Politicians Should Look Abroad for the Source of Our Energy Woes

Politicians looking for quick, domestically focused solutions for our energy problems are off track.

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Sharp and unexpected rises in oil and gasoline prices make the public agitated—and politicians downright silly.

This time, the politicians' catalogue of nonsense is a long one: Speculators are manipulating global oil prices; the budget deficit has driven up oil prices by driving down the dollar; they are even peddling the simpleminded nostrum that a temporary holiday from the modest federal gas tax would offset the price hikes or even bring those prices down.

Amid the predictable foolishness, a reasonable approach emerged that both presidential candidates actually embraced, if reluctantly and somewhat elusively. Democrats finally agreed that we should allow companies to drill offshore if it can be done without environmental damage. Even if it won't produce any oil for several years, it could generate jobs promptly. For their part, Republicans grudgingly accepted substantive measures to increase energy efficiency and the use of alternative fuels.

But if they're looking for the actual culprits for the gas prices that now ail most Americans, they'll have to cast their eyes beyond our own shores. Most informed people and every energy economist know that in the $10 billion-a-day commodity market for crude oil, the only force that can move energy prices day to day beyond where the market dictates are the state-owned oil companies of Saudi Arabia, Russia, Iran, and a handful of other countries that control 80 percent of the world's reserves and nearly as much of the world's daily oil production. To put it in perspective, the three biggest U.S. oil companies—ExxonMobil, Chevron, and ConocoPhillips—account together for less than 4 percent of worldwide reserves.

The Russian invasion of Georgia underscored the influence of a few nations over the world's most important economic commodity and once again made it an important geopolitical issue. While Georgia's pipelines are only one of several sore spots for Vladimir Putin, effective influence over them fits nicely into his campaign to centralize the Kremlin's control over Russia's enormous oil and gas reserves and production—second in the world to only Saudi Arabia—and use them as geopolitical tools. With Putin's confiscation of the Yukos oil conglomerate, the key institution for this strategy is Gazprom, the huge, state-owned natural gas conglomerate that today supplies nearly one third of the gas needs of France and Italy, more than 40 percent of Germany's needs, 60 to 70 percent of gas consumption in Austria, Hungary, and Turkey, and virtually all the natural gas used in Greece, Finland, and most of Eastern Europe. Gazprom is not only also developing the vast Shtokman gas field in the Barents Sea to produce liquefied natural gas for the U.S. market, it also has absorbed Russia's largest oil producing company, Sibneft, with more reserves than any nation except Saudi Arabia and Iran.

Putin does not hesitate to use Russia's outsize presence in oil and gas markets for political ends. Gazprom earns notoriously low profits, even with recent high prices, because Putin purchases domestic public support by setting Gazprom's prices for most Russian customers at one fifth or less of world prices. Putin also ties Gazprom's foreign prices to the political support other countries pay his regime: Countries in his favor pay as little as one fourth as much as countries in disfavor. In 2006, for example, following the Orange Revolution in the Ukraine, Gazprom quintupled its charges to the new Ukrainian government. When the new government balked, Putin threatened to cut off its gas and oil supplies in the dead of winter; and when the European Union protested, they received the same threat.

In this energy and geopolitical environment, and with Putin's Kremlin watching closely, it surely makes little sense for the U.S. government to single out U.S oil producers for special taxes. Windfall profits taxes have never made much sense to most economists because they penalize companies for selling into boom markets. It would be like applying a special, additional tax to homeowners who sold during the bubble or shareholders who sell during a strong bear market. Nor does it make any sense to take an existing investment credit and declare that henceforth a few large oil companies will be ineligible. Whether prices are high or low, oil companies should pay the corporate tax like everybody else. If politicians decide they want more revenues from corporations, they should raise the rate—for better or worse. Even better, Congress could eliminate tens of billions of dollars in special tax subsidies for particular industries—including oil—and use some of the revenues to expand support for energy efficiency and alternative fuels, and the rest to lower the corporate tax rate.