Pity Big Oil. Exxon Mobil released news last week of a record-shattering $36 billion profit for 2005. United Kingdom-based Royal Dutch Shell announced a striking $25 billion profit in its fiscal 2005. On Tuesday BP revealed it earned an after-tax profit of a mere $22 billion.
In better times, this is when the champagne corks would pop and oil tycoons would parade their income statements through the New York Stock Exchange. Not so this earnings cycle. Energy prices being what they are, Exxon and its unctuous peers have replaced the usual earnings glitz with what the Wall Street Journal correctly calls a “reverse PR blitz.”
Already, oil and gas companies have taken out full-page ads in national newspapers to justify the profits bounce. Energy honchos have explained their future investment prospects in detail their shareholders hadn’t even heard of. Consumer groups responded to the announcements with frothy condemnations and loose accusations. And between eulogies of the American economy, members of Congress have announced plans, as they did last fall, to take the energy giants to task.
Energy executives, on the other hand, say they’ve played by the rules. If all corporations are supposed to make money except the ones with “oil” or “gas” in their job descriptions, what is an energy company to do?
In the past these kinds of outcries have had a tendency to blow over. This one may very well do the same. But widespread suspicion of price gouging among consumer groups and members of Congress have fueled fears that either states or the federal government might hit oil companies with a windfall profits tax ” a kind of one-time, “you’ve-made-way-too-much-money” charge.
Thankfully, backdoor windfall profits taxes are not part of the standard operating policies in Washington or the states. California legislators overwhelmingly squashed the idea last week. In fact, the last time a federal windfall profits tax was introduced was in 1980 on the eve of the decade-long Iran-Iraq war. The tax was repealed eight years later, but looking back to 1990, a Report of the Congressional Research Service determined that the levy had significantly reduced domestic gas production, increased foreign-oil dependence and drained billions in revenues that could have been used for oil and gas exploration.
Most likely, a windfall profits tax would create similarly disastrous results this time around. Notwithstanding the hoopla surrounding energy profits in recent years, most oil companies have used their earnings for research and development, oil exploration and other long-term capital investments. Since 2002, Chevron actually has invested more than it has earned. The same holds for Exxon Mobil from 1995 to 2004 and ConocoPhillips for the past three years. If Congress robs oil companies for profits, what lawmakers really are doing is trashing America’s energy future.
To be sure, it is easy to dismiss Congress’ chest-thumping as more bark than bite. After all, oil companies make for easy political targets during election years. But legislators seem to have no qualms about the oil industry’s already enormous tax burden (effectively, 38.3 percent compared with the rest of the market’s 32.3 percent). Vindictively, the Senate recently passed some shabby tax accounting legislation targeting oil companies that would make that share even bigger.
If lawmakers could prove oil companies took advantage of consumers last year, then this would be a very different story. But oil executives have repeatedly and emphatically denied accusations of overcharging customers at the pump. And if you listen closely, the justification for Congress’ backdoor thrashings never has anything to do with price gouging. The reason Senate hearings on price gouging never amount to anything is that the Federal Trade Commission examines such allegations and has found no evidence to support them.
The politically unpalatable truth is Big Oil has nothing to answer for, nothing to pay to Congress or back to consumers. Oil prices are set by basic-market forces, not fat capitalists sitting in back rooms of Vice President Dick Cheney’s mansion in D.C. Uncertainty in Iraq, Iran, Nigeria and Venezuela, coupled with new energy needs in India and China, means demand is finding supply just a little higher on price’s axis these days. “Energy prices fluctuate over time ” oil was less than $20 a barrel for most of the 1990s,” The Wall Street Journal wrote last week, “If oil executives could pull a string and create $65-a-barrel oil and $3-a-gallon gas, that’s all we’d ever see.”
Of course, to say that oil companies have been entirely sensitive to consumer sentiment would not be quite accurate either. A little corporate philanthropy would do Big Oil well right now. But even without proof of market manipulation and in complete disregard of the oil industry’s tax burden and billion-dollar investments, Congress still is huffing and puffing about blowing Big Oil’s wells down.
Good business be damned; off with their heads!
Darren Bernard welcomes comments at [email protected].
