Record Setting Oil Profits

Oil reached an all time record high of about $70 a barrel in August, and though it has backed off a good deal, it is still expensive at about $58 a barrel. The American economy has so far been able to handle these prices with relative ease; growth in the 3rd quarter was 3.8 percent, 2 tenths higher than economists anticipated. Despite this less than worst case scenario, few have benefited from high oil prices; with the exception of perhaps renewable energy firms, Toyota, with its hybrid vehicles, and, of course, oil companies.

Oil companies posted unthinkable profits in the 3rd and 4th quarters of 2005. The largest, ExxonMobil, saw a 75 percent increase in profit from the same time last year, earning a staggering $9.92 billion during the 3rd quarter, the single largest quarterly haul in history. Shell was right behind them, with $9.03 billion (up 68 percent), ConocoPhillips reported an 89 percent increase with $3.8 billion, and BP reported $4.87 billion (up 34 percent).

These enormous profits, not surprisingly, have lead to outrage, especially as they come after hurricanes Katrina and Rita.

Oil companies saw these record profits despite actually losing some production capacity to hurricanes, because prices climbed to record-highs, while their operating cost remained essentially unchanged.

Oil firms were not necessarily doing anything to drive prices up; they were simply selling their product at the market price, and making a killing. It is true that American oil firms, like ConocoPhilips, took a beating during Hurricane Katrina, but much of the damage to infrastructure is covered by insurance.

The profit reports have lead many to declare price gouging and spurred talk of a windfall profits tax.

Byron Dorgan, Democratic Senator from North Dakota, introduced a three year tax of 50 percent on profits made from oil in excess of $40 a barrel. The senator is less than enthusiastic about its chances, though; CNN quoted him as saying, “This is not a very hospitable political environment to challenge the oil industry… We have a president and vice president who come from the oil industry and they’re not interested in doing anything that runs counter to the interests of major integrated oil companies.”

The chance of seeing a windfall tax, or a roll back on subsidies is remote, discussion of it is probably just lip service to assuage constituents, especially considering that many moderate Republicans are eager to distance themselves from a beleaguered and unpopular Whitehouse. New Hampshire Republican and head of the Senate Budget Committee, Judd Gregg, said that he would look into some type of windfall profits tax; and Senate majority leader Bill Frist held hearings on November 8th, to hear explanations from oil executives on their most recent success.

CEOs predictably had well crafted and seemingly logical explanations during those hearings; according to CNN Exxon Mobil CEO Lee Raymond said, “History teaches us that punitive measures hastily crafted in response to short-term rises in prices will have unintended consequences and disincentives to investment,” Raymond also strongly rebuffed the notion of price gouging “to minimize the increase in price while at the same time recognizing that if we kept the price too low, we would quickly run out of gasoline and have shortages. It’s a tough balancing act.”

His logic is sound; to reduce demand and prevent a massive shortage prices had to be raised, and raised a great deal as demand for energy is very inelastic, it takes huge changes in price to affect demand. However he fails to answer the question of who should reap the profits from a natural disaster, which is what caused the shortage and allowed them to raise prices to begin with.

Companies who are already seeing huge government tax breaks and incentives, or the working poor who will struggle to heat their homes.

When people hear about the arguably outrageous amounts of money these corporations are making, all while many struggling to heat their homes, they are understandably outraged. Many feel the government is more concerned with subsidizing big oil than making energy products affordable. According to a July 28th Washington Post article, Congress gave a $14.5 billion tax cut and incentive program to the energy industry, 58 percent of which went to traditional energy companies, including the oil industry. With oil bringing in such huge profits, it is hard to understand why they need government hand outs as well.

Like the rest of the country, UVM students have strong opinions about the high cost of energy; Rodney Martel, class of 09, put it bluntly, “If they can tax my beer, they can tax their oil.” Erica Mullen expressed her thoughts somewhat more poignantly, “Yeah, I think it is outrageous for them to be making so much money off something so basic.”

We should take some of their profits and use it to help people pay their heating bills, or look into alternatives.”

Their views are shared by a number of congressmen and senators, including Rep. John Dingell of Michigan, who expressed his frustration in his weekly radio address by saying, “What was the Republican answer to the hurricanes? More subsidies to the oil industry.”

While criticism is strong for all oil companies, none has drawn as much flack as ExxonMobil, mostly due to its refusal to invest any amount of money explicitly into renewable energy research. According to a USA Today article, Exxon spokesman Dave Gardner, said, “We’re an oil and gas company. In times past, when we tried to get into other businesses, we didn’t do it well. We’d rather re-invest in what we know.” This is despite rivals finding no problem investing heavily in renewable technology–Chevron has spent $1 billion since 2000 on renewable energy; BP has invested $500 million in solar panels since 2000, and $30 million on wind since 2002, and their solar operations have turned a profit too.

On top of this, BP is involved in a number of tree planting programs to offset some of its pollution. This may add up to little more than positive PR, but as their television ads say, “it’s a start.”

As mentioned ExxonMobil, the largest privately owned oil firm in the world, has made $9.92 billion in the last three months, with such a large figure it is easy to lose perspective of such a colossal figure. Think of it like this, if broken down to per second profit, it is roughly $1275 per second, for three straight months. Compare that to Microsoft who reported a robust $3.14 billion; ExxonMobil made over 3 times that amount.

Although often ridiculed, Halliburton paled in comparison with a measly $499 million. It is important to note though how large and essential these corporations are, oil products are absolutely essential to life in industrial nations, given the nature of the oil market it is understandable how they made so much money under the circumstances; this does not mean it is “right” but notions of some price gouging conspiracy are misguided.

Heating expenses promise to be brutal this winter. It would be nice to see the federal government provide a coherent solution to the problem, especially with one so obvious at hand, Senator Dorgan’s plan could be a viable way help people pay their heating bills this winter. Only time will tell if the congress has the vision to impose a tax on windfall profits which are essential the spoils of a natural disaster. In the mean time, it is not getting any warmer.