Kudlow & Company Show (CNBC-TV)
LARRY KUDLOW, host: Joining me now to debate the merits and demerits of overregulating and taxing energy profits, we have Russ Roberts, professor of economics at George Mason University and great blogger at CafeHayek. And then we have consumer advocate Jamie Court, president of the Foundation for Taxpayer and Consumer Rights. Mr. Court the left of center, Mr. Roberts the right of center.
Russ Roberts, I’m sure you’re a fan of the Bible and Leviticus. The question is: Should we be taxing or tithing or overregulating energy companies right now? What’s your view?
Professor RUSSELL ROBERTS (George Mason University, Professor of Economics): Well, I think that the tithing in Leviticus goes to the high priest the temple and what we would call holy causes. The Hebrew word is tsaddik, which is righteousness. I don’t really associate that with the 535 members of Congress. So I think it’s not really a great analogy, a kind of a dangerous one.
I think we got to keep in mind, when we talk about trying to do something about so-called excess profits is, we’ve got to keep in mind what our goal is. Our goal is to make the world a better place. We don’t want to pander to economic ignorance. We don’t want to posture and vilify oil companies simply for the sake of getting in the headlines. We want to do something to make people’s lives better, and these excess profits ideas are not going to do that.
KUDLOW: Mr. Jamie Court, do you favor tithing? Do you favor taxing? Do you favor additional regulations on the energy companies who are at least briefly profitable?
Mr. JAMIE COURT (Foundation for Taxpayer and Consumer Rights): Well, as a populist, what I favor is making sure we have enough refinery capacity to meet demand. And over the last 20 years, we’ve seen demand for refined supply go up 30 percent and supply, refined supply, go up 10 percent domestically. We haven’t had a refinery built since 1976 in the United States of America. So what I favor is supply-side regulation, meaning that the Department of Energy, whoever controls it in the executive branch, can tell oil companies when they need to increase refining capacity to meet demand. They can stop oil companies from exporting refined product away from areas in need if there isn’t enough supply to meet demand.
Right now we have a home heating oil crisis in the Northeast, and we have oil companies in the first seven months of this year shipping 1.7 billion more gallons of home heating oil out of the United States, according to the Department of Energy, than last year. And imports are not making up for it. So what I am against is manipulation of the market, and I believe oil companies have done that. And the reason we see huge profit reports…
KUDLOW: All right, Jamie–Jamie hang on. Let me…
Mr. COURT: Excuse me for one second.
KUDLOW: Let me let Professor Roberts–no filibusters. We’re going to give you more than equal time. You’ve already had it. Let me go back to Russ Roberts.
Russ, number one, Mr. Court says the federal government should tell energy companies when to expand or build refineries. And number two, he says that the oil companies are deliberately moving offshore to hold up prices. Your response, please.
Prof. ROBERTS: Well, I don’t think they’re much of a cartel. Overseas producers might be, but domestic oil companies are not very good at that. They compete vigorously, as the profit margins you discussed earlier indicate. What I think we want to do is give them the incentives to build those refineries that haven’t been built. It’s not a conspiracy. It’s just rational profit seeking on their part.
We’ve got to remember any these proposals, no matter what we do, we’ve got to remember that pigs don’t fly. Oil companies are not charities. We shouldn’t expect them to be. We expect them to pursue the interests of their stakeholders and their shareholders, so let’s give them a profitable incentive to look for more oil and build more refinery capacity and make it easier for them to get us the goods.
KUDLOW: Let’s put the chart– This is a partial chart — on the board. Melissa Lee referred to it earlier.
(Graphic on screen)
Second Quarter 2005 Earnings (Cents Per $ of Sales)
Banks – 20, Pharmaceuticals – 19, Software – 17, Semiconductors – 15, Oil & Natural Gas – 8
KUDLOW: I think we have the top five companies. Banks have a margin of 20 percent, pharma is 19, software is 17, semiconductors 15 and oil and natural gas down at eight. Melissa, is that basically what you were referring to in your report?
MELISSA LEE reporting: It is exactly what I’m referring and that begs the question, Larry, why pick on oil companies and natural gas companies? Why not put that tithe on banks or pharmaceuticals?
Mr. COURT: The reason is this. The oil companies…
Prof. ROBERTS: Melissa, careful…
KUDLOW: Go ahead, Mr. Court. Take a whack at it.
Mr. COURT: The reason is, when the price of gasoline goes up, the price of delivering goods across the economy goes up. The reason is oil companies know that by making less gasoline, they make more profit. And in the late ’90s, we have memos on our Web site at consumerwatchdog.org that Senator Wyden has released showing they deliberately reduced refining capacity to drive up prices and profits. When that happens, there is a ripple effect to the economy and the rest of the economy slows down. Gasoline in our economy, in our society, is a necessity of life, and you have to watch manipulation of that market far more
closely than others.
KUDLOW: Russ Roberts, let me guess–go right ahead, Russ.
Prof. ROBERTS: I disagree.
KUDLOW: Chime in, please.
Prof. ROBERTS: Yeah. I disagree with the implications that somehow the run-up of the last month or so was due to a conspiracy. It was clearly due to a hurricane. The hurricane destroyed refining capacity, destroyed supply. Suddenly there were more people wanting to buy gasoline. There was more gasoline in demand than there was available, and the price went up. If next summer the oil companies try to do this again and there’s no hurricane, it won’t succeed. There’ll be too much gasoline on the market and price will fall, the same reason it’s fallen in the last month by a dollar or so a gallon. Did it…
KUDLOW: Professor Roberts, do markets set oil prices and gasoline prices or do companies set them?
Prof. ROBERTS: Well, markets set the prices generally, especially in the short run in cases after a hurricane. We like to blame the oil companies. If we wanted to have lower gasoline prices, we should put a law against hurricanes, and we should put a law that would somehow keep the supply intact. Now there are things…
KUDLOW: Mr. Court, we’re going to have to close down. I want to give you–please, sir, be brief.
Mr. COURT: This is a three-year trend.
KUDLOW: Do you favor a tax and do you favor investment regulation?
Mr. COURT: I favor regulation of supply, and I think that for three years we’ve had big profit margins for this industry for one reason. They’ve made too little gasoline to meet demand. And when the market doesn’t work, the government does have to step in and make sure it’s fair, particularly when gasoline that fuels the rest of the economy is what we’re talking about.
KUDLOW: All right. Thank you very much. We appreciate it, Russell Roberts and Jamie Court.