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Oil barons, pay up
Why an oil windfall profits tax is a good idea.
December 15, 2005: 4:17 PM EST
By Nelson D. Schwartz, FORTUNE senior writer

NEW YORK (FORTUNE) - I don't think Big Oil is evil. In fact, unlike the writers of the new movie "Syriana," I don't think corporate oil execs are especially corrupt -- they're like you, me and everyone else -- just trying to make a buck.

The big difference lately is that they're making a lot of bucks, and that's got the attention of the folks on Capitol Hill. A budget and tax package approved by the Senate last month includes a provision that would hit the five biggest energy companies -- Exxon Mobil, Shell, Chevron, BP and Conoco -- with what's essentially a $5 billion windfall profits tax.

President Bush is now threatening to veto the entire bill, and, predictably enough, the industry is warning the tax provision could have a "chilling effect" on new investment. In the end, the tax hike may not even make it to the president's desk -- the industry's Republican friends in the House may kill it first.

And that's too bad. At a time when the country is facing budget deficits of more than $300 billion, the Pentagon is spending $6 billion a month in Iraq and the energy industry has more cash than it literally knows what to do with (Exxon has $30 billion sitting on its balance sheet), Big Oil could certainly afford to put an extra $5 billion into the federal coffers.

And if those arguments don't convince you, consider this classic example of corporate chutzpah -- even as oil companies fret about the supposed impact of any new taxes, oil and gas drillers are getting several billion dollars in subsidies thanks to the energy bill approved by Congress and signed into law earlier this year. To make matters worse, they're getting this giveaway even as their own profits are soaring and Americans pay record prices at the pump.

But we're getting ahead of ourselves. Let's look at what the industry itself is saying. First, there are arguments like the one from the American Petroleum Institute's Mark Kibbe, who warns the tax "would have a huge chilling effect on future investments in the refining industry." In fact, the current proposal calls for a one-time change in how inventories are taxed, so it wouldn't change the fundamental, long-term economics of refining.

And those economics are very, very good right now -- Valero, the country's biggest independent refiner, earned more than $2 billion in the first three quarters of 2005. Exxon's downstream U.S. refining operations have made $2.75 billion this year. Numbers like those provide plenty of incentive to invest in refining, even if next year's tax bill goes up.

What's more, the last new refinery was built decades ago, capacity is only growing tighter, and its not as if anyone is exactly abandoning their cars for bicycles or buses so the demand/supply balance should continue to go the industry's way.

There's another claim making the rounds about the danger of the tax -- domestic oil production will fall as a result. Indeed, say experts like PIRA Energy's Larry Goldstein, output fell by 500,000 barrels a day following the Carter Administration's decision to impose a windfall profits tax in the late 1970s, which was later repealed when prices fell.

Guess what? U.S. output is already in decline as fields age, and Big Oil is pulling out of North America, leaving tired wells to smaller companies like Occidental and other independents. For these smaller players, there's still plenty of money to be made at prices north of $40 a barrel, and this tax hike won't apply to them in any case.

Ironically, if the oil industry were to step up and pay the tax, they'd be in a position to make clear to the American people that they're not the Big Bad Oil barons Hollywood is so fond of portraying. And it's not like they can't afford it: Exxon is on track to grab the top spot on the Fortune 500 next year, and earned $25 billion last year. By one estimate, the five biggest oil companies earned a whopping $33 billion in the third quarter alone.

Hey buddy, you can spare $5 billion.

The other side of the story

December 15, 2005 -- Last week, I wrote about why Congress should approve a proposal to hit the energy industry with what's essentially a $5 billion windfall profits tax by changing the way inventories are treated under accounting rules.

Exxon Mobil spokesman Mark Boudreaux responds that supporters of the tax ignore the long-term economics of the oil industry. He adds that oil companies are being criticized now when prices are high, even though they kept investing heavily when prices were low.

"We invested $15 billion in 1998, when oil was at $10 a barrel -- that's almost double what we earned that year," he says. "We have to deal with valleys as well as peaks. This is a long term business, and it's our job to manage through these."

What's more, he says, "These accounting rules have been around since the 1930s. Changing them like this doesn't give investors confidence in the fiscal regime that you operate under, at a time when the industry is being challenged to invest heavily to meet the needs of growing US and global economies."  Top of page

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