This is a partial transcript of "Special Report With Brit Hume" from April 28, 2006, that has been edited for clarity.

(BEGIN VIDEO CLIP)

PRESIDENT GEORGE W. BUSH: The temptation in Washington is to tax everything and they spend the money, they being the people in Washington, the answer is for there to be strong reinvestment to make this country more secure from an energy perspective. These oil prices are a wake-up call. We’re dependent upon oil and we want to get off oil.

(END VIDEO CLIP)

JIM ANGLE, HOST: A wake-up call. It costs a pretty penny to fill up your gas tank these days and a lot of consumers feel like someone is taking advantage of them. Oil companies are big visible targets for consumers and for politicians so how much are the oil companies making? What if anything can be done now to bring prices down? For some thoughts on that w turn to Jerry Taylor of the Cato Institute. Jerry, thanks for joining us.

JERRY TAYLOR, CATO INSTITUTE: Thank you, Jim.

ANGLE: Let me ask you first, a lot of people feel like they are being taken, they are being hosed by the oil companies these days. Fair or not?

TAYLOR: Oil prices and gasoline are sold in auctions on spot markets. There is not very much way oil companies cannot manipulate spot markets. And in fact, the prices that the service stations are paying for their gasoline to sell to you, they are paying based on the spot price. So prices are set in the market based on willingness to pay, supply and demand considerations, so people are paying the market price right now.

ANGLE: Now the price of oil and the price of gasoline has leapt in recent months, it’s actually gone up in recent years. One would assume with the price of oil that high and the price of gasoline that high that oil company profits are also rising by the same percentage factor. How accurate is that?

TAYLOR: Well, they are going up. But not as high as people think. Now, the earnings figures look arresting. Hear that a company made $10 or 12 billion in the last quarter, that certainly arches eyebrows. But these are big companies. If you look at their profit margins, how much they’re making on each dollar sold, the last quarter of 2005, the last quarter which we have complete data, the oil companies arranged in profits from British Petroleum which was making all of 6.8 percent as a profit margin that quarter all the way up to ExxonMobil at 10.7 percent. Frankly, the lady who sells me hotdogs on the street is probably earning 10 or 12 percent. This station, News Corp. earns 10.2. So these are not particularly unusual profits. They are pretty much the industrial average.

ANGLE: We all have the sense that the oil companies are not only ripping us perhaps off, but raking it in, raking in enormous profits, six, eight, 10 percent really doesn’t sound like much. How does it compare to other companies and other industries?

TAYLOR: Actually, the industry has earned less profit than most other industries. Goldman Sachs looked at the earnings from the oil sector from 1970 through the end of 2003 and they found that return on invested capital in the oil sector was less than the U.S. industrial average. If you look at just the most recent quarters and look at net operating profits you will find that Yahoo earned 45 percent in the fourth quarter 2005. Other companies like IBM and Intel, they have made a lot of money. The oil sector itself made about 8.8 percent of an operating profit in 2005. That compares to about 8.5 percent for the economy as a whole. So it’s fairly standard. There is nothing unusual about these profits. They’re actually somewhat normal.

ANGLE: Now, there is a lot of talk on Capitol Hill about windfall profits taxes. One, you seem to be suggesting there aren’t any windfall profits, but two, we have been down this road before. What has been our experience with windfall profits taxes?

TAYLOR: Right, you wouldn’t know it from the politicians. They politicians act as if this is a brand new idea and it never occurred to anyone before — let’s give it a shot. But we passed one in 1980 and it was in place all the way through 1988. And it had the predictable response. What it did is it discouraged investment from the oil industry. Because after all, if you are only allowed minimal return or small profits, and that’s it, you’re not going to invest in an industry where you can’t get even average profits. According to the Congressional Research Service, which is a nonpartisan research service, domestic production went down because of the windfall profits tax by three to six percent, oil imports increased by eight to 16 percent and the net effect of the tax was not to decrease price, it was actually to raise price. So there is not really much debate about that. The windfall profits tax is going to increase prices if we were to slap it on the economy.

ANGLE: Why is that, because the oil industry was in a depression only a few years ago. I remember when T. Boone Pickens, for instance, was bankrupt. We’ve got about a minute left. Is that because their downside risk is unlimited but upside gain has a cap on it?

TAYLOR: That’s absolutely correct. If you are only allowed to book losses or minimal returns but you can’t even book average returns, you can put your money in a lot of places but you probably won’t put a whole lot of it there.

ANGLE: Now the oil industry is struggling back after a lot of years. Is it now investing enough? You heard the president talk about reinvestment. He wants them to invest in pipelines and more exploration and that sort of thing.

TAYLOR: Well, the Cambridge Energy Research Associates tallied all the investments in the pipeline today and they argue that by 2015 global oil production is going to increase by 25 percent. That would be a record in the industry so there is a lot of money going into reinvestment. But the idea that Congress has any business micromanaging investments at ExxonMobil or someplace else to say look, you should be building refineries, you shouldn’t be returning capital to your investors, that’s crazy. That’s not the Congress’ business to look over the shoulder of Rex Tillerson at ExxonMobil and tell him how to spend his money. They’re not competent at it and it’s not their job.

ANGLE: Got to go. Jerry Taylor of Cato, thanks very much.

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