Oil

It was reported in the wall street journal today that Exxon had posted another large profit for the fourth quarter of '05 to the tune of approximately 10 Billion dollars. Additionally it was reported that these earnings were an improvement from Q4 of the year prior despite the fact that the oil giant produced one percent less for the most recent results.

Obviously there has been and will continue to be great political pressure placed on the companies that have posted such banner earnings both from the general public and the government. As to the argument of who is right, what is excessive, and the public responsibility in matters such as these I will not endeavor at this time. What I will touch on briefly is this. The proposed senate solution, as reported in the above referenced article, to these enlarged profits is to increase the tax burden on the oil companies. This will do nothing but fill the pockets of the government with the already stretched funds of the consumer. I base this upon a simple lesson that many of us learned (and appear to have forgotten) in Macroeconomics 101. The tax burden that is placed on the consumer is directly proportional to the inelasticity of the demand. The market for energy is at this point very inelastic. Therefore the government can tax the suppliers all they want and the majority of the deadweight loss will be passed to the side of the consumer.

The quickest though possibly the most difficult way to resolve our fossil fuel dilemmas is to allow the market to correct itself. Let the oil companies operate as they have and they will soon find that they have driven, (by virtue of excessive price) the consumer away from the wares they are peddling and into the open arms of the dealers selling the next generation of energy resources.