WATCHING WASHINGTON THE 'WINDFALL PROFITS' TAX

With Patrick Crow The U.S. oil industry's sharply higher fourth quarter profits have prompted some congressmen to propose reviving the "windfall profits" tax. Such bills have been filed in the House of Representatives, and Sens. Joseph Lieberman (D-Conn.) and Howard Metzenbaum (D-Ohio) plan to offer a budget amendment to tax away oil profits exceeding a 1985-89 average. Lieberman said, "The oil companies have gained a tremendous windfall as a result of Iraq's aggression. Kuwait's

Feb. 11, 1991

3 min read

The U.S. oil industry's sharply higher fourth quarter profits have prompted some congressmen to propose reviving the "windfall profits" tax.

Such bills have been filed in the House of Representatives, and Sens. Joseph Lieberman (D-Conn.) and Howard Metzenbaum (D-Ohio) plan to offer a budget amendment to tax away oil profits exceeding a 1985-89 average.

Lieberman said, "The oil companies have gained a tremendous windfall as a result of Iraq's aggression. Kuwait's loss was the oil industry's gain."

ARGUING AGAINST THE TAX

William O'Keefe, American Petroleum Institute vice-president and CEO, recently told reporters, "I think it's unfortunate there have been some politicians who in knee jerk reaction made some ill conceived, misguided proposals to use fourth quarter earnings as a justification to relive history and make the mistakes of the 1980s."

O'Keefe said two key questions should be asked about the windfall profits tax: Would it reduce U.S. dependence on imports from the Persian Gulf, and would it increase domestic energy production?

He said, "I think anyone who has looked at the experience of 1979-86 would come to the conclusion that the answer to both questions is 'no.'

He pointed out the windfall profits tax was a misnomer because it was an excise tax on the price of crude oil, not a tax on profits. Operators could pay a tax and incur a loss. As a result, it discouraged investment in production and thus encouraged imports.

Although fourth quarter profits were up sharply, O'Keefe noted third quarter profits were comparable to the third quarter of 1989 and were lower in the first two quarters of that year.

"The fourth quarter was good because crude prices went up in reaction to the conflict in the Middle East, and the base year for comparison, 1989, was the lowest in the decade. So any improvement would look very good. If you look at the whole year ... industry earnings would be 7.8% above 1989 but about an equal percentage below 1988."

O'Keefe expects first quarter 1991 profits to be lower. "The world now knows there is an abundance of crude oil. There is adequate refining capacity. The Iraqis have demonstrated they cannot seriously affect Saudi production. So there's no reason to believe there's going to be any interruption in crude oil or products in this country. That suggests prices of crude oil should stay at about the current level."

O'Keefe said API has to consider a windfall profits tax as a serious threat, but he believes the effort to impose the tax will run out of steam.

"I think the first quarter will not be robust and will not generate the kind of earnings that would sustain that kind of legislative debate."

CHANCE OF PASSAGE

A few other points should be noted. A tax bill might be a threat if filed by moderate congressmen, but Metzenbaum and Lieberman are ultraliberals who continually seek-but never seem to find-price gouging by oil companies.

Also, neither sits on the budget or finance committees. They would have to try for an amendment on the floor. But almost no support for a windfall profits tax is evident in either house because product prices have returned to preinvasion levels, and supplies are ample.

Everyone but Metzenbaum and Lieberman seems to know the real villain is not "big oil" but Saddam Hussein.