra on those profits, then that tax affects business investment for the future. That, in turn, lowers investment in oil, raising the price at the pump, lowering wages, and lowering returns to investors.
The fact of the matter is that Obama would be more accurate if he said that his foreign policy would help lower gas prices given that recent tensions in the Middle East have played a larger role in raising the price. Unfortunately, Obama is merely engaging in nonsensical political rhetoric by targeting the current outcomes of the energy markets instead of the underlying causes.