Bashing big oil companies has become all the rage of late. Such assaults, though, turn out to be grossly misguided, not to mention misplaced.

But why not take on ‘Big Oil behemoths,' as U.S. Senator Charles Schumer (D-NY) has called these firms? After all, drivers got smacked with big price hikes at the gas pump after Hurricane Katrina hit in late August, and prices remain well above their year ago levels. Home heating costs promise to be much higher than last year as well. In the midst of all these added costs, news has gushed forth about large profits for oil companies in the quarter ending on September 30.

The political reaction has been predictable. Sen. Schumer referred to oil companies as ‘bandits,' and wants to hit them with a windfall profits tax. Senate Majority Leader Bill Frist, a Tennessee Republican, has called for hearings on high energy prices.

Even local politicians have not passed up the opportunity to take a swipe. For example, in response to earnings news, Newsday recently reported that a Long Island county legislator declared: ‘This goes to show that it most likely was price gouging and most likely it was a taking advantage of consumers.'

To the contrary, what these heated political responses go to show is that a large number of politicians are either clueless as to how the economy works, or choose pandering over sound economics.

A more serious assessment of profits for oil and natural gas companies reveals that the industry falls pretty much in the middle of the pack in terms of its earnings relative to sales.

In the second quarter of 2005, as reported by the American Petroleum Institute (API), the oil and natural gas industry's earnings per sales dollar came up short of the average for all U.S. industry. The third quarter numbers will bump up those returns, but still keep the oil business well within the normal range for U.S. industry. And over the long haul, the oil and natural gas industry does not perform extraordinarily well compared to other businesses. API's analysis shows that from the mid-1980s to 2003, the S&P Industrials far outperformed the petroleum industry in terms of return on investment.

At the same time, though, one group has reaped huge and consistent rewards at the expense of energy consumers. In a new report, the Tax Foundation compared the domestic profits of the 25 largest oil companies in the U.S. to federal and state taxes on gasoline production and imports.

The foundation's findings are nothing less than stunning. It turns out that from 1977 to 2004, the industry's domestic profits tallied up to $643 billion, after adjusting for inflation (in 2004 dollars). Meanwhile, gas-related tax collections were more than twice those profits - coming in at $1.34 trillion (again, in 2004 dollars).

So, while politicians from both parties pile on oil companies, they have made a far bigger killing off consumers. Where's the political outrage about this?

There's also a big difference between taxes and profits. Taxes raise costs, discourage business and investment, and get wasted on all kinds of misguided political schemes. In contrast, prices and profits work as signals in the marketplace. Higher prices and profits encourage new energy exploration and development. API's data show that capital expenditures do in fact track quite closely with profitability. So, Senator Schumer's windfall profits tax idea turns out to be the exact opposite of what should be done if we want to secure more affordable energy.

Increasing price and profits spur innovation in terms of conservation and creating entirely new sources of energy as well.

As it turns out, politicians bashing ‘big oil' are not really concerned about how expensive gas is at the pump, but instead are just interested in scoring cheap political points. But those cheap political points can carry a heavy economic cost.

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This column may be reprinted with appropriate credit.
 

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.