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Archive for Sunday, December 4, 2005

Oil company profits not out of line

December 4, 2005

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"A Locrian who proposed any new law stood forth in the assembly of the people with a cord round his neck, and if the law was rejected, the innovator was instantly strangled." - Edward Gibbon, "The History of the Decline and Fall of the Roman Empire"

— If Congress had the rule of the Locrians, a people in ancient Greece, it would have been fatal to Sen. Byron Dorgan, the North Dakota Democrat. He recently got 34 colleagues, none of them Republicans, to vote for his measure to punish oil companies for earning profits which, relative to revenues, were unimpressive.

Dorgan's measure also would have inflicted collateral damage on everyone who buys petroleum products, and would have injured millions of Americans - many of them currently inciting Congress to smite the oil companies - who do not know that they own oil stocks. Herewith an after-action analysis of a battle that has been fought before and will be again.

"None of us know much about what is happening with respect to pricing," said Dorgan, disclaiming a competence rarely ascribed to senators. But, quickly recovering from uncharacteristic humility, Dorgan joined Senate colleagues in exhibitionistic indignation about the fact that the five largest oil companies, led by ExxonMobil's $9.9 billion, had combined third-quarter profits of $32.8 billion.

ExxonMobil, which has more than $50 billion of past profits invested in energy development projects, made 9.8 cents per dollar of sales, much less than the 21.2 cents made by a company selling another fluid that lubricates American life - Coca-Cola. Nevertheless, another Midwestern populist, Sen. Charles Grassley, the increasingly eccentric Iowa Republican who chairs the Finance Committee, admonished the oil companies to contribute 10 percent of their third-quarter profits to augment existing federal subsidies that help some Americans pay their heating bills. Many of those Americans live in the chilly Northeast and vote for liberals who, in Congress, write this narrative:

By blocking much drilling in Alaska and offshore, Congress does nothing to improve the price of oil. Then Congress spends taxpayer dollars to soften the impact of the price, thereby encouraging consumption that raises the price. Then Grassley asks oil executives to join the moral grandstanding by squandering their shareholders' wealth - diverting it to protect oil consumers from some consequences of their representatives' irrationality.

The Senate, having flirted with this loopy idea of oil companies tithing themselves, then contemplated a worse idea - Dorgan's "windfall profits" tax. A "windfall profit" is a technical term denoting a profit made by someone else. Americans do not say there was anything windfall-like about this year's $2.5 trillion increase in the value of their houses.

This year the six largest oil companies will disperse 34 percent of their cash flow - $31 billion - in dividends to shareholders. But such flows can be shrunk by "windfall profit" taxes. That is explained, with a clarity sufficient even for the dimmest 35 senators, in a study - "The Economic Impact of a Windfall Profits Tax for Savers and Shareholders" - by Robert J. Shapiro, former undersecretary of commerce in the Clinton administration, and Nam D. Pham, an economist.

Although the real rationale for a windfall profits tax is to allow legislators to strike a histrionic pose, Dorgan's tax, say Shapiro and Pham, would have produced gross revenues - depending on where the price of oil is in the range between $45 and $60 a barrel - of $18.5 billion to $104.9 billion over five years. But because the windfall profits tax payments would have reduced corporate income tax payments, the government's net, say Shapiro and Pham, would have been only $8.6 billion to $48.7 billion.

They calculate that 41 percent of oil company stocks are owned by pension plans and individuals' retirement accounts. Hence much of the tax's burden would have fallen on current and future retirees, reducing both the market value of, and dividends paid by, those stocks. The cost to all the oil companies' shareholders, in forgone stock appreciation and dividends, would have ranged - depending on oil prices and inflation - from $21.3 billion to $121.8 billion per year.

Furthermore, Shapiro and Pham conclude that the windfall profits tax would have discouraged domestic oil production and increased U.S. dependence on imports from the Persian Gulf. And from Venezuela, thereby funding the left-wing fascism of Hugo Chavez.

Because the average price of a gallon of gasoline has swiftly plunged from the post-Katrina high of $3.07 to $2.15 (compared to $185.60 for a gallon of Starbucks espresso), the recurring populist fever that always follows oil price spikes has broken. It will be back. Too bad the Locrians' rule will not be.

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