By Tyson Slocum
Published: Monday, November 28, 2005 in the Washington, DC Examiner
In the first nine months of 2005, the five largest oil companies operating in America - ExxonMobil, ChevronTexaco, ConocoPhillips, BP and Shell - enjoyed $81.4 billion in profits, eclipsing the total for all 12 months of 2004.
These profits are fueled by the high energy prices paid largely by Americans, since the United States uses one out of every four barrels of oil consumed in the world. As prices for gasoline, home heating oil and natural gas soar, oil companies rake in higher profits.
The ability of these oil companies to make bigger profits is largely the result of recent mergers, where former competitors like Exxon and Mobil fused their operations. That's why the U.S. Government Accountability Office concluded last year that recent oil company mergers have directly led to higher gasoline prices for consumers.
In most industries, when the main component (crude oil) of a product (gasoline) skyrockets in price, those higher costs eat into profit margins. But not the oil industry because ExxonMobil and the other major oil companies operate as a type of monopoly, with massive oil production, refining and retail marketing operations.
It isn't just Saudi Arabia's King Abdullah who gets rich when a barrel of oil hovers at $60/barrel; it's ExxonMobil and the other oil companies, since collectively the five largest oil companies produce 10 million barrels of oil a day - more than Saudi Arabia's 9 million barrels of oil a day. And much of the oil ExxonMobil et al is producing is coming from land owned by U.S. taxpayers (more than one-third of the oil and natural gas America produces every day comes from federal land). It only costs a company like ExxonMobil about $10 to produce a barrel of oil, but they're selling it to Americans for close to $60/barrel - a huge windfall profit.
The oil companies' windfall profits don't end there. Because the largest five oil companies also own half of America's oil refining capacity, they're more easily able to manipulate markets. The Federal Trade Commission confirmed this when it investigated the industry in 2001 and concluded that U.S. oil companies "withheld or delayed shipping additional supply in the face of a price spike" and that one oil company executive "made clear that he would rather sell less gasoline and earn a higher margin on each gallon sold than sell more gasoline and earn a lower margin. Another employee of this firm raised concerns about oversupplying the market and thereby reducing the high market prices."
The proof of these uncompetitive markets stemming from recent mergers is in the numbers. As late as 1999, U.S. oil companies made 22.8 cents for every gallon of gasoline they refined. By the summer of 2005, they made 99 cents on every gallon.
That's why a Windfall Profits Tax makes so much sense. Oil companies are making record profits off the price of crude oil and gasoline and it's coming at the expense of consumers. Proceeds from a Windfall Profits Tax could not only provide refunds for middle- and low-income consumers to help protect them from high home heating prices this winter, but the tax could be used to finance important investments. Proceeds from the tax could fund rebates for homeowners to upgrade their insulation, replace drafty windows and trade in their old appliances for more energy efficient ones. Revenues from the tax could be used to encourage consumers to buy more fuel efficient, hybrid or alternative fuel cars. And such a tax on oil companies could also be directed to state and local governments to fully fund public transportation.
Naysayers argue the Windfall Profits Tax didn't work the last time we tried it. The Windfall Profits Tax of 1980-88 wasn't very effective not because of the tax itself, but because oil prices fell shortly after enactment of the tax due to global events unrelated to U.S. tax policy. Congress enacted the Windfall Profits Tax in 1980 after U.S. oil company profits surged following the Iranian Revolution and the resulting Iran-Iraq war, which caused oil prices to increase from $14/barrel in 1979 to $35/barrel by January 1981. But after 1981, crude oil prices steadily decreased until completely bottoming out in 1986-87 as demand slackened and as other oil producing countries increased their output. As the value of the commodity subject to tax (oil) fell, the effectiveness of the tax was diminished.
But that was then. World oil markets aren't going to collapse anytime soon, because the major oil producers are already producing at full capacity, unlike the 1980s. But as long as Congress and White House refuse to confront the oil companies, it is clear that the industry's $54 million in campaign contributions since 2001 (81 percent going to Republicans) has bought oil companies a certain amount of immunity from scrutiny.
Tyson Slocum is the director of Public Citizen's Energy Program.
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