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Talk About Taxing Big Oil's Profits | Oil Watchdog

Talk About Taxing Big Oil's Profits

Tue, May 6, 2008 at 9:54 am

    Talk About Taxing Big Oil's Profits

    Taxing Oil Profits: Proceed With Caution

    Politicians are dying to get at more of Big Oil’s billions, but
    analysts are torn about what that will do to prices or future energy
    sources.

    May 06, 2008

    NEW YORK, NY — Politicians are eyeing oil profits like a fat juicy glazed ham.

    With all the money Big Oil is making – the top five publicly traded
    firms pocketed over $120 billion in 2007 alone – and with an election
    on the horizon, it’s easy to see why.

    The leading Democratic presidential candidates want a windfall profits
    tax to do various things, and although their plans differ slightly they
    generally want to use the money to give Americans a break from
    skyrocketing energy prices and jumpstart research into renewable energy.

    House Democrats have also warned of punitive measures if these massive profits continue at the expense of American consumers.

    But while the politicians present their plans, analysts are far less
    sanguine about whether or not a windfall profits tax would actually
    help soothe steadily rising energy prices and spur R&D for
    alternative energy sources.

    A consumer rights group says that windfall taxes could actually raise
    gas prices as oil companies might attempt to squeeze refinery
    production to recoup their lost profit.

    "It would have a fairly easy pass-through" to motorists, said Judy Dugan, research director at Consumer Watchdog.

    Oil industry: Hands off our cash

    The industry, of course, doesn’t like the extra profit tax.

    "If our profits are taxed, that means we’ll have less capital to invest
    in new production" and it could raise gas prices, John Hofmeister,
    president of Shell U.S., recently told CNNMoney.com.

    Oil companies have been investing more in new production lately, but
    that argument is a little hard to swallow given the disparity between
    the huge amounts of money the big firms have been returning to
    shareholders versus the meager new oil discoveries.

    Amy Myers Jaffe, a fellow in energy studies at the James A. Baker III
    Institute for Public Policy just finished a two-year study looking at
    oil companies and how they spend their money.

    The study found that for the five big international oil companies –
    ExxonMobil (XOM, Fortune 500), Royal Dutch Shell (RDSA), BP (BP),
    Chevron (CVX, Fortune 500) and ConocoPhillips (COP, Fortune 500) –
    spending on share buybacks went from under $10 billion a year in 2003
    to nearly $60 billion a year in 2006.

    Spending on developing their existing oil fields, however, went from
    about $35 to $50 billion, while spending on finding new oil fields went
    from about $6 billion to $10 billion.

    "These companies are spending a very small amount of their operating
    cash flow on exploration," she said. "They are spending the majority of
    their funds buying back stock."

    Finding oil: No cheap feat

    Recently, oil rich countries like Russia and Venezuela have begun to
    elbow out foreign companies in order to keep a larger portion of their
    own energy profits. In the meantime, a shortage of skilled workers and
    materials has hit the industry, making finding new oil is a challenge.

    Oil analysts and the industry itself concede that this turn of events
    makes it hard for companies to invest profits for new exploration
    projects and must be redistributed to shareholders.

    But it’s unlikely this scenario – high oil prices and limited access to
    resources – will remain static forever, and it’s important for oil
    companies to have access to cash when times change and exploration and
    development are more achievable, said Antoine Halff, head of energy
    research at Fimat in New York.

    Fields in Mexico, Russia, Venezuela and other places are facing
    production problems, and its becoming more likely that big foreign
    firms will be called in to help, said Halff.

    Halff said a one-time profits tax probably would have a negligible
    effect on worldwide production, but a permanent tax would likely hamper
    the hunt for oil in the future.

    What about the Google windfall profits tax?

    Analysts with energy consultants Wood Mackenzie agree with Halff’s
    take, and introduced a more ideological reason for holding off on a
    windfall profits tax.

    "Do they want to take some from Microsoft too? How about hedge fund
    managers," asked Wood Mackenzie oil analyst Ann-Louise Hittle, somewhat
    rhetorically.

    It’s true that while the oil industry rakes in huge sums of cash in raw
    numbers, the profit margin for the S&P energy sector, at about 10%,
    is only slightly higher that the average for the S&P 500.

    Google, by contrast, has a profit margin of 25%, yet no one is calling for a special tax on search engines.

    Others say there’s a big difference between tech and oil companies.

    "Their investment decisions affect you and I," said Jaffe. "If Google
    doesn’t make the right investments, it doesn’t impact my ability to get
    to work."

    Jaffe also countered that the lack of access and manpower is no reason
    Big Oil isn’t finding more oil now, saying her study showed the next 20
    largest oil companies were investing far more in exploration, and
    finding far more oil.

    Government vs. the free market. While the debate about whether or not
    to tax Big Oil’s profit rages on, there’s also the debate as to who is
    best suited to bet on our future energy choices.

    The oil companies have been criticized for being shortsighted and not
    investing enough in renewable resources. Indeed, some want to use a
    windfall profits tax to fund renewable energy projects.

    The counter argument to government sponsored R&D is that when it comes to new technologies, the market picks them best.

    "Can [the government] take this capital and do a better job investing
    it than shareholders can," asked David Kreutzer, an energy economist at
    the Heritage Foundation, a conservative think tank. ‘I’d say no on that
    one."

    Dave Hamilton, director for global warming and energy projects at the
    Sierra Club dismissed the notion that free markets are the best way to
    solve the nation’s energy challenge, saying capital gravitates towards
    what’s profitable, not what’s best for the nation.

    "The oil companies are skimming the cream off the nation’s economy," he
    said. "Look where’s it gotten us so far. I don’t think we’ve been
    successful in the last seven years in solving our energy problem."

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