Obama Rhetoric on Oil Sounds Nice, But Nonsense

July 31, 2008

There isn’t much honesty in this presidential campaign from two candidates who supposedly were of a new type of politics. Earlier this week, Sen. McCain distorted Obama’s position on energy taxes in a recent advertisement (the one that featured Britney Spears and Paris Hilton). And today, Sen. Obama made misleading statements saying that McCain wants to cut taxes on oil companies by $4 billion. But what Obama didn’t say is that McCain’s corporate tax cut would apply to all corporations, whether they produce oil, wind energy, or cookies. (That’s kind of like saying that Sen. Obama favors government paying for Warren Buffett’s prescription drugs since he supports Medicare Part D. Of course, everybody gets it.)

What’s also funny is that when the vote in the Senate came up for a specific piece of legislation that did give special tax favors (and takes hikes) on oil companies and other energy producers (green as well as “dirty”), Obama voted for it and McCain voted against it. It was the Energy Policy Act of 2005, which was a pathetic piece of legislation. McCain, along with many environmentally-friendly Democrats, as well as a few fiscal conservatives, voted against the measure. (It passed 74-26 and was signed by Pres. Bush who of course never had the guts to veto anything on principle.). Obama likely voted for it merely because his home state’s corn producers stood to benefit from the ethanol mandates and subsidies that were included in the bill.

In his speech on Thursday, Obama also criticized McCain’s gas tax holiday (rightly so), and then implied to voters that the oil company profits are merely at the expense of consumers, which is baloney and shows of economic ignorance of the fact that the purpose of prices is to allocate resources. Even if oil companies gave every dollar of profit to charity (and investment in the firm remained the same), the price would still have to be high given the huge worldwide demand for oil, or else there would be a shortage. Obama said, “But while Big Oil is making record profits, you are paying record prices at the pump and our economy is leaving working people behind.”

Speaking of oil company profits, there is also the nonsense in a letter written by Democrats in Congress telling the oil companies that they should invest in alternative energies instead of buy back their stock. Essentially, they are telling the oil company executives that they should diversify the portfolio of their shareholders (corporate diversification) for them. But that leads to the obvious question: why not let investors diversify themselves if they think alternative energy is such a great investment? There are plenty of firms in that business. Suppose, on the other hand that there exist economies of scale (or scope) and thereby benefits in having the existing oil companies diversify themselves into green alternatives. Wouldn’t you expect them to be doing just that right now in order to maximize the return to shareholders? After all, you imply that by buying back their stock, all they care about is their shareholders. If it’s such a great investment, then their shareholders shouldn’t mind. In fact, their stock should rise.


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