Major oil companies release their earnings this week, and they are going to be astronomical. While ExxonMobil’s yearly profits may resemble a slow day at the Internal Revenue Service, Senator Clinton is already calling for a new $20 billion tax on oil companies. People in this country are fed up with high gas prices and one can hear the long knives being sharpened in anticipation of this week’s earnings reports. However, before Senator Clinton gets all fired up about conspiracies and greed, it is probably best that she take a step back, search out some choice wisdom from Milton Friedman, and think about the past and present realities of the oil business.

Oil companies are not conspiring against the American people. They are merely experiencing a run of coinciding favorable market conditions combined with a little good luck. If the American people desire the return of cheap gasoline, then it is best to allow the oil companies to make their money. Applying yet another tax to a heavily taxed and regulated industry’s commodity is definitely the wrong tack.

Oil companies owe most of their record profits to high demand for crude and tight supplies. The world is becoming wealthier, so more and more people are joining the ranks of those who absolutely must have a particular something in order to make their lives more complete, and that something is oil. Oil is like that must-have toy during the holiday season and it’s Christmas everyday, which leaves Americans, Europeans, Indians, and the Chinese all bidding up the price of crude.

Tight refining capacity is also one of the driving forces behind oil companies’ record profits. There are many reasons for the tight capacity, but the simple fact of the matter is that there has been very little money to be made in refining over the last 30 years. Sure, pumping and moving oil has been profitable, but not distilling it into gasoline, jet fuel, asphalt, and dozens of other products. The reason behind this has been cutthroat competition between refiners combined with the fact that refiners are usually independent operations or kept as separate, standalone divisions within a larger corporate structure. This means that if the refiners are not making any money, they cannot expect the more profitable divisions to bail them out or cross-subsidize them.

Furthermore, refining requires risking vast sums (billions and billions of dollars), and in addition to being traditionally thin, margins are often unpredictable and uncomfortably erratic. For example, in 2001 refiners’ margins reached a record high of $2.78 a barrel before plummeting to $0.19 in 2002, which was the second worst year since records began in 1977.Any sane person with money has kept his or her cash as far away from refining as possible.

Not only has investment been sparse, but money that could have been used to expand capacity has often funneled into federally mandated environ mental equipment. The nation’s refiners spent a whopping $47 billion in the 1990s in order to comply with the 1990 amendments to the Clean Air Act. Although there is no guarantee that this money would have been spent on expanding production, it could have bought an estimated 2,350,000 to 4,700,000 barrels a day in additional capacity, which would have been more than enough to eliminate the need for gasoline imports and would have flooded the domestic market with significantly cheaper fuel.

The key to lower fuel prices is not to complain about oil companies’ profits but to sit back and let the petrochemical giants make their money. High profits will attract investment, increase supplies, and lower prices. Threatening to make businesses give back their money is a surefire way to prevent their expansion and push gasoline prices even higher. Increasing taxes on oil companies’ profits is not going to decrease gas prices or put money back in peoples’ pockets.

Senator Clinton somehow believes that $20 billion in new taxes will lead to lower gasoline prices, but since when has taxing something ever made it cheaper? Like high crude prices and increased refining costs, “windfall taxes” will inevitably pass right through oil companies and fall square on the consumer.

Mr. Walling is a legal fellow with the Regulatory Studies Program at the Mercatus Center at George Mason University.