Windfall Profits Are A Good Thing

The other day we saw who the real "gas price gougers" are. Today we will see why Big Oil windfall profits are actually a blessing to all, and not in disguise either:

Back in 1980, in the midst of the last era of expensive oil, oil companies represented 28% of the S&P 500’s value. This investment boom stimulated exploration and led to an oil “glut” in the 1980s and ’90s. In this new environment, cheaper oil and lower oil-company profits meant that investment moved elsewhere, and with this asset redeployment, oil-company share of the S&P 500 fell to 7%. The latter number arguably foretold today’s energy prices to the extent that they’re a demand, as opposed to a weak-dollar, phenomenon.

Notably, oil companies now comprise 10% of the S&P’s value, and the number will presumably rise as oil companies report earnings and are subsequently rewarded with higher valuations. This change in the S&P’s makeup heralds cheaper oil in the future.

Also, record profits attract imitators and innovators. Canadian oil company Suncor Energy is an example of innovation at work. It has devised a way to extract crude from oil sands, and the consensus is that this process will greatly expand the amount of proven reserves around the world. Happily, investors have rewarded Suncor; its stock is up 400% over the last five years, a timeframe in which the Dow has been flat while the S&P 500 and Nasdaq have been down.

See how that works? Oil companies make profits by locating, extracting, and selling petroleum and petroleum-based products. The more profits they make, the more resources they will have, along with the accompanying greater incentive, to try to produce more oil. Producing more oil will lead to lower prices at the pump since more of the lately escalating demand will be met. And everybody wins.

I know that economics isn't a very interesting topic and most people don't know the first thing about it, but is this really that complicated a concept to get one's mind around? Would it really be better for the economy and gasoline consumers (and consumers of anything made of or packaged in plastic, BTW, which includes quite a bit) if Big Oil was drowning in red ink?

You expect Democrats to demagogue this issue like they do every other, and come up with dumbassed bills like that of Senator Byron Dorgan (D-ND) that would reimpose the infamous "windfall profits" tax that wreaked such economic havoc during the halcyon days of Jimmy Carter (and contributed to the return of the equally infamous gas lines at filling stations across the country). But Bill Frist, the Senate Majority Leader, being cowed into threatening Big Oil execs with being dragged before congressional hearings to be drawn & quartered for their "obsene" earnings? Didn't we put Republicans in charge to at least put a stop to such ignorant mischief, and maybe, just maybe, educate the public about economic issues?

Gas prices have dropped as much as 20% over the past month or so absent any government action at all. How can this be? Won't that impact Big Oil's "obsene profits"? Will they even stand for it?

Honestly research the answer to this overall question and your high-gas-price anxiety will melt away like the $3 a gallon pump signs that never materialized.

And you'll also be several steps ahead of anybody on Capitol Hill.

UPDATE: Hugh "Hack" Hewitt (no, I'm not going to start calling him "Triple H," because that moniker is already taken) just fired off a brilliant line on his radio program about the Democrats and gas prices:

They won't let us look for oil where it might be, drill for oil where it is, and refine the oil we have.

Boy, that sums it up with a bag 'o chips, doesn't it?