Nov. 14 (Bloomberg) -- It was quite a spectacle to see the party of Big Business summon executives of Big Oil to probe the nature of Big Profits.

This congressional tomfoolery was organized at the behest of Republican Senate Majority Leader Bill Frist on Oct. 27 following the release of oil companies' third-quarter profits.

Net income for the top five publicly traded energy companies -- Exxon Mobil Corp., BP Plc, Royal Dutch Shell Plc, Chevron Corp. and Total SA -- jumped 52 percent last quarter to a combined $33.4 billion. Exxon's profit of $9.92 billion was an oil-industry record and among the biggest for any company in history.

So much money, so little access: You could see the senators salivating. Profits the private sector might use for oil exploration and development, investment in new refineries (subject to strict regulation), research into energy-saving technology and new jobs surely could be better spent on more Bridges to Nowhere.

If this is how the Republican Congress is squandering its majority status, no wonder the electorate wants to reinstate the Democratic leadership in 2006 by a margin of 48 percent to 37 percent, the widest gap for either party in 11 years, according to a Nov. 4-7 NBC/Wall Street Journal survey.

Much Ado About Nothing

Frist, whose descent into silliness began with his video diagnosis of Terri Schiavo, wasn't the only Republican starring in this theater of the absurd. Senator Pete Domenici, Republican of New Mexico and Chairman of the Committee on Energy and Natural Resources, was superb in the role of Wesley Mouch, Ayn Rand's petty-bureaucrat-turned-economic-czar in ``Atlas Shrugged.''

``The oil companies' witnesses owe the company an explanation, and they owe it to us as those who represent the people,'' Domenici said. ``I expect the witnesses to answer whether you think your current profits are excessive and to talk about what they intend to do with the reserves and the profit accumulations that they have.''

No, Senator Domenici, the oil companies' witnesses don't owe you anything. They are accountable to the shareholders and indebted to the bondholders.

Domenici needed a refresher course -- ostensibly for his average constituent back home-- on how prices are set in a market economy.

``The price is set on the world market by willing buyers and sellers, as to what willing sellers are willing to sell it for and willing buyers are willing to pay for it,'' Exxon CEO Lee Raymond explained.

Comedy of Errors

Clear? Not to the gentleman from New Mexico.

``I'm not sure my constituent is pleased with the answer,'' Domenici said. ``But nonetheless -- not unpleased; they don't understand it.''

Perhaps I can be of help. Any attempt to interfere with the market's ability to set prices has predictable results and unintended consequences. Capping oil prices, for example, would create shortages because it decreases the incentive to producers and increases demand. It leads to the development of a black market.

Taxing big bad oil's excess profits, on the other hand, may appeal to consumers for whom higher gas and heating oil prices are a huge burden. The reality may be somewhat different.

A windfall profits tax ``plays into voters' misperceptions that the taxes don't fall on them,'' said Peter Van Doren, a senior fellow at the libertarian Cato Institute in Washington and editor of ``Regulation'' magazine. ``Most of the cost will be passed on to consumers because demand for energy is so inelastic. It's a sales tax from an economic point of view, regardless of where it's paid.''

As You Like It

Such a tax would act as a wedge between producer and consumer, with the difference going to the government. With the government taking a share of the excess profits (how do you define excess?), the companies' ``revenues are lower and the incentives to produce go down,'' Van Doren said.

The public perception of oil companies as an automatic profit machine turns out to be inaccurate. In an unpublished paper by Van Doren and Cato senior fellow Jerry Taylor, the authors found that over the last 33 years, ``the oil and gas sector has been less profitable than the rest of the U.S. economy'' as measured by return on investment.

What's more, the net profit margin of these companies has barely exceeded the Standard & Poor's 500 Index average from 1993 though the second quarter of 2005 (5.97 percent versus 5.42 percent), Taylor and Van Doren found.

Measure for Measure

No matter how many times Congress has asked the Federal Trade Commission to investigate price gouging (anti-competitive behavior) on the part of oil companies, the FTC has found ``market factors to be the primary drivers of both price increases and price spikes,'' Taylor and Van Doren said.

The Democrats at the Senate hearing were just as bad. After harrumphing at the dismissal of her motion to swear in the witnesses, California Senator Barbara Boxer got right down to business with her class-warfare charts. The five oil company executives, it seems, are paid much, much more in salary and bonus than either the average U.S. worker or a minimum wage employee.

Boxer's charts and line of questioning were overruled as ``publicity,'' and she was sent to the back of the class.

Democratic Senator Ron Wyden of Oregon tried to play ``gotcha'' with the executives, first getting them to admit the tax incentives in this year's energy bill were unnecessary and then trying to back them into a corner on the role of speculation.

All's Well That Ends Well

If, as Exxon's Raymond once said, speculation accounts for $20 of the current price of oil ($57.53 a barrel as of Nov. 11), isn't speculation bad? Wyden asked. And shouldn't Congress try to rein in that speculation ``in order to make markets work?''

Wyden's time was up before he could fit his other foot in his mouth.

Surely someone on the two Senate committees conducting the oil industry hearing must realize the endgame. Taxing excess profits in good times, giving favored companies a helping hand (subsidies), regulating the markets, setting prices: the Soviet Union collapsed under the weight of such a system.

We have cataloged the human genome, conquered the mystery of outer space and mastered the art of transmitting data bits around the world in seconds. Yet we still can't resist the urge to tinker with the invisible hand.

The grandstanding by Congress last week was great theater. Any attempt to translate the investigation into high oil prices into legislation to curb them will turn this comedy into tragedy.

To contact the columnist on this story: Caroline Baum in New York at cabaum@bloomberg.net .