Gas Price Gambit

Tyson Slocum

April 20, 2006

Tyson Slocum is the acting director of  Public Citizen's energy program.

Since President George W. Bush’s inauguration in January, 2001, oil prices have increased 240 percent. This week, energy traders in New York pushed crude oil above $70 a barrel despite the fact that U.S. oil supplies are at their biggest surplus in eight years (shooting a big hole in the theory that drilling in Alaska ’s Arctic National Wildlife Refuge will bring prices down). Charging $70 for a barrel of crude translates into higher prices for all of the things that are made from oil—from gasoline to home heating oil to plastics to jet fuel—and increases the costs of transporting goods, which translates to higher prices for consumers. As a result, moderate and low-income families are paying an ever-greater share of their incomes on costs associated with high energy prices. Indeed, the Federal Reserve is increasingly nervous about the negative impact these sustained high energy prices are having on the economy and inflation threats.

While millions of people are suffering under the weight of higher prices, there is a narrow group making huge amounts of money. It’s not just the Saudi royal family that gets rich when speculators drive up the price of oil; ExxonMobil, which produces more oil every day than Kuwait, has enjoyed profits of $110 billion since President Bush took office. While it costs ExxonMobil about $20 to extract a barrel of oil in Nigeria, the United Arab Emirates or from federal land in Alaska or Texas, the company is selling that oil to the American people for $70/barrel.

That explains why ExxonMobil and other oil companies are posting the biggest profits in our economy’s history. ExxonMobil boasts in its 2005 annual report that it earned a 46 percent rate of return on its capital investment selling oil and natural gas that it pumped out of the ground.

ExxonMobil—just like all the other vertically-integrated oil companies—also owns many of the refineries where crude oil is turned into things like gasoline and jet fuel. The company earned a 59 percent rate of return on its capital investment in American oil refineries in 2005.

Faced with record profits by oil companies, the economic hardship that creates for working families and the toll that burning fossil fuels has on the environment, one might assume that Congress and the White House are taking action.

You’d guess wrong. In August 2005, President Bush signed into law the most expensive energy legislation in our nation’s history. This energy bill adopted most of the May 2001 recommendations of Vice President Dick Cheney’s energy task force, which, you may remember, relied solely upon the input of energy company CEOs and their lobbyists to write up a report that—surprise!—concludes that America must provide bigger incentives to oil and gas producers.

Indeed, Bush’s energy law spends $5 billion in new tax breaks and government spending programs that benefit oil companies, and exempts a wide range of oil and natural gas drilling from the Safe Drinking Water Act and the Federal Water Pollution Control Act. The bill does nothing to increase energy efficiency, such as through improving fuel economy standards.

Campaign contributions from the oil industry ensure that the bulk of public subsidies continue flowing to oil companies. After all, ExxonMobil and the other major oil companies have nearly $1 trillion in capital invested in drilling, refining and selling petroleum products. They are not about to let the government start funding renewable energy projects on a scale that threatens their ability to squeeze every last dollar of profit out of this investment.

Public Citizen proposes an alternative: a windfall profits tax on oil companies, with the proceeds used to finance clean energy alternatives to fossil fuels, increased investment in mass transit, bigger incentives to individuals and small businesses for energy efficiency and enforcing stronger fuel economy standards.

One way to solve our addiction to oil is to use less of it: America consumes one out of every four barrels of oil in the world every day, yet we are the third biggest producer of crude—only the Saudis and the Russians produce more than we do. Even if we doubled domestic production—physically impossible, but just assume it for argument’s sake—to match that of Saudi Arabia, we would still be forced to import half of our oil.

And with President Bush overseeing annual budget deficits exceeding $420 billion, the federal government isn’t exactly in the best position to spend the money it will take to break our oil addition. But a windfall profits tax on record oil company earnings is an equitable way to get it done.

Naysayers argue the windfall profits tax didn’t work the last time we tried it. The windfall profits tax of 1980-88 was ineffective not because of the tax itself, but because oil prices fell shortly after enactment of the tax due to global events unrelated to U.S. tax policy. Congress enacted the windfall profits tax in 1980 after U.S. oil company profits surged following the Iranian Revolution and the resulting Iran-Iraq war, which caused oil prices to increase from $14 a barrel in 1979 to $35 a barrel by January 1981. But after 1981, crude oil prices steadily decreased until completely bottoming out in 1986-87 as demand slackened and as other oil-producing countries increased their output. As the value of the commodity subject to tax (oil) fell, the effectiveness of the tax was diminished.

But that was then. World oil markets aren’t going to collapse anytime soon, because the major oil producers are already producing at full capacity, unlike the 1980s. Indeed, The Wall Street Journal concluded this week that “a crash looks unlikely now, both because supplies remain tight and because of the large volumes of money that investors are pouring into oil markets.”

In addition to a windfall profits tax, Congress needs to reform the royalty system imposed on companies drilling for oil and natural gas on public land. One-third of the oil and natural gas produced in the United States comes from land owned by the taxpayers, but royalty payments by oil companies have not been keeping up with the explosion in energy prices and profits enjoyed by the industry. A recent New York Times investigation found that oil companies are exploiting royalty loopholes allowing them to escape paying billions of dollars to taxpayers that could be used to fund our transition away from oil dependence.

The Bush administration’s approach of throwing more of our money at oil companies has only deepened America ’s problem of being “addicted to oil.” Financing clean energy alternatives through a windfall profits tax is the logical next step to fixing America ’s energy problems.