Opinion > September 4, 2008

By Josh Binney | Old Gold & Black columnist

One issue always seems to be at the forefront of this year’s presidential campaign: the rising price of oil.

This problem is so important for our political and economic future, and yet it is so misunderstood.

Perhaps it is best to start with the facts everyone knows. Gas is much more expensive now than it used to be. Until a few weeks ago, the national average for this crucial resource was hovering just around $4.00 per gallon. As a result, the average American is struggling to afford the cost of energy, and oil companies are making record-breaking profits – over $143 billion last year.

In attempting to find a solution to the growing burden energy prices are placing on American families, Senator Barack Obama and many liberal politicians have proposed a $1,000 emergency energy credit to be paid for with a windfall tax on the profits of oil corporations. Like his main opponent for the Democratic nomination, Senator Hillary Clinton, Obama believes that those who have benefited most from the energy boom should sacrifice a “reasonable share” of their profits to help those who are struggling to pay their gas bills.

It’s an idea developed with the best of intentions. There’s only one problem: it just won’t work.

The most ironic and immediate impact of a tax on oil companies, Obama’s $1,000 stimulus check notwithstanding, is that it will further strain the wallets of average American consumers. As with any tax levied on suppliers, the majority of the burden is passed on to buyers in the form of higher prices. We’ve already seen this with the state and national taxes on gasoline levied on oil companies, which have raised gas prices by an average of almost $0.50/gallon nationwide. The remaining burden would likely fall on shareholders through lower dividends. Consequently, the tax would raise the price of gasoline, eating up most if not all of the $1,000 promised by Obama.

Over time, however, the broader economic consequences of a windfall tax would be even more severe. It was John C. Calhoun who said that “to deprive (people) of the fruits of their exertions would be to destroy the desire of bettering their condition.” By penalizing the oil companies for profiting from the evolution of the energy market, we would leave them with little incentive to find new and more efficient products and refining methods. The government would actually discourage investment and innovation in an industry that both parties agree needs more of both.

So, Obama’s plan fails to accomplish its primary objectives by neither encouraging oil companies to lower their pricing nor easing the burden on the average consumer.

Not only would our economic woes be exacerbated by a windfall tax, but the idea of the government taking a “reasonable share” of the profits of its citizens in an attempt to redistribute the nation’s wealth is not worthy of a liberal, free market society. In other words, the windfall tax being proposed is just not fair.

Exxon Mobil’s profit margin for the last fiscal year was recently cited as 10 percent in the Wall Street Journal. The same article compared the energy industry’s average profit margin (8.3 percent) with those of other markets. Beverages and tobacco (19.1 percent), pharmaceuticals (18.4 percent), computers (13.7 percent) and Google (25.3 percent) are only a few of the many industries and companies whose profit margins well exceed those of “big oil.” There is no call for a windfall tax on these “excessive” profits, however, as there are few political points to be scored from doing so.

So, in our discussion of the larger energy problem, we have let our emotions get the better of us. The energy crisis is a serious issue – one that has severely hurt the pockets of the American working class – and we should strive to find a solution. But abandoning our principles of liberty and equity in favor of a redistribution of wealth that will have no positive effect is certainly not the answer.

Obama’s heart is in the right place, but we don’t need good intentions — we need results. A windfall tax would cripple the American energy industry, discourage investment and innovation, place an even greater burden on the consumer and make us more dependent on foreign oil.

It’s a politician’s solution to an economist’s problem – a vote for the status quo. It’s time for a change. Surely, Obama can understand that.

Josh Binney is a sophomore from Hampden, Mass.