November 9, 2005 in Nation/World

Oil industry may face tax on windfall profits

Kevin G. Hall Knight Ridder
 

WASHINGTON – The stakes couldn’t be higher for captains of the oil industry today when they appear before a joint hearing of two U.S. Senate committees to answer questions about the highest corporate profits ever.

One question sure to get their attention: Why shouldn’t Congress impose a windfall profits tax on them?

Beyond the expected theatrics at the joint hearing of the Senate’s energy and commerce committees, there’s a growing chance that Congress might target oil industry profits. That’s because on Oct. 27, ExxonMobil Corp. reported the largest quarterly corporate net profit ever, $9.9 billion, up 75 percent. Royal Dutch Shell reported profit growth of 68 percent; British Petroleum, 34 percent; Chevron Corp., 12 percent; and ConocoPhillips, 89 percent, to $3.8 billion.

These five companies, whose executives will testify today, reported combined quarterly profits of $32.8 billion. That’s an astonishing $356 million per day for the 92-day third quarter. The money came from Americans paying record-high gasoline prices at the pump – more than $3 a gallon, thanks to a tight global oil market and hurricanes that ravaged industry infrastructure around the Gulf of Mexico.

Today, gasoline prices are back to pre-hurricane levels, but winter home heating costs are projected to soar by more than 60 percent in some parts of the nation. Opinion polls show that the rising cost of energy now surpasses health care as the top concern of American families.

That’s why the heat is on the Republican-controlled Congress, which may find it necessary to go beyond a public mugging of the CEOs and actually take action.

House Speaker Dennis Hastert, R-Ill., recently warned that oil companies must do their part “to ease the pain” of Americans by using their record profits to build more refineries. Sen. Charles Grassley, R-Iowa, chairman of the Senate Finance Committee, wrote to oil executives urging them to donate 10 percent of their profits to a program that defrays home heating costs for the poor and elderly.

Senate Budget Committee Chairman Judd Gregg, R-N.H., proposes a windfall profits tax to help the poor and elderly this winter. In a statement, he said, “I cannot sit back in good conscience while those in our society struggling to heat their homes are being left in the cold by oil companies.”

Today’s hearings, the first of their kind in decades, came after Senate Majority Leader Bill Frist, R-Tenn., contemplating a 2008 run at the presidency, said oil company executives should explain their record profits amid an energy squeeze on average Americans.

And that’s just the Republicans.

Sen. Hillary Clinton, D-N.Y., proposes an “alternative development energy fee” of up to $20 billion annually on oil profits. Sen. Byron Dorgan, D-N.D., proposes a 50-percent excise tax on oil profits when crude oil goes above $40 a barrel on global markets. His tax would return oil industry profits to consumers in the form of a rebate.

Testimony from the executives may be key to avoiding a windfall profits tax.

“If they don’t come across as sympathetic to the plight of the consumer, there are going to be more incentives for the Congress to say, ‘This is too much and I’ve got to do something,’ ” said Frank Verrastro, director of energy programs for the Center for Strategic and International Studies, a conservative think tank in Washington.

President Carter proposed a windfall profits tax on the oil sector in 1979 as a trade-off for deregulating energy prices. Congress enacted the compromise in 1980. The tax ranged from 30 percent to 70 percent, depending on crude oil prices, until President Reagan scrapped windfall taxes amid low global crude prices.

The windfall profits tax was levied only on established oil production. New domestic production in the Gulf of Mexico and elsewhere was taxed at a more favorable rate to provide oil companies an incentive to find more oil. The two-tiered tax system proved hard to enforce.

“It decreased investment. It made it less attractive to invest in the (U.S.) oil business, and the end result was domestic production went down and imports went up. It’s the exact problem we’re trying to solve now,” recalled William J. Bittles, who’s now retired, but was a Shell vice president when the windfall profits tax was in place.

In a recent interview, Royal Dutch Shell’s president of U.S. operations, John Hofmeister, said the industry is spending more than ever on exploration and production and that a tax on profits would discourage that. The American Petroleum Institute estimates that U.S. oil companies will spend about $66 billion this year on exploration and production.

Oil traders worry that a well-meaning Congress could create longer-term supply problems.

“It discourages investment in a sector that, let’s face it, needs investment,” said Phil Flynn, an energy analyst and vice president of Alaron Trading Corp. in Chicago.

Consumer advocacy groups disagree.

“The oil industry is ripping off the public, and the cost to the nation, to our economy and to individual citizens is huge,” said Joan Claybrook, president of the liberal group Public Citizen in Washington. “These profits are so huge that even at a 50 percent tax, they are still making out like bandits.”

Get stories like this in a free daily email


Please keep it civil. Don't post comments that are obscene, defamatory, threatening, off-topic, an infringement of copyright or an invasion of privacy. Read our forum standards and community guidelines.

You must be logged in to post comments. Please log in here or click the comment box below for options.

comments powered by Disqus