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Inherit the Windfall

When surging oil profits prompted both conservative and liberal members of Congress to summon oil company executives to Capitol Hill for a hearing earlier today, a public relations rookie crafted the statement below for the oil chiefs to deliver to their interrogators. Cooler heads prevailed, however, and the statement was discarded in a gilded trash bin. An underpaid Reason intern moonlighting as a janitor salvaged it for publication. Here it is:

Good morning to you all.

We would like to thank you for giving us the opportunity to address this august body, but, frankly, being summoned for a Grand Inquisition and threatened with the confiscation of our so-called windfall profits is not our idea of fun.

Yes, we all made record profits this past quarter. We are proud of this achievement and, indeed, in the future hope to surpass it. Our survival and success depends on producing value for our investors, most of whom are ordinary, middle-class Americans—your constituents, as a matter of fact—who invest in our stocks through their pension funds or 401K accounts.

Our aggregate profits are so large because we have huge sales. But our profit margins—the more relevant measure—are below the overall Standards and Poor industry average. Exxon Mobil, the most profitable company among us, posted $100 billion in sales last quarter —the first American company to hit that mark ever. But its profits were $10 billion—hardly a margin that suggests the "price gouging" that some of you have accused us of.

In fact, the oil industry's margins are well below those of Gannett, the largest newspaper corporation—and no doubt far, far below those of Fox News, whose pandering populist anchor, Bill O'Reilly, maximizes his company's profits by questioning our right to maximize ours. If you really want a reliable revenue stream, why not tax windbags instead of windfalls?

Besides, we already tried windfall profit taxes—along with leisure suits and polyester ties—with disastrous results.

During the period between 1980 and 1987, the last time when such a tax was in effect, 1.6 billion fewer barrels of oil were produced—because such taxes diminish the incentive to produce oil.

Furthermore, if we are prohibited from recovering our exceedingly high storage costs, we will be less inclined to maintain large oil inventories that help tide the country over during production disruptions caused by calamities such as Hurricane Katrina. Please note that even though oil prices went up during the hurricane, no one outside the disaster area had to go without oil. Surely that is preferable to acute shortages and long waiting lines at the gas pump, which cause American workers to lose wages and the American economy to lose productivity.

In a market economy, price is set by supply and demand, not wishful thinking. The price of oil has gone up because of growing demand from emerging economies like India and China and disruptions in supply due to natural disasters in North America and political instability in Latin America and Iraq. If we could collude to raise oil prices whenever we pleased, why didn't we do so last year when prices at the pump dropped to nearly a dollar a gallon? Moreover, why would the inflation-adjusted price of gas still be no higher than what it was a decade ago?

But if you are going to threaten us with additional taxes when we post profits, in the interest of fairness, shouldn't you also give us tax refunds when we suffer losses? Our refiners posted losses of more than $1 billion in 2002. Should they expect a retroactive refund? Will you shield us if an alternative fuel source threatens to put us out of business? No business can afford to take market risk if it can't reap commensurate rewards.

The term "windfall profits" implies unearned, ill-gotten gains. We earn our profits by producing something of value for our consumers. True windfalls are the budget surpluses that flow into the government's coffers—without your having to lift a finger—when industries like ours become more productive. Since some of you are trying to persuade the public by promising to rebate our profits to consumers, perhaps you should also agree to return the next Federal surplus directly to the taxpayers (on the off chance that you ever run a surplus again).

One final word to House Speaker Dennis Hastert, the Republican from Illinois who has been disingenuously hectoring us to increase our production capacity: Sir, there is nothing we would like better. But in order to appease the environmental lobby, you and your colleagues have dragged your feet about opening up the Arctic and other oil reserves. Moreover, building a new refinery has become prohibitively expensive, given all the environmental requirements you have imposed. It took Arizona Clean Fuels five years just to get air-quality permits to build a small refinery outside of Yuma. It is not our fault that no new refinery has been built in this country in the last quarter of a century.

If you are serious about boosting national oil production, we suggest you start by taking a good look at all the impediments you have put in our way and leave us alone to serve our customers and investors.

Shikha Dalmia is Senior Analyst




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