Newsom Grandstands on Oil Profits

California Gov. Gavin Newsom speaks during a press conference in Sacramento, Calif., on Feb. 1, 2023. Justin Sullivan/Getty Images

Commentary

You would think Gov. Gavin Newsom would be happy with higher gas prices at the pump, and the ensuing high oil company profits. The hits to consumers encourage people to buy the electric cars his 2020 executive order mandates for all new-vehicle sales by 2035. The order even explained at the time, “Clear policies such as the Governor’s Executive Order help provide market signals to investors and can mobilize private capital.”

Instead, advancing his call for a tax on oil company profits, he said last week, “While Californians were being ripped off at the pump last year, Big Oil’s bottom line ballooned to levels never seen before in history.”

Indeed, oil company profits for 2022 have been high, expected to be $190 billion combined. The main ones: Exxon: Record $56 billion profit. Chevron: Record $35.5 billion profit.

The Biden administration also piled on. Said White House spokesperson Abdullah Hasan, “It’s outrageous that Exxon has posted a new record for Western oil company profits after the American people were forced to pay such high prices at the pump amidst [Russian President Vladimir] Putin’s invasion” of Ukraine.

But we all know what happened. The invasion led to embargoes against Russian energy, followed by Russia withholding energy. That disrupted global markets, driving up prices.

The way it’s supposed to work after such a disruption is: The higher prices increase profits in the oil industry, which in turn invests the profits in new production, which makes up for the withdrawn production. In a couple of years global oil equilibrium is returned, and prices drop.

Nobel economics laureate Friedrich Hayek showed how prices are “information.” They are signals. When prices go up, and profits with them, that’s a signal to produce more. When prices drop, the opposite happens, and production drops.

When this price system is disrupted, whether through Newsom’s meddling or full-blown socialism, as in the Soviet Union, then production is hampered, actually making matters worse. However, because oil and natural gas are global commodities—the biggest, in fact—such disruptions as that advanced by Newsom only affect local markets, such as California’s. Whatever transpires in California on a proposed “windfall profits” tax will have little or no impact on oil production in Saudi Arabia, the UAE, Venezuela, Iraq, Iran, Norway, and other places.

Russians, if they even hear about it, will be amused at Californians’ antics.

The main impact of Newsom’s windfall profits tax, if it ever becomes law, will be oil companies reducing investment in California oil production and refining. Why invest in a place that doesn’t like you? And which is trying to ban your product entirely? The problem with socialist-style price fixing, which is what Newsom is pushing, is it’s backward looking.

Already the market is changing. The New York Times headlined a Feb. 1 story, “Oil Giants, After Surge in Profits, Are Wary About Spending.” Subhead: “Economic and military uncertainty clouds the outlook for Exxon, Chevron and other energy companies, whose bonanza from high prices is already fading.” The story:

Exxon’s fourth-quarter profit of $12.75 billion, while strong, was down sharply from the $19.7 billion it earned in the third quarter. Oil prices have settled to a level more than a third lower than their peak shortly after the Ukraine war began last February, and natural gas prices have crashed by 70 percent from their highs in August, mostly because of an unseasonably warm winter in much of Europe and the United States.

Put another way: The capitalist system is working the way it’s supposed to. Markets are adjusting worldwide—to the war, to the warm weather, and let’s not forget, to the inflation caused by too much spending by the federal government.

The oil industry also still is adjusting to the biggest shock of all, the drop in the price of oil below $0 three years ago at the beginning of the COVID-19 pandemic. In a sense, today’s profits are making up for the horrible year of 2020. This is from the Oil & Gas journal in February 2021, two years ago: “The five integrated supermajors—ExxonMobil, BP, Shell, Chevron, and Total—posted a combined record loss of $76 billion in 2020.”

What’s really happening is Newsom is grandstanding for an expected presidential run. Especially as President Biden’s documents scandal lingers, the president’s exit from a potential re-election bid seems more likely. That’s by far from certain. Biden still could run, and win.

Meanwhile, Newsom is signaling to Democratic primary voters he’s tanned, rested, and ready to take on the oil companies and other disfavored groups, even if that means actually increasing gas prices for Californians.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.