Avoiding a‘windfall profits’ tax

Don Stowers, Editor-OGFJ

Perception can be more powerful than reality. Ask ExxonMobil CEO Lee Raymond, who was one of five energy executives to testify before the Senate Energy and Commerce committees in November.

Raymond’s company was on the hot seat largely because it had reported earnings of $9.9 billion in the third quarter, while consumers were spending record amounts at the pump for gasoline.

It seems logical to many that high fuel prices are somehow related to higher profits. After all, gasoline prices had risen to around $3 a gallon just after Katrina and Rita struck the Gulf Coast and are still hovering at around 60 cents more than they were this time last year.

ConocoPhillips CEO James Mulva pointed out to the senators that although gasoline rose an average of 67 cents a gallon for the three months ending Sept. 30, the Houston-based company’s profit margin per gallon was just 4 cents.

“We do not see this as a windfall,” he said.

In fact, the profit margins for each of the five companies at the hearing - Chevron Corp., Shell Oil, BP, ExxonMobil, and ConocoPhillips - were less than that of many other large companies in other industries. Nobody seems to be suggesting that Microsoft or Google pay extra taxes for their “windfall profits.”

Sen. Pete Domenici (R-NM), one of the energy industry’s best friends in the US Senate, spoke candidly when he said that lawmakers are being “bombarded with complaints” from constituents who are suspicious of the oil industry’s motives.

The energy executives reminded their questioners that the market sets commodity prices - not the oil companies. They also should have reminded them that they have a fiduciary responsibility to their shareholders to make their businesses perform as profitably as possible.

That said, the industry would be wise to heed the direction the wind is blowing in Washington. Congress is holding these hearings because its members detect the mood of the country is getting a little ugly. If voters are angry about high energy prices, they may take it out on their elected officials. In this scenario, few senators or congressmen would hesitate to make oil companies the scapegoat if they felt it would help their re-election prospects.

In my view, the industry could do a better job of explaining how it is working to reduce our dependence on foreign oil, how it is using technology to retrieve reserves that were once considered uneconomic, and how it is meeting or exceeding environmental standards in the pursuit of desperately needed oil and gas to fuel the nation’s economy.

In the wake of natural disasters such as last December’s tsunami and the recent hurricanes that struck the Gulf Coast, the industry was quick to respond. Oil and gas companies and their employees donated millions of dollars to help individuals and families impacted by the natural disasters.

Since perception is so important, it wouldn’t hurt to do more to publicize these acts of kindness and the fact that the industry is mindful of its social responsibility. It might even make a difference as to whether or not burdensome new tax proposals are enacted. OGFJ