Friday, January 20, 2012

Demand-Supply Theory Tossed on its Head

Prof J – you were wrong! 
At least that’s what Rep. Kuchinich and several other economic professors idiots in Congress obviously think.  Mr. Kuchinich, fitfully worried about high gas prices, proposes to tax the windfall profits of oil companies.  Now, I was taught, by none other than Prof J, that the response to higher prices could be addressed through increased supply.  As the price of any given product rises, suppliers are incented to bring even more product to market.  If the supplier is making economic profits, the chances that others will want in on the action dramatically increases.  As more suppliers bring even more product to market, prices usually retreat.  This can be seen in today’s natural gas market.
However, Rep. Kuchinich proposes a new economic model to solve these pesky micro economic problems.  His solution – the Reasonable Profit Board.  Think I’m joking?  HR 3784, which was introduced this week and proudly named – The Gas Spike Act of 2012, would create this new federal Board.

This new Reasonable Profits Board (I just love how that name rolls off the lips!) would be empowered to monitor the profits of oil companies and tax their excess profits, defined as profits between 100 and 102 percent of a reasonable profit.  Confusingly, Rep. Kuchinich chose not to define reasonable in the bill.

So, according to Rep. Kuchinich, the best way to lower gas prices is to increase taxes on the very suppliers that bring gas to market.  His theory suggests that taxing the profits (or reducing the price suppliers receive for their products) will magically reduce gas prices?! I would argue, and I hope most folks would agree with me, that this would incent companies to bring less product to market, not more, resulting in even higher prices.  

So, maybe Prof J was right all along.


  1. Well, I've been wrong before... but I'll test my economic theorizing against any politician's any day of the week. And twice on Saturday. I don't work on Sunday (remember the Sabbath and keep it holy).

    When I heard about this nonsense steam shot out of my ears. It's patently ridiculous. Let's look at the profit margins of some oil companies, shall we? Exxon-Mobil has a profit margin (net income/net sales) of 9.75% in the past twelve months. Chevron's is 11.79%. Marathon is 4.44%. These seem like very reasonable profit margins to me. Even a little low.

    In contrast, Apple has a profit margin of 23.95%, Google's is 26.78%, and Microsoft's is 33.01%. No one is making any noise about these guys. Do you know why? Because oil companies are a favored political target because people think oil and gas prices are somehow set anti-competitively.

    It's true the supply of gas right now is not what it would be in a competitive free market. But you can thank drilling and pipeline restrictions, not 'greedy oil companies' for that.

    Thank you, and good morning.

  2. Amen, brother!

    You and I must be on the same wave length. I had an email exchange with my buddy Hook about this very same topic. I also showed him the profit margins of oil companies v. Apple.

    Here's what I say: if you think oil companies are awash in profits, quit your bellyaching and start your own oil/gas company. Kuchinich obviously knows better than Exxon Mobile and Chevron on how to run a firm, so I say shut up and do it!

    This is something straight out of Atlas Shrugged.

    1. That's exactly right. If there are abnormal profits to be had, go get them! That's why so many start-ups are still in the tech industry - that's where the abnormal profits are.