The last time gasoline prices were as high as they are today was in 2008, and Barack Obama, the Democratic candidate for president, made it clear that one of his major policy goals was to make fossil fuels expensive, so that “alternative” and “green” sources of energy would be more economically competitive. Three months before he was confirmed as secretary of energy, Steven Chu confirmed in an interview that “somehow we have to figure out how to boost the price of gasoline to the levels in Europe.”
With polls making it crystal clear that Americans are not pleased with spiking gasoline prices, President Obama has deployed what might be called the “octopus strategy.” When an octopus is threatened, one of its survival tools is to dispense a cloud of ink to confound predators. Likewise, in response to rising fuel prices, Mr. Obama has dispensed a cloud of obfuscation - one that scapegoats others for high energy prices when his own policies are at fault. His targets are the usual suspects: “traders and speculators” and predictably, oil companies themselves.
Of course, the scapegoating of “speculators” is old hat. They were, for instance, blamed for the gasoline price spike that occurred after Hurricane Katrina but the Federal Trade Commission (FTC) never found evidence to support claims of market manipulation at the pump or a significant pattern of “price gouging.”
The fact is “speculators” are not villains; instead they play a necessary role in making the world energy market more efficient. These individuals are really investors who help smooth out market fluctuations by equilibrating supply and demand over time via futures markets. This function is especially important for companies with serious financial exposure, e.g. airlines and trucking companies, allowing them to hedge against rising fuel costs.
The other target of the president’s demagoguery is “big oil.” As he recently said at a Nevada town hall meeting, “four billion dollars of your money are going to these companies at a time when they’re making record profits and you’re paying near record prices at the pump. It has to stop.”
What in the world is he talking about? Does he intend to eliminate the “expensing” of intangible drilling costs, which has been part of the tax code since its inception? Allowing an immediate deduction for development costs rather than amortizing them over a longer period has always been understood to be necessary in order to provide the capital and cash flow in an industry where the risks are huge and returns are realized, if at all, over many years or even decades. Eliminating this deduction would hit an industry that employs 9 million workers but which has a rate of return on investment significantly lower than that of other industries.
The other “subsidies” that President Obama proposes to eliminate are tax credits offered to all manufacturers, not just to oil and gas companies. Of course, if the president were truly concerned about wasting taxpayers’ money on wasteful subsidies, he would kill the ethanol subsidies that have driven corn and wheat prices sky high as well as those for wind and solar.
Eliminating subsidies effectively raises taxes on oil companies. But these taxes are already exceptionally high. For example, when oil prices peaked in 2008, the largest U.S. oil company, ExxonMobil, paid $36.5 billion in income taxes worldwide, $34.5 billion in sales taxes, and $45 billion in other taxes, for a total of $116.2 billion.
During the last quarter of 2010, ExxonMobil paid the U.S. government alone more than $9.8 billion, including an income tax expense of $1.6 billion. Over the past five years, ExxonMobil’s U.S. tax expense of almost $59 billion was $18 billion more than the company earned in the United States during the same period.
And make no mistake: High taxes already constitute a far greater component of the price of a gallon of gasoline at the pump than oil company profits. For instance, for every gallon of gasoline or diesel fuel that U.S. oil companies refined and sold in the United States during the last quarter of 2010, they made on average an accounting profit of about 2 cents. At the same time, total federal and state taxes represent on average 48 cents per gallon of gasoline.
Mr. Obama’s octopus strategy is an attempt to obscure the real source of rising energy prices: his own refusal to allow access to domestic resources. For instance, the administration continues its “slow roll” on issuing new drilling permits for the Gulf of Mexico and the Environmental Protection Agency has denied permits that would allow access to an estimated 27 billion barrels of crude oil located off Alaska’s north Arctic coast.
The president and his defenders argue that even if the government were to immediately lift restrictions on access to domestic resources, the impact on world prices would be minor and take time. But this claim illustrates ignorance of how markets operate. The last time that world oil prices were this high in 2008, President George Bush announced he was lifting some restrictions on domestic production. The world price of oil began to decline almost immediately, thanks to the hated “speculators,” whose actions in buying and selling reflected the likelihood of lower future oil prices, driving prices lower.
President Obama’s octopus strategy cannot obscure that fact that neither evil speculators nor undertaxed oil companies are the cause of high gasoline prices. His ink cloud cannot hide the fact that the United States has the world’s largest energy resources, but because of our government’s foolish policies, American oil companies have access to very little crude oil. It’s time for the president to abandon the octopus strategy and fix the real problem: a dysfunctional energy policy that shuts off access to vast domestic energy reserves.
Mackubin Thomas Owens is professor of national security affairs at the Naval War College and editor of Orbis, journal of the Foreign Policy Research Institute.