January 25, 2012
Congressā Next Bad Idea Would Destroy the Shale Boom
by James Baldwin
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 unre asonable 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.
