Swiping Oil's "Windfall"

Representatives from five large domestic oil companies are scheduled to testify before Congress today about the industry's recent spike in profits.

The oil industry's record third-quarter profits — at a time when motorists were reeling from unprecedentedly high gasoline costs and warned of huge heating bills this winter — has caught the attention of both Republicans and Democrats in Congress. Some analysts predict the 29 largest oil companies will earn $96 billion this year.

"Consumers need relief from high energy prices," Sen. Byron Dorgan, D-N.D., said Tuesday, reiterating his call for a windfall profits tax on oil companies. "Talk is cheap. The price of energy is not. Congress needs to act."

The idea of a windfall profits tax has captured the imagination of many politicians and put oil executives in a cold sweat. Such a measure would tax any oil-company profits which exceed certain limits defined by historical norms; for instance, 30% of any profits more than 10% above a five-year average.
One typical proponent suggests that such a measure would "easily" raise about $10 billion per year. This report, from the Center for Economic and Policy Research, makes for really maddening reading:

The recovery from Hurricane Katrina will be long and expensive...The need for public money for immediate relief and reconstruction will almost certainly top $100 billion, and could run as high as $150-$200 billion (6-8 percent of the federal budget). With the federal government already facing large budget deficits, these additional expenditures are not coming at a good time.

For this reason, it is appropriate to look for new revenue sources. One obvious possibility is the windfall profits being earned by many oil companies in the wake of Katrina’s damage and the recent worldwide surge in oil prices...

The basic logic behind a windfall profit tax is quite simple. The oil industry made its investment and production plans under the assumption that oil would be selling for far less than today’s prices. As recently as 1998, oil was selling for less than $15 a barrel, and it was averaging less than $25 a barrel until the United States began preparing to invade Iraq in 2002...

Since the industry was looking at much lower prices when it made most of its investment and production decisions, it can cover its costs and make a normal profit at prices that are less than half the $60-$70 a barrel price seen at present in world markets.

Here's the argument, in brief: 1) we need money, 2) they have it, 3) they didn't even really expect to make that much anyway, and 4) they won't even miss it.

The oil industry does make for an appealing target, of course. After all, they're profiting by our misery.

The oil industry's record third-quarter profits — at a time when motorists were reeling from unprecedentedly high gasoline costs and warned of huge heating bills this winter — has caught the attention of both Republicans and Democrats in Congress. Some analysts predict the 29 largest oil companies will earn $96 billion this year.

But there are a few things wrong with this picture of giggling fat men holding sacks of money. First, the price of oil has been all over the map for decades, and oil executives nevertheless need to make decisions about future investment and exploration based on the best projections they can make. Should we punish this because they were unable to predict a massive surge in crude-oil prices? I will say this: you have to have nerves of steel to operate in an industry where your primary product goes through price swings like these.

Second, oil-industry profits, even at recent levels are not excessive when you compare them to other sectors of the economy. As this industry report shows, there are a lot more profitable businesses out there, such as banking and software. Why are these not considered as "new revenue sources"?

Third, the government already takes a large bite out of oil company revenues. Indeed, according to a study by The Tax Foundation, the oil industry has paid far more in federal, state, and local taxes than it has recorded in profits--during every year of the two decades ending 2004.

What we have here, as usual, is a bit of a witch hunt. Politicians, coming into an election year, don't want to be seen as being soft on an industry whose high-priced products are so important to the day-to-day lives of every American. That, however, doesn't justify the government telling businesses how much they should charge or earn.

Indeed, many analysts believe that a windfall profits tax would be a detriment over the longer term, discouraging oil companies from making the investments in additional capacity that could accomodate our growing demand for fuel. It might even result in greater domestic shortages, as oil firms opt to do more of their business outside the US in order to dodge the "windfall" altogether.

There's no question that oil companies are capable of collusion, or that individual gas stations will gouge their customers in a crisis. But it's also beyond dispute that the global economy is hungrier than ever for crude, and that the political situation is such that there are abiding uncertainties about production and supply logistics. If there is collusion, the federal government is well within its rights to step in; if there are gougers, state and local officials can seek their own remedies.

But punishing oil companies merely because they are profitable? God help our economy if the government can arbitrarily change the rules for the sake of political expediency.

Tags: Oil, Gasoline, Windfall, Congress, Senate, Profits