With gasoline prices touching $3 in most of the country this autumn and natural gas well over $10, politicians have been looking for a scapegoat. Sadly, many have pointed fingers at the big integrated producers, claiming that they’ve somehow “gouged” consumers.

The hostile climate spawned proposals for a windfall tax on energy firms. Probably the most serious proposal came from Senator Byron Dorgan: a 50 percent tax on all of the major's profits when oil trades above $40 per barrel. Several energy companies have highlighted this proposal as a major risk to their business. Both sides of the aisle are guilty of promoting this tax.

Such tax proposals are counterproductive. Domestic energy companies do not set the price of crude oil and natural gas; rather, the prices rise and fall due to global supply and demand.

The rising price of oil has led to bigger profits for the integrated oils. However, the big oils suffered through a long depression in the late 1980s and early ‘90s when crude oil prices languished under $20 per barrel. Obviously, their profits suffered back then. So if the government proposes excess profits tax when oil prices are high does it stand to reason they'd subsidize the big oils during cyclical downturns? This argument and course of action would seem to have little place in a capitalist society.

Moreover, the big oils are starting to deploy those rising profits to step up their exploration and development activity. This is quite obviously a good thing. Some are also using those profits to improve or enhance their refining capacity and production infrastructure; there's a huge shortage of such capacity in the US (and globally) right now. Eventually, exploration, development and infrastructure spending will mean larger supplies of oil and gas--and better prices for consumers.

If so-called "excess profits" are taxed, there's little inventive to take bigger risks on the exploration front. Even more to the point, some of the big deepwater developments in the Gulf of Mexico or oil sands projects in Canada might well be rendered uneconomical if a windfall tax were imposed. It would seem to make little sense to handicap these promising developments.

Fortunately, the Byron Dorgan amendment was defeated in the Senate by a huge margin before the bill was ultimately passed.

The true causes of higher gasoline and electricity prices of late have a lot to do with a lack of infrastructure. And at least part of that blame must be placed at the feet of the very politicians who have been debating the windfall tax proposals.

Complex regulations and siting requirements have meant that no new refineries have been built in the US since 1976. But while refineries aren’t being built, demand for gasoline and other “light” products is absolutely exploding. As the chart below shows, demand for such products is projected to continue rising in the coming years.

Source: Energy Information Administration

What really caused this autumn’s gasoline price spike was that the Gulf Coast hurricanes shut in a significant proportion of US refining capacity. That was particularly problematic because the nation’s refineries were already running at near full capacity when the storms hit. In the late ‘90s, such a storm would not have had as profound an effect but with the gap between capacity and demand already so tight, there was no room for error.

The Energy Information Administration (EIA) is projecting only minimal growth in domestic refining capacity between now and 2025. As the chart below shows, growth in US capacity will be among the slowest of any region of the world. This situation is totally untenable; if gasoline demand continues to rise, existing refining capacity in the US will not be sufficient to meet that demand.

Source: Energy Information Administration

But gasoline isn’t the only market where there’s an acute infrastructure shortage in the US. The fastest growing source of energy over the next two decades or more will be natural gas. This is true not only in the US but around the world.

Meanwhile, once-abundant reserves of natural gas near key markets such as the US and Europe are depleting. The likely consequence: a massive increase in the global natural gas trade.

Fortunately, a technology exists to facilitate the movement--and the trade--of natural gas over great distances. Natural gas, when cooled to -260 degrees Fahrenheit, turns into a liquid known as liquefied natural gas (LNG). Even better, by converting gas to LNG, the gas shrinks about 610 times. That's roughly equivalent to shrinking a full-sized beach ball to the size of a ping-pong ball. That convenient liquid can be transported in tanker ships in a similar fashion to crude oil and then regasified--converted back to a gas--near its end markets.

For years, natural gas was burned off as a useless byproduct of oil drilling, especially for fields located some distance away from major markets. There was no pipeline infrastructure near these fields to transport the gas. But LNG changes all that. Those isolated fields, known in the industry as stranded fields, are now valuable assets.

Right now most imported natural gas in the US comes from Canada. Gas in Canada can be easily moved and sold into the US via the existing pipeline grid. Unfortunately, Canada faces a similar problem to the US. Canada is producing about 9 bcf of gas per day more than it needs to meet domestic consumption. That adds up to over 3.2 tcf per year of surplus gas available for export. But Canada's own consumption of gas is rising rapidly, the nation's reserves are depleting and production growth is likely to slow. The result: Canada will not be able to meet all of America's gas needs. To see where the gas will come from, check out the chart below.

Source: Energy Information Administration

Expanded use of LNG would not be a big problem is it weren’t for the shortage of LNG importing capacity in the US. Just as there aren’t enough refineries in the US to support demand, new terminals will need to be built to support the coming wave of demand. But local opposition to new terminals has led to serious difficulties in siting new plants. Thus, unlike China, Japan and South Korea, among others, the US does not have enough LNG capacity. Until that infrastructure problem is resolved, the US will have trouble keeping up with gas demand and pricing will remain relatively high.