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A Profit-Taking Candidate

Tuesday, February 13, 2007

Recent remarks by Hilary Clinton suggest an energy policy that would score political points, but harm the economy.

In response to reports that oil companies had posted a profit of over $39 billion, Democratic Presidential candidate and Senator Hillary Clinton said that she would want to take those profits and have them invested in the creation of alternative energy sources that will help make America “energy independent.”

That’s right. Senator Clinton wants to confiscate oil company profits—there really is no other way to read her comments. She could merely have said that she thought it was best for the U.S. to invest more in alternative energy sources. She could have restrained herself to advocating the imposition of a carbon tax—an idea that is winning supporters across the political divide. But those steps were apparently too modest; by her lights, it is apparently a good idea to directly take oil company profits and use them to further policies she claims will bring about energy independence for the United States.

The problems with this suggestion are myriad. First, oil company profits are hardly all that impressive over the long haul. As Larry Kudlow points out, the actual profit enjoyed by oil companies only amount to a little over ten cents on the dollar. But don’t tell that to Senator Clinton, who is either convinced that oil companies rake in obscene profits or wants the American public to buy into that misconception—which would, after all, make it easier to sell the idea of taking oil company profits for alternative energy purposes and for the pursuit of energy independence.

Oil shareholders have made a high-risk investment because of the potential for high rewards—which is what the oil firms themselves do when they spend billions to develop new fields in inhospitable political climates.

If this is not enough to throw cold water on Senator Clinton’s proposal, consider that the goal of “energy independence” itself is chimerical at best. In today’s global economy, the linkage among global oil markets is functionally impossible to avoid and while domestic oil consumption might be curbed, no serious policymaker can genuinely think that it is possible to insulate prices at the pump here in the United States from the global oil market. Indeed, trying to eliminate oil imports from the United States is laughable public policy and will lead to a spike in oil prices that is nothing short of mind-boggling. If you think that the current debate over whether oil producers are “gouging” the consumer at the pump has gotten fevered and out of control, just wait until you see what happens to prices if we try to achieve “energy independence.” Remember the lines at the pump last time the state tried to intervene?

Senator Clinton’s argument for the confiscation of oil company profits also implies a view of what profit means to a corporation. If one listens only to people like Senator Clinton, one would think that corporate profits are enjoyed by a select few who are at the top of the company heap. Not so. Corporate profits are to the benefit of shareholders far and wide, many of whom have never seen the inside of a corporate boardroom and who are of relatively limited means. Shareholders have invested their hard-earned dollars into oil companies—among other business entities—and expect to see a return on those investments. Oil shareholders have made a high-risk investment because of the potential for high rewards—which is what the oil firms themselves do when they spend billions to develop new fields in inhospitable political climates.

Senator Clinton's proposal to confiscate oil company profits to create alternative energy sources and foster "energy independence" would do nothing of the kind. It would amount to excessive government intervention in energy markets and would deprive oil companies of the incentive to supply more oil and to engage in research and development concerning the creation of cleaner fuel technology. Additionally, Senator Clinton's plan will deprive oil company shareholders of the profits they have earned as a consequence of investing in oil companies. As the Presidential campaign progresses, Senator Clinton should be challenged to explain how her plan takes into account the realities of the energy market and the rights of shareholders. And the voters should pay close attention to her answers on the issue.

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