WITH AMERICANS steaming over $4-a-gallon gasoline and ExxonMobil reporting first-quarter earnings of nearly $10.9 billion, the temptation to grandstand about "obscene" profits and "greedy" oil companies is one too many politicians cannot resist. On Monday, seven Senate Democrats proposed the "Consumer-First Energy Act of 2008," the centerpiece of which is a 25 percent windfall-profits tax on US oil companies. This, the senators declared in a press release, will "address the root causes of high gas prices."
Just how it would do that they never quite make clear, perhaps because rattling class-warfare sabers is higher on their priority list. "Oil companies are racking up obscene profits left and right while American families are stretched to the limit by skyrocketing gas prices," growls Senator Charles Schumer of New York. "It's time for Big Oil to pay its fair share so Americans can see a little relief."
Also aboard the windfall-profits bandwagon are presidential hopefuls Barack Obama and Hillary Clinton. "We've got to go after the oil companies and look at their price-gouging," proclaims Obama. "We've got to go after windfall profits." Clinton derides oil-company profits as "Dick Cheney's wonderland" and evidence that "there is something seriously wrong with our economy."
There is something seriously wrong, all right - the economic shallowness of politicians who believe that when oil companies prosper they should be penalized. Or who imagine that the way to bring gasoline prices down is to jack the oil industry's taxes up. Or who actually think that earnings of 8.1 cents per dollar of sales - Big Oil's profits over the past five years, exactly equivalent to the overall US manufacturing average (excluding autos) - constitute a "windfall."
Oil is a boom-and-bust business. Sometimes profits soar. Sometimes there are no profits. Today a barrel of light sweet crude fetches more than $125, but it wasn't that long ago that the price fell below $20 - with, for many, excruciating results.
"I worked for a large oil company in the early '80s," a reader wrote to me the last time Congress and the media were in a swivet over oil-company earnings. "I lost my job, along with 150,000 other engineers and geologists, when the price of oil dropped from $36/barrel to $10/barrel in six months."
The hope of reaping big profits is the incentive that impels Exxon, Chevron, and other oil companies to take enormous risks and spend immense sums - a single offshore drilling platform can cost as much as $1 billion - to discover, extract, and refine new supplies of petroleum. Profits earned in the boom years make it possible for the industry to persevere through the bad years. Diminish those profits and you diminish that perseverance - oil companies won't invest as much, won't explore as much, and won't produce as much.
We've been down this road before. Under a windfall tax signed into law by Jimmy Carter, domestic oil production plummeted by an estimated 795 million barrels, while imports of foreign oil surged. Congress had anticipated windfall tax revenues of $393 billion. The actual take: just $80 billion. Like so much else associated with the Carter era, the windfall-profits tax was a counterproductive flop. Do Democrats really believe a new dose of Carternomics is going to make today's economy stronger?
If you want to see a real windfall, take a look at what Big Oil pays in taxes. The 27 largest US energy companies forked over $48 billion in income taxes in 2004, $67 billion in 2005, and more than $90 billion in 2006 - an 87 percent increase. Since 1981, the Tax Foundation calculates, the oil industry has earned a cumulative $1.12 trillion in profits - but it paid a cumulative $1.65 trillion in taxes (add another half-trillion to account for taxes paid to foreign governments).
For most of the 25 years between 1981 and 2006, says foundation president Scott Hodge, taxes collected from oil companies by federal, state, and local governments were nearly double the industry's profits in any given year. For all the clucking over ExxonMobil's $10.9 billion in profits last quarter, little attention was paid to its total tax bill in the same period: more than $29 billion.
So who's the real "profiteer" - Big Oil or Big Brother? And who is likelier to keep energy abundant - the profit-seeking entrepreneurs who pull it from the ground, or the politicians who demonize them when they succeed?
Jeff Jacoby can be reached at [email protected].