Tyson Slocum
08/01/06
Oil companies are not paying their fair share. A 2004 study by the Institute on Taxation and Economic Policy found that between 2001 and 2003, the petroleum industry’s effective federal corporate income tax rate was 13.3 percent—far below the statutory rate of 35 percent. A recent New York Times’ investigation found that oil companies are exploiting royalty loopholes to escape paying billions of dollars in taxes that could be used to fund our transition from oil dependence. And just months ago, Congress and the president signed into law new oil company tax breaks worth billions of dollars.
Oil companies implore us to ignore the $342.4 billion in profits that the five largest of them have made since 2001. They downplay this figure when communicating to the public and lawmakers, and point to the slim margins (8 to 10 percent) that result when profits are measured as a share of sales. But when they talk to Wall Street, these companies use a radically different metric: profits as a share of capital investment.
ExxonMobil’s 2005 annual report explains that the company “believes that return on average capital employed (ROCE) is the most relevant metric for measuring financial performance in a capital-intensive business” such as petroleum. Using this calculation, ExxonMobil boasts a 46 percent rate of return on its capital investment in selling the oil and natural gas that it pumped from the ground in 2005.
Oil companies are raking in these windfall profits because, like any other part of the petroleum industry, they get rich when the price of oil skyrockets. A company such as ExxonMobil, which extracts more oil daily than the entire nation of Kuwait, spends about $20 to pull a barrel of oil out of Nigeria, Alaska or Texas. But it sells that barrel to the American people for more than $70.
Furthermore, ExxonMobil—like any vertically integrated oil company—also owns many of the refineries where crude is turned into gasoline. The company earned a 59 percent rate of return on its capital investment in U.S. refineries in 2005. Refiners are making so much money in part because recent mergers—like those that created ExxonMobil, ChevronTexaco (now called Chevron) and ConocoPhillips—have reduced competition in the refining sector. In 1993, the five largest refiners controlled 34.5 percent of the national market, while the largest 10 controlled 55.6 percent. By 2004, the largest five controlled 56.3 percent; the largest 10, 83.3 percent. Mergers enable a handful of companies to keep refinery capacity tight and drive up prices.
A windfall profits tax represents the most equitable way out of this mess. Proceeds from a windfall profits tax should be invested in alternative fuels, improvements to mass transit, incentives to individuals and small businesses for energy efficiency and higher fuel economy standards. Critics may argue that a windfall profits tax will provide lower returns to oil industry shareholders. But doing nothing to address sustained high energy prices will take its toll on the economy and, ultimately, all shareholders.
Naysayers claim that the windfall profits tax did not work the last time we tried it. In reality, the windfall profits tax levied on this industry between 1980 and 1988 was ineffective only because oil prices fell shortly after its enactment due to global events unrelated to U.S. tax policy. After 1981, crude oil prices steadily decreased until bottoming out in 1986–87 as demand slackened and as other oil-producing countries increased their output. As the value of oil diminished, the effectiveness of the tax levied upon it diminished.
That was then. Oil markets are not going to collapse anytime soon because the major producers are running at full capacity, unlike in the 1980s. Indeed, a recent article in the Wall Street Journal stated that “a crash looks unlikely now, both because supplies remain tight and because of the large volumes of money that investors are pouring into oil markets.”
Politicians have been slow to support a windfall profits tax, most likely because since 2001, the oil industry has made $58 million in federal campaign contributions—with 81 percent going to Republican candidates—and has spent an additional $221 million lobbying the federal government. That money has purchased the industry immunity from scrutiny. Sooner or later, however, even legalized bribes will not be able to save the industry from being held accountable for our energy crisis.
 | Tyson Slocum is director of the Energy Program at Public Citizen, a national, nonprofit consumer advocacy organization founded in 1971 to represent consumer interests in Congress, the executive branch and the courts. |