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No simple response exists to address the complexity of Big Oil's profit margins - especially when the political nature of the oil crisis is factored into the equation. Implementing a windfall profits tax is a viable component to regulating oil prices, but it cannot stand by itself.

The problem of high oil prices is an issue of supply and demand. The high global demand and limited supply of oil raises the price per barrel, and the demand by stockholders stokes each company's drive to seek higher profit margins. Obviously, these two corporate goals remain in tension.

Economic theory suggests that in time, the markets will find an equilibrium that suits the consumer, the investor, and the environment. From the foundation of my economic training, I believe this to be true. Given enough time, the self-interest of the marketplace gives birth to a profitable reiteration of the Kantian Imperative. This begs the question, will it happen soon enough?

Most economists are fully aware that the markets act inefficiently (for example, companies leverage debt to signal expected profit), but they are convinced supply and demand is the most responsible system for consuming and distributing resources to effect their highest utility. I am convinced supply and demand adequately regulates non-renewable resources that we are willing to completely consume, but it often miscalculates the tipping point of renewable resource depletion.

Calculating the consumption of renewable resources requires market predictability. The United States' consumption of natural resources is excessive, but generally predictable. On the other hand, markets without government regulation tend to be more volatile (... think the Asian Tigers), and they are more bullish consumers of natural resources. If the US has a relatively stable market, why does it consume more resources per capita than any other single nation?

Oil prices are cheaper in the United States than they are in most countries overseas. However, we will not be appeased. We complain about volatile prices at the pump and demand our investment turn a profit. A windfall profit tax might help to regulate the market volatility felt at the pump, but the problem still remains that we incorrectly treat oil as a renewable resource and misappropriate its usage. If the government decides to implement a windfall profit tax, it should also give a larger tax break for research and development of alternative fuel sources. Then companies announcing higher profits would signal a long-term investment in American energy, instead of short-term, but unsustainable, profitability.

Oil companies should pay windfall profit taxes, but only in indirect proportion to their investment in alternative fuels.

Learn more about this author, Joseph South.
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