Congress’ Next Bad Idea Would Destroy the Shale Boom
Last week, six Members of Congress, led by Rep. Dennis Kucinich (D-Ohio), introduced the “Gas Price Spike Act.”
With concerns over the likelihood of higher gas prices this summer, the bill and its sponsors propose the creation of a “Reasonable Profits Board” that would control the profits of oil and gas companies.
Under the bill, this board – made up of unelected bureaucrats – could apply a “windfall profit tax” on the sale of oil and gas at rates of 50% to 100%. These taxes would take aim at corporate profits that the board feels are “unreasonable” or “unfair.”
Congress would then appropriate the money raised to subsidize electric vehicles and mass transit.
Now you may want to take a second and breathe, because this is no satire.
Oh, and the proposed bill offers no specific guidance on how the board would determine what represents a “reasonable profit.” How do we even begin to define this term? Are some profits more unreasonable than others? And who decides what is “reasonable?”
Yesterday, Apple Inc. (Nasdaq: AAPL) shattered earnings expectations. The electronics company has a profit margin north of 20%; meanwhile, the oil and gas industry has a sector-wide margin a little less than 10%.
And though the price of oil and gas will rise in the future – and despite the name of the bill – a reasonable profits board would do nothing to improve consumers' plights at the pump.
In fact, it would only make things worse for people like you and me.
This Board Would (Knee) Cap Energy Investment
Every day, Kent and I focus on investment opportunities that offer the strongest share appreciation potential and dividend upside.
That's how we've delivered big profits to Energy Advantage subscribers. Last month, the portfolio posted an average gain of 11.6%. Kent has named the best investments in the shale oil and gas boom and has explained how to profit in the “sweet spot in energy investing.”
But this profits board would essentially get to decide how much of a return it's going to let you, as an investor, make year-over-year. After all, your returns come from the profits of the company in which you invested.
There's an image in Washington that public companies are big, faceless giants that are unaccountable to no one.
In fact, they are accountable…They are accountable to shareholders, whether they're institutional portfolio managers or retail investors like you and me.
Here, in the U.S., things may be shaky, but there is one thing that's unequivocally good.
We are in a new age of energy production, due to a revolution in technology and our ability to unlock unconventional energy sources. As we've seen, a number of new energy companies have come on line, and we are entering a new gold rush.
But this all requires investment.
And a reasonable profits board is little more than a death panel for energy investment.
Let's say that Congress decides that a reasonable profit margin for companies like Exxon Mobil (NYSE: XOM) or ConocoPhillips (NYSE:COP) is 4% or 5%.
This is all the money that could be paid to shareholders in the form of dividends. Everything else goes to Washington.
Investors will be far less likely to pick up shares of a company whose upside is limited by windfall profit taxes.
When we categorize investment opportunities, we do so by measuring the potential risks of each investment against its potential returns.
The likelihood of returns for risk-taking is traditionally represented by a bell curve, with extreme losses and gains far out into the tails, and thus unlikely. The profits board would essentially remove certain levels of upside possibility from investors' reach.
If the government caps expected rate of returns, it would deter domestic investment in the energy sector. Why would anyone finance a higher-risk energy project, when government could simply step in and confiscate a greater portion of the expected level of return?
Economies operate on the risks companies take and the reward of their profits. Apple didn't maintain its investors over 25 years because the company capped returns.
But a profits board will not just deter investors in the U.S. It will do something far worse to the entire economy.
The Board Would Drive Investors Out of the U.S.
Forcing investors to assume risks while limiting return (and there is always potential downside to any investment) is fiscal insanity.
Investors will just start looking to foreign markets. And there are plenty of opportunities to make money elsewhere.
Investors will turn to opportunities in Canadian energy firms.
Or to China.
There are plenty of international companies and projects that offer similar risks, but higher returns than Congress' proposed board would ever allow.
Once again, Congress fails to understand that investor capital is central to the huge economic boom we're seeing in the shale fields. But instead of encouraging investment there, Congressmen are proposing ideas that are just going to lead to a mass exodus of capital finance. When prices are controlled or profits are capped, development will stall over time, as companies starve from a lack of investors.
We've already seen how Sarbanes-Oxley reduced the number of IPOs in the United States each year and how investors are flocking to Hong Kong and London to find new public companies.
Now, they're threatening to kneecap another vital industry with harebrained ideas that only work in the vacuum of philosophical policy debates.
This brings me to my final point.
A Profits Board Shows Congress Ignorance of Economics
Hopefully, this is the first and last you will ever hear about this proposal.
But it is a shining example of the fact that only 25% of Congress has any training in economics, a breathtaking statistic, given their role in the economy.
It appears that Congressmen have little understanding of balance sheets or income statements. If they did, they would know that profits are not simply the result of selling goods or services for as much money as possible.
Profit margins are measured by a company's ability to control their liabilities. In order to report a strong profit margin, companies have to stay within a budget on their supplier contracts, their debt levels, and the amount of money they spend.
If a company went out and spent its money recklessly, like, say, Congress does, there would be no positive profit margin, and more importantly, no investors.
If Exxon borrowed and spent the way the U.S. government does, it would have gone out of business decades ago.
Above all else, this shows that we always need to be aware of the attitudes Congress has toward business, and what it means to investors over the long term. This profits board unlikely to happen, but it's founded on such a misguided idea, it's certainly steering eyebrows north.
But what else would you expect out of Washington, a former swamp that traded mosquitoes for politicians… and malaria for public debt?
[Editor's Note: Whatever nonsense comes out of Washington next, you can bet Kent's Energy Advantage subscribers are still laughing all the way to the bank. And Kent is all over the next big trend that will make investors huge returns. Yep, this is big.]