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Levy is needed on oil profit windfalls

May 04, 2008|DAVID LAZARUS | CONSUMER CONFIDENTIAL

It seems quaint to think of it now, but it was only three years ago that lawmakers in Washington were debating whether to impose a windfall profits tax on the oil industry for all oil sold above $40 a barrel.

Proponents of the tax argued that U.S. consumers simply couldn't tolerate the gobs of profit oil companies were making as pump prices hovered around $2.60 for a gallon of regular unleaded.

As of Friday, oil was trading near $116 a barrel, gas was averaging $3.60 a gallon nationwide and $3.89 in California, and oil companies were making even bigger gobs of profit.

Exxon Mobil, the world's largest oil company, reported quarterly profit of $10.9 billion last week, up 17% from a year before.

It was the second-most-lucrative quarter in the company's history, after the record $11.7 billion pocketed in the previous three months.

Chevron reported profit of $5.2 billion, up almost 10% from a year earlier. Europe's Royal Dutch Shell said its quarterly profit jumped 25% to a record $9.1 billion, while BP said its profit soared 63% to a record $7.6 billion.

Earlier, ConocoPhillips said its profit rose 17% to $4.1 billion, and Westwood-based Occidental Petroleum said its profit climbed 50% to a record $1.8 billion.

So what about that windfall profits tax?

The measure was vigorously opposed by the oil industry and voted down by the Senate in late 2005. But the situation that so vexed lawmakers remains.

So does drivers' anger toward the oil industry, which is seen as gleefully padding its pockets at the expense of cash-strapped consumers.

I stopped by a Pasadena gas station where a gallon of regular unleaded was going for about $4.04 the other day. Every driver I spoke with said the oil companies were gouging people at the pump and that their profit levels were outrageous.

"They're killing us," said Altadena resident Andrew McAllister, 48, as he filled his 1989 Honda Accord. "I can't afford to drive, and I make a decent living."

Like others I spoke with, McAllister said he favored a windfall profits tax. "If they're making record profits again and again, they need to give some of it back," he said.

Do they? I too got caught up in the outrage during an appearance last week on the cable channel CNBC, where I'd been asked to comment on what the oil companies should do with all that money.

My proposal: Some sort of levy -- call it a windfall profits tax, call it something else -- that would raise billions of dollars annually for public transportation projects so that drivers would have viable alternatives to using their cars.

This prompted a gusher of e-mail from CNBC viewers asking why I was seeking to punish oil companies for doing what companies are supposed to do -- make money and enrich shareholders.

It was a fair question.

I took up the matter with Philip Verleger, an economist who, as an official in the Carter administration, was one of the architects of a windfall profits tax imposed on the oil industry in 1980.

The eight-year levy on domestic production was intended to provide a sense of economic fairness to consumers as politicians lifted price controls imposed in 1971. It basically taxed all profits above a base price linked to the cost of oil in 1979, with annual adjustments for inflation.

"Unless we tax the oil companies, they will reap huge and undeserved windfall profits," President Carter declared at the time.

Verleger said the windfall profits tax he helped devise had a clear purpose -- to compensate for the lifting of price controls. He isn't sure as clear a rationale exists today.

"How would you measure the windfall?" Verleger asked. "If you can't measure it, you can't tax it."

The trick is setting the base price. Just three years ago, a windfall was seen as anything surpassing $40 a barrel for oil. Now we're at almost three times that level, and Verleger said he believes oil will be at $200 a barrel by the end of the year.

So where do fair (albeit high) profits end and windfalls begin?

The oil industry already pays billions of dollars a year in taxes, but it also receives billions in government subsidies.

The exact amount of tax breaks is difficult to calculate because of the variety and complexity of programs involved, but Greenpeace estimates the figure could be as high as $35 billion.

Meanwhile, the perception remains among many drivers that the industry is taking advantage of people because, well, it can.

"There's nothing you can do," La Canada Flintridge resident Vanessa McEwen, 39, wearily declared as she filled her 2000 Jeep Cherokee in Pasadena and prepared to chauffeur her kids to an after-school activity.

After thinking about it a bit, I suppose I have to grudgingly acknowledge that a windfall profits tax isn't the solution. Like many people, I find the oil companies' profits obscene. But they don't control the market, and, yes, they're in business to make money for shareholders.

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