By Kerry Jackson, Pacific Research Institute
Further confirmation that California is on the wrong side of the rabbit hole came on the last day of September, when Gov. Gavin Newsom called for a new tax on oil companies in response to the high cost of gasoline.
“Oil companies are ripping you off,” he tweeted. “Their record profits are coming at your expense at the pump.
“I’m calling for a NEW windfall tax exclusively on oil companies. If they won’t lower their prices, we will do it for them.
“The $$ will go directly back to you.”
So, if we have this straight, under the plan, the state will levy an additional tax on oil companies to punish them for prices that are skewed by California public policy, then send those taxed dollars, minus of course Sacramento’s “handling fee,” back to consumers.
The ignorance of economics – or the eagerness to ignore them for politics – is staggering. Prices fall – isn’t this what Newsom ostensibly wants to happen at the gas pump? – only when companies produce more of something at a lower cost. But punitive taxes and obstructive regulation, both common in California, are barriers to increased production.
We see this clearly in the energy industry. The high prices are signals to producers to increase supply. However, taxes and layers of rules make it prohibitively costly, and due to the latter sometimes impossible, to do so. That’s why, in the case of energy, incentives to increase production and to tap new sources of raw materials, have been chilled.
Pepperdine economist Gary Galles says Newsom’s plan “is in some ways just standard government practice – rip off people who can be demonized and use it to buy others’ votes.” It also allows politicians “to scapegoat petro companies and pose as consumers’ savior using the money to assuage the guilt of theft that is involved.”
Galles suggests that rather than oil company greed, which Newsom implies is the cause of high prices, “government policies, such as restrictions on drilling, refining, shipping and mandates on special blends” are “clearly at fault.”
When fuel prices are high, and in California they are the highest in the nation, oil industry profits are always treated by politicians as if they are unethical. But John Tamny, vice president of FreedomWorks, reminds us that oil companies are never pitied when their profits are low.
“Were oil companies giving money away in 2014 when the price of a barrel fell into the $20s, and did they take a vow of poverty when oil fell to $9 and $10 and barrel in the 1980s and 1990s?” he asks.
Those government policies mentioned by Galles have an extraordinary impact on fuel prices in California. According to a report from Stillwater Associates in Irvine, Californians paid a $1 premium per gallon for gasoline compared to the rest of the country in 2019 because of taxes and regulations, such as carbon dioxide cap-and-trade and the low-carbon fuel standard. The 2020 premium was lower, not quite 90 cents, “due to the effects of the pandemic.” Stillwater senior associate Leigh Noda did not figure a premium for 2021. Had he, it would have been similar to 2019’s, he said.
To his credit, Newsom authorized refineries to change over to the state’s cheaper winter blend of gasoline several weeks early this year. That’s helpful. Prices could drop as much as $1 a gallon by early November. But vilifying the companies that provide one of the two most important commodities in the world isn’t.
Though a businessman, and a multimillionaire, Newsom doesn’t seem to understand how markets work and why businesses need to make profits. It doesn’t matter if they are “unprecedented,” “record,” or if some consider them “outrageous” or “obscene.” Profits are as important to companies as blood is to human life.
In 2005, just after gas prices had spiked to what were then record highs, Cliff Slater, one-time University of Hawaii economics department scholar, suggested that anyone who thought an oil company was “excessively profitable” should “go buy some shares.”
The advice came with a warning, however.
“In March of this year, when oil was $40 a barrel and before any hurricanes, you could have bought ExxonMobil shares for $62. Today” – December 2005 – “with oil up to $55 a barrel, hurricanes galore, and sky-high gas prices, you can buy Exxon shares for $55 – a 10% decline. You might want to figure that one out.”
He could have been talking to Gavin Newsom in 2022.
Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.