Shortages and Pinheads

My favorite writer on economic matters is Dr. Thomas Sowell of the Hoover Institute at Stanford. He always says that whenever an economist hears about shortages, he immediately asks about price controls. Unfortunately this connection is apparently only made by economists. Ask anybody who doesn’t really know economics why we had gas shortages back in the late 70’s and they will tell you it was Big Oil or perhaps OPEC who were just busy making “obscene” profits. But the fact is it was price controls that created that shortage, and our Governor, Jim Doyle is trying to get one going again.

It’s weird to me why this connection is never made, it’s really so logical and avoidable. Let’s say you are Marathon Oil. You have oil and gas to sell. The Governor of Wisconsin declares that he wants a tax on oil. No big deal, every state has a gasoline tax. Ah, but this law has a new wrinkle. This law says that you are forbidden from “passing along” any price increase to the consumer. This tax must come directly from you, Marathon Oil. You must eat this tax, and we’d really like to see you grimace when you pay it because, we really hate you and all the things you do. We’d like to be assured that it hurts. This tax is meant as punishment, pure and simple.

So what are you going to do? I mean Wisconsin is the only state where you sell gasoline isn’t it? It’s not? You mean there are other states where you can sell your oil and not face lower profits and risk jail? Hmmmmmmmmm.....let me think about this for a minute, I want to make sure I understand this. I can sell my oil in Minnesota or Iowa and not pay the tax. I can even make up for the lost volume by lowering the price a couple of cents in those other states and I’ll still come out better than if I sold it in Wisconsin.. Sure there will be gasoline shortages in Wisconsin, but hey, they should take that issue up with their Governor. It’s their problem.

That is essentially what happened over the weekend. Marathon Oil announced that if this tax is passed, they will simply sell less oil in Wisconsin. This was not a threat, just a statement of obvious fact. They didn’t have to give this a lot of thought. In today’s market, the oil companies are going to sell all the oil they have to sell. It’s just a matter of where and to whom. If you can sell it there and make more than if you sell it here, which are you going to do? You can call it a tax, but it’s effect is more like a price control and it will have the same result as a price control; shortages. But maybe Governor Pinhead will come up with a law to make Marathon sell their oil in Wisconsin. Yeah, that’s it, we’ll make them sell us the oil, and we’ll tax ‘em into oblivion. After all, they are truly bad people who do nothing but take money out of our pockets.

UPDATE: May 30, 2007

Yesterday I posted this rant. In today's Wisconsin State Journal the AP had a story repeating Doyle's talking points but thankfully included a comment from an oil company executive pointing out that it is absurd to cite a company's world wide profit and then compare it to the amount of income tax the company paid to the state of Wisconsin. After all the only thing they do in Wisconsin is sell gasoline to retailers, which is a pretty insignificant part of their operation. But an executive from Murphy Oil made this observation:

"Dave Podratz, a Murphy Oil executive, said the company had financial losses after Hurricane Katrina damaged its production facilities in the South. A Wisconsin tax on oil company profits would be an incentive for Murphy to try to sell more of its gas in Minnesota, he said."

Wow, who could have predicted that?