Excess Profits as Motivator

The textbook example of excess profits—a phenomenon that occurs when investors and entrepreneurs after seeing huge profits in a specific industry rush to join the party--in Econ 101 is the late 70’s/early 80’s phenomenon of the video arcade. Investors saw the profit potential of such stores and soon most cities had more than a few where they’d not too soon before had only one or maybe even none.

The entry of competitors bled off the excess profits and soon also drove the poorly run stores out of business. All part of the business cycle.

This phenomenon exists everywhere, and when you look for it you can find numerous examples. Surely it applies to the current record-breaking profits reported by the large oil companies.

Instead of promoting development and exploration we have many a government type instead flogging oil companies over their record-setting profits (never minding that the key observation is that the profit-margin remains essentially unchanged despite the increase in price at the pump). As Walter Williams put it in his CapMag piece last fall:

According to the American Petroleum Institute, over the last 10 years, it has cost the oil industry $47 billion to comply with costly and sometimes useless environmental controls. There are restrictions on exploiting the huge oil reserves in Alaska, the Gulf and the Atlantic and Pacific coasts.

Speaker Hastert said, "These are extraordinary times that call for extraordinary measures. We expect oil companies to do their part to help ease the pain American families are feeling from high energy prices."

Instead of mouthing platitudes and beating up on oil executives, Speaker Hastert should lead the effort to reduce restrictions on drilling and refinery construction. Sen. Dorgan should review our 1970s experience with an oil windfall profits tax that reduced American production and increased our dependence on foreign sources.

The question is at this point, when will profits reach a point where oil companies and alt energy firms as well move into the market? What, if anything, is slowing that process?