California's Crude Energy Plan

From IBD:
Posted 5/17/2006

Energy Development: Voters in the Golden State may get to decide in November if the path to energy independence lies in punishing those who produce energy and make money from doing so.

If the collapse of the former Soviet Union proved anything, it was that command economies do not work. When governments try to determine which technologies to pursue, which products to make and where resources and money should be allocated, the result is failure.

Free-market economies where consumers and producers get to make choices, and make money off these choices, have a track record of success. But undaunted by the laws of economics and the lessons of history, a new initiative may qualify for California's November ballot to repeal the law of supply and demand.

Last week, election officials took receipt of petitions with 1.2 million signatures in support of a proposition to tax all oil extracted in California and use the revenues to "promote" research on alternative sources of energy.
The tax rate would increase as gasoline prices rise, topping out at a maximum rate of 6%. To ensure that greedy gas station owners and oil company executives won't raise prices to cover the tax, the measure specifically prohibits that.

California produces 773,000 barrels of oil a day, and the proposition's backers estimate that if oil prices stay above $60 a barrel — prices that are determined by supply and demand on world markets, not by gas station owners and oil executives in dark rooms — the tax would raise at least $4 billion over the next decade.

That's $4 billion that oil companies would otherwise use to look for new sources of oil, which is where a major portion of their profits go. The three largest U.S. energy companies are projected to make capital expenditures on research and development and new equipment of $43 billion this year, up from $33 billion in 2005. Exxon Mobil spent $4.8 billion on capital and exploration costs in the first quarter alone.

Ironically, the measure has attracted financial support from venture capitalists in Silicon Valley. We say ironically because the latest reports show Big Oil's big three — Exxon Mobil, ConocoPhillips and Chevron — earned 8 cents on every dollar of sales. Meanwhile, high-tech companies like Google, Yahoo and eBay, all conceived in Silicon Valley, pocketed 19 cents on the dollar.

Neither Google, Yahoo nor eBay has to search for product in deep ocean waters or harsh environments. They don't ever run the risk of spending billions only to find nothing. Nor are they restricted from finding their product because the search might harm the caribou.

This initiative in California is essentially a "windfall profits" tax, an idea that's been tried and found wanting. When levied in the 1970s, according to Congressional Research Service data, it cut domestic oil production 3% to 6% and increased oil imports 8% to 16%. This is not the path to energy independence. When you tax something, you get less of it, not more.

The way to lower oil prices is to increase supply. And the way to increase supply is to let people make money doing so. Alternative sources of energy will take off when they become economically competitive, and when people are free to innovate and make a profit from them.

Oil, too, was once an alternative energy source, one that saved the whales that were being hunted for whale oil until the first oil well was drilled in Pennsylvania by Edwin Drake in 1859. Oil, and the profit motive, built the world's largest economy and changed the world forever.

Whatever our future energy choices are, let them be choices, not mandates. Let the free market decide.