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| Thought Leaders: Industry |
Point: Penalize the Profiteers
Tyson Slocum
08/01/06
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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. |
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