Furor over oil-industry windfall puts GOP to the test

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CBS MarketWatch

WASHINGTON, D.C. — Lawmakers want the oil industry to consider giving a little something back this holiday season. Namely, profits.

After a massive surge in oil prices created record earnings — Exxon Mobil alone recently posted a nearly 11-figure quarterly profit — even some of Washington’s staunchest defenders of big business have eyed the industry’s brimming coffers and openly asked whether government and consumers shouldn’t share in the good fortune.

But just how far will the Republican-controlled Congress go to silence complaints that too little has been done to help consumers feeling gouged by soaring energy prices?

On Wednesday the public may get its best sense yet of the mood in Washington, when Republican leaders summon top oil executives before two Senate committees to defend their record profits. The notion of some form of windfall-profits tax is on the agenda.

“It’s definitely gaining traction,” said Jamie Court, president of the California-based Foundation for Taxpayer & Consumer Rights and a windfall-tax proponent.

Congressional Democrats initiated the call for a tax on oil profits and have introduced half a dozen pieces of legislation to impose a levy on the industry.

This week, however, Sen. Charles Grassley, the powerful Republican chairman of the Senate Finance Committee, chimed in with a sharply worded letter to oil companies that argued the industry has a “responsibility to help less fortunate Americans cope with the high cost of heating fuels.”

Conservatives in Washington usually deride talk of a windfall-profit tax — a policy last seriously advocated in 1979 — as populist demagoguery intended to appease angry consumers by finding a culprit and thereby give lawmakers political cover. This time, the climate seems to be changing.

Why now?

“People are hurting, and the oil industry is gaining,” explained Dean Baker, co-director of the Center for Economic and Policy Research.

So long as prices at the gas pump remain high, the debate over who profits and who suffers promises to be a hot-button issue.

In a public-opinion poll taken in October, 44% of Americans said U.S. oil companies share “a lot” of the blame for the rise in gasoline and oil prices, while 27% viewed the recent hurricanes as the decisive factor.

Party troubles

Analysts say Republicans are distracted and vulnerable to Democratic attacks because of party in-fighting over Supreme Court politics, budget deficits, low White House approval numbers and worries about next year’s midterm elections.

With deficits increasingly grabbing attention, legislators’ equally large spending ambitions have some analysts worried that Congress may be warming to the notion of tapping an increasingly alluring pool of money.

Additionally, the political costs of failing to address energy prices could prove too significant for some Republicans headed into the upcoming election cycle, leading them to contemplate a break with the party’s traditional free-market principles.

“I would have thought Republicans would have been completely dismissive” of the idea of a tax on profits, but the response has been encouraging, said Baker, the author of a recent paper advocating a windfall tax.

Industry analysts warn that a decision to seize “excessive” oil-industry profits via an excise tax could have long-term economic ramifications for consumers and companies in the forms of decreased industry investment and higher gas-pump prices down the road.

Yet Republicans don’t seem ready to back off their tough talk yet.

Still, the Foundation for Taxpayer & Consumer Rights’ Court admitted that enacting a tax is a long shot despite “unprecedented scrutiny” of the energy industry today.

In the end, according to Paul Sankey, a Deutsche Bank analyst, “free-market Republicans still dominate Congress.” That, he wrote in a recent research memo, makes the likelihood that a windfall tax will be enacted “extremely slim.”

Big money

In the third quarter, the nation’s top five oil companies — Exxon Mobil Corp. (XOM), BP Group (BP), Royal Dutch Shell (RD), Chevron Corp. (CVX) and ConocoPhillips (COP) — reported a combined $32.8 billion in net income. Exxon Mobil, which posted a net profit of nearly $10 billion, made corporate history as the first U.S. company to surpass $100 billion in quarterly sales.

Company executives have explained these gains by highlighting the boom-and-bust cycle historically faced by the oil industry, rising global demand for supplies, and the effect the recent hurricanes had on domestic oil prices.

Following the Katrina and Rita disasters, about 25% of U.S. refining capacity was offline, and roughly 8% remains down today, according to data from the ratings agency Standard & Poor’s.

But lawmakers don’t appear to be satisfied with these explanations, and the top executives of all five major oil companies will face questions from the Senate Energy & Natural Resources Committee and the Commerce Committee next week.

‘One great quarter’

Being called to testify before Congress is nothing new for energy industry officials, and, of course, a hearing doesn’t necessarily translate into policy changes.

“We’ve had these hearings time after time after time,” said Frank Maisano, a lobbyist with Bracewell & Giuliani, which represents the refinery giant Valero Energy Corp. (VLO).

“One great quarter and two good years can’t erase the previous 15 years,” Maisano said.

But this time Republicans appear to be a bit annoyed by a perceived unwillingness among the industry’s biggest players to build new refineries, ease tight capacity and invest in alternative forms of energy while they horde cash.

In the first quarter of 2005, the oil industry’s profits were running at an annual rate of $62.8 billion, compared with an average of $24.3 billion over the past five years (in 2005 dollars), according to Baker. While energy prices are notoriously volatile, high prices are predicted to continue into 2006 because of the ongoing tight relationship between supply and demand.

“House and Senate staffs do not appear to be in any hurry yet to advocate for enactment of windfall-profits taxes — but they do seem to be frustrated by what they see as Big Oil’s unwillingness to announce new refinery projects and take the heat off politicians,” said Christine Tezak, senior vice president at Stanford Washington Research Group.

In his letter to the American Petroleum Institute, Sen. Grassley, R-Iowa, effectively urged oil companies to tithe — that is, set aside 10% of profits. “You have a responsibility to use these record profits to invest in more exploration, production and refining capacity to increase supply of petroleum products,” his letter read.

Grassley’s letter was a sign that Republicans are prepared to use “hardball tactics,” said Bill Ahem, communications director for the Washington-based Tax Foundation.

“The message was [to] put some money to work at home,” said Tezak.

Refine time

Republicans in both the House and Senate have proposed legislation to speed the permitting process for new refineries and to provide the refinery sector with incentives to expand capacity, but a deadlock in the Senate Environment and Public Works Committee makes passage unlikely.

Industry concentration over the past three decades has reduced the number of domestic refineries by more than half, and, although refiners have expanded capacity at existing refineries, total capacity has dropped to 17 million barrels a day from 18.6 million barrels a day back in 1981.

The last major built-from-scratch refinery was Marathon Oil Corp.’s (MRO) 245,000-barrels-per-day Garyville, La., facility — completed in 1976.

The White House, often criticized as overly friendly toward the oil industry, actually helped bolster the case for congressional action and opened the industry up to questioning when it repeatedly cited a lack of growth in the refining industry as the chokehold in the U.S. supply chain following Hurricane Katrina, according to Court.

‘Once the dust settles’

The oil companies, of course, suffer no shortage of political allies in Washington. “Once the dust settles… [lawmakers will] realize the windfall-profit tax is a bad idea,” said Maisano.

“You’re having extraordinary profits due to an extraordinary situation… The whole rational [for a windfall-profit tax] goes away [once ] oil prices return more to normal,” Baker acknowledged.

Congress enacted a windfall-profit tax in 1980 on U.S.-produced crude oil in anticipation of windfall profits following the repeal of domestic price controls. But oil prices crashed in the 1980s, and the tax never generated the anticipated revenue.

“The economic situation in 1979 was simply drastic,” with high interest rates and inflation that can’t be compared to the current situation, said the Tax Foundation’s Ahem.

It will be the price of gasoline, Ahem predicted, that inflates or deflates calls for a windfall-oil-profits tax.
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