The story in the Oct. 29 Washington Post about oil companies' improved third-quarter earnings might have made industry lobbyists pause because it included a still volatile word—windfall—to describe the bottom-line impact of higher prices and strong demand. A mischievous copy editor went one step further and, on the inside page where the story continued, wrote a headline reading, "Oil Companies Awash in Windfall Profits."
The wording evokes the windfall profits tax, enacted in 1980 to make phaseout of crude oil price controls politically palatable. It also raises a question: Might the recent surge of crude prices revive interest in a windfall profit tax?
"It still commands a vocal minority in Congress, but at most it's two or three members," says Michael Platner, tax director at the American Petroleum Institute, noting "a couple of windfall profits tax bills" introduced with little support during the last session.
Little interest
Lee Fuller, vice-president of government relations at the Independent Petroleum Association of America, shares the view. "I haven't seen any interest in a windfall profits tax from the mainstream in Congress, particularly in the House Ways and Means Committee," he says.
Platner and Mark Kibbe, an API tax specialist, cite Business Week's Third-Quarter Flash Report showing an oil and gas industry profit margin (net income divided by revenue) of 6.4%, compared with 8.3% for industrials, 10.4% for service companies, and 13.5% for the technology sector. "Our members include several big companies that produce large revenues," Kibbe says. "But they also spend a lot of money."
Fuller points out differences between the political climates now and in the late 1970s. Earlier, the country was ending 2 decades of very stable oil and gas prices, particularly for natural gas, which had been subject to federal price controls since the mid-1950s. After the crude price increases of the 1970s, "the perception was that higher profits were windfalls," Fuller says.
Analysts discovered after the fact that the windfall profits levy—which taxed not profits but the difference between the sales price of crude and a legislated base price—did not deliver the anticipated revenues and actually discouraged domestic exploration. It also was costly to administer, reduced US production, and increased imports. "The tax just didn't work, and it didn't make sense," Kibbe says.
Market's role
Fuller sees more understanding now than existed in the 1970s of the market's role in oil and gas prices. And the news media are beginning to recognize supply questions about oil and gas. "I don't see an effort to tax profits," he says.
Unlike in the 1970s, Republicans control both sides of Congress, Fuller points out.
"My sense is that there will be some people who will raise the issue," he says. "But I certainly don't see a broad perspective that would react to a windfall profits tax as an appropriate legislative direction."
