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Oil industry under fire
Soaring earnings prompt calls for a windfall profit tax, but will big oil end up having to pay?
October 28, 2005: 2:51 PM EDT
By Chris Isidore, CNN/Money senior writer
Sen. Byron Dorgan has proposed a
Sen. Byron Dorgan has proposed a "windfall profit" tax on oil being sold above $40 a barrel.
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NEW YORK (CNN/Money) - Soaring energy prices and record profits for big oil companies have sparked a wave of public outrage in the United States that's led all the way to Capitol Hill.

But while consumers are facing a winter of high heating bills and oil companies are feeling the heat, the industry is unlikely to get burned by a "windfall profit" tax any time soon.

On Friday Chevron (Research) became the latest big oil company to report a jump in profits for the third quarter, a day after Exxon Mobil (Research), the nation's biggest oil company, reported $9.9 billion in net earnings -- the biggest corporate profit on record.

All told, the 19 oil and gas companies in the Standard & Poor's 500 index that have reported so far have earned more than $20 billion excluding one-time charges and other items, up more than 50 percent from a year earlier, according to earnings tracker First Call.

The profits have led even some Republicans who are normally seen as friends of the oil industry, such as Senate Majority Leader Bill Frist and House Speaker Dennis Hastert, to call for hearings into the profits gushing from the nation's energy producers.

"Oil and gas companies are enjoying record profits. That is fine. This is America," Hastert said in a statement.

"However, there have been allegations of price gouging in the wake of the hurricanes. This is unacceptable, and any company who does it will be prosecuted," he added. "Our oil companies need to do more to inform the American people about what they are doing to bring down the cost of oil and natural gas."

But Hastert said he opposes a windfall profit tax, and Democrats are pushing what they perceive as political advantage on the issue.

Sen. Byron Dorgan has introduced a three-year tax of 50 percent for any profit oil companies make for oil sold above $40 a barrel.

But even the North Dakota Democrat admits it's an uphill battle for the bill.

"This is not a very hospitable political environment to challenge the oil industry," Dorgan told CNN/Money. "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."

But Dorgan said he's sensing some growing support for a tax across the aisle.

"I've had some Republicans express some interest in the bill, but not enough to be a co-sponsor," he said. "But I think every member of Congress is starting to feel pressure from back home, particularly colder states seeing projections of a 60 or 70 percent rise in heating costs this winter."

Even if the tax passes, though, it's not clear how much money it would raise. Companies could deduct the cost of exploration, investment in refineries or in alternative sources of energy, so they might never have to pay any "windfall" tax.

A spokesman for the oil industry says producers are already making that investment, even without the push from a windfall profit tax.

Oil and Gas Journal estimated earlier this year that the industry would spend $86 billion on exploration and capital expenditures in 2005, a number that will be much higher after Hurricane Katrina, said Bob Tippee, editor of the industry publication.

"This is unfortunate rhetoric from politicians," said John Felmy, chief economist at the American Petroleum Institute, the industry trade group. "We're a cyclical industry, earning a fair rate of return for everything we have to do to meet our energy needs, all the money we have to invest, all risk we have to take."

Still, even with exploration costs offsetting part of any windfall tax, the tax could raise $3 billion to $4 billion a year from each of three or four biggest oil companies, according to Philip Verleger, an economist and senior fellow at the Institute for International Economics.

And Verleger, who worked in the Carter administration the last time a windfall profit tax was passed in 1980, said it wouldn't surprise him to see Republicans change their tune if oil prices stay high or rise further in 2006, as the mid-term congressional elections draw near.

He recalled that Sen. Russell Long, D-La., and a friend of that state's oil industry, changed his opposition to a windfall profit tax as oil prices continued to climb from 1979 to 1980.

"I remember being in a room with Long and industry executives and he told them, 'What you people don't understand is that the highest priority among politicians is survival, not the protection of the oil industry.' You saw the survival instincts beginning this week. By some time next summer, the Republicans are going to be in survival mode, and the oil industry will be in deep, deep trouble."

The key to determining the impact of such a tax on oil industry profits will be the details, which are impossible to project at this point.

"It could be written so nobody ever has to pay a penny," Verleger said. "The devil is in the details."

But Verleger and some oil analysts believe that if there is a tax, it won't be that toothless. And some analysts said it may not be the end of the industry's problems in Congress.

"Oil companies can see the winds have shifted even with Republicans in control of Congress," said Fadel Gheit, oil analyst with Oppenheimer. "The White House is reeling. All of a sudden the industry does not have the strong backing it had six months ago," he added, noting investors are already growing concerned about possibly more action from Congress.

But Gheit said support for a special tax could wane as the worst of the winter heating season winds down, and Dorgan agreed that there's a relatively short window in which to pass a bill.

"Right now it's a squeeze play for oil industry," said Gheit. "But if they can get by from here to February, I think the coast is clear."  Top of page

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