In a setback for sound energy policy, the House of Representatives recently voted to impose $16 billion in new taxes on oil companies. To make matters worse, it also approved billions in tax breaks and incentives for a host of renewable energy sources, such as biofuels, geothermal and wind power, along with related conservation efforts.

This legislation is a paradox: It restricts access to and increases the cost of domestic oil and gas supplies, while simultaneously calling for "energy independence." The House bill is to be combined with a Senate bill passed in June that, among other things, mandates the use of 36 billion gallons of ethanol by 2022.

Both pieces of legislation are based on the false premise that Congress can predict and manage the nation's energy future. Indeed, every president since Richard Nixon has called for greater energy independence, so this is well-trod territory. But recent history demonstrates that free market forces, not political whims, should determine the course of energy prices and conservation efforts.

First, raising taxes on oil companies does nothing to increase domestic oil and natural gas production. Rather, it increases dependence on foreign sources, and the higher taxes ultimately get reflected in the energy prices paid by consumers. The nationwide average for gasoline taxes is 46 cents per gallon, an amount that is sure to rise if this legislation is enacted.

After peaking in late May, gasoline prices have fallen considerably, but without much fanfare. Indeed, gasoline prices adjusted for inflation and disposable income are about the same today as in 1972. The House and Senate bills are a sure path to higher real prices.

Second, the Senate bill contains a provision that outlaws price gouging during "energy emergencies." Politicians on both sides of the aisle often try to pin energy price increases on "Big Oil" conspiracies. Yet not a single government study of past energy price spikes has found evidence of collusion among oil companies.

According to the Federal Trade Commission, "in no other industry does the FTC maintain a price monitoring project such as its project to monitor retail gasoline and diesel prices." The Senate bill is likely to lead to permanent price controls. By restricting the ability of oil companies to adjust to changing market conditions, this provision also paves the way to higher prices.

Third, mandating greater use of ethanol will work to the detriment of consumers. The price of corn has almost doubled in the past two years, which drives up prices for corn-based commodities, such as artificial sweeteners. Corn prices also are volatile, reflecting unforeseen variations in weather and marketing conditions.

As farmers devote more land to corn, this restricts the supply of other agricultural commodities, as well. Higher food prices result. Greater ethanol use is warranted if dictated by market forces, but not by subsidies and congressional decree.

Fourth, the House bill proposes to pay for new energy technologies by enacting new taxes on domestic fossil-fuel production, including a 13 percent excise tax on crude oil and natural gas produced from federal submerged lands in the Gulf of Mexico. These taxes discourage risky investments and development of domestic energy reserves.

In large part, the tax legislation is a misguided attempt to seize a greater portion of oil-industry profits. However, return on capital for the refinery sector averages about 10 percent, compared to 15 percent for other major industrial companies. Returns on oil and natural gas extraction -- the riskier sector -- average about 13.5 percent.

The oil industry is capital intensive, and new investments have increased in line with earnings. From 1992 through 2006, the five major oil companies invested $765 billion in energy infrastructure, compared to net earnings of $662 billion. New investments in 2006 alone were $174 billion, which matched net earnings in that year.

Does Big Oil pay its fair share of taxes? Conventional thinking in Congress says "no," but objective evidence indicates otherwise. In most years, combined tax payments to all levels of government exceed domestic profits for the industry.

In 2005, the top three companies -- ExxonMobil, ConocoPhillips and Chevron -- paid a combined income tax of $44.3 billion, plus $114 billion in other taxes, including franchise, payroll, property, severance and excise taxes. According to a January 2006 report by the Tax Foundation, the average income tax rate for the major oil companies is about 38 percent, compared to 32 percent for other publicly traded companies.

Congress can do better by recognizing that we depend on fossil fuels for 86 percent of our nation's energy. The House and Senate bills would distort market signals, with predictable consequences for prices.

Let's get on a better long-term path toward our energy future -- one that combines realistic cost-effective policies with continued reliance on market forces.

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