OIL AND POLITICS

It made for great political theater for senators to scold oil company executives for the huge profits they reported shortly after Hurricane Katrina shot gas prices over $3 a gallon. However, taxing oil company profits, simply because they are large, is wrong.

In the third quarter of this year, oil companies reported record profits. Exxon Mobil Corp. earned $9.92 billion, up 75 percent from the third quarter last year. BP’s profits rose to $6.5 billion and Chevron reported $3.6 billion in profits.

This has prompted many lawmakers, including House Speaker Dennis Hastert and Senate Majority Leader Bill Frist, to criticize the industry and the Senate this week passed a temporary $5 billion tax on the largest oil companies as part of a massive tax bill. The House and Senate versions of the bill must still be reconciled.

It may make consumers feel better to think that lawmakers would punish oil companies into lowering their prices, but consumers actually have more power over fuel prices than lawmakers. As seen shortly after Hurricane Katrina, high prices caused people to buy less gasoline. As expected, gas prices then fell. If consumers want oil companies to earn smaller profits, they should trade in their gas-guzzling sport utility vehicles for hybrid cars and buy smaller, more energy efficient homes.

If lawmakers had really wanted oil companies to act more responsibly, they would not have approved billions of dollars in handouts to the energy industry. Yet, huge subsidies were included in the energy bill, which many of the current critics of the oil industry voted for just months ago.

At least the temporary tax, originally proposed in the Finance Committee by Sen. Olympia Snowe, had the benefit of serving as a way to raise money for the Low Income Home Energy Assistance Program. The tax stayed in the reconciliation bill, but the provision directing it to LIHEAP did not.

Sen. Susan Collins proposed to repeal two tax breaks and devote the money – more than $3 billion – to LIHEAP. This proposal had the advantage of directing incentives, which oil company executive acknowledged in a Senate hearing were unnecessary, to people who really needed help.

A windfall profits tax on oil companies is punitive, won’t change corporate behavior and fosters unpredictability, says Mark Anderson, a professor of resource economics at the University of Maine. “There is no economic rationale for a windfall profits tax,” he says, adding that targeting just one industry with such a tax is unfair.

Financial service and pharmaceutical companies routinely record larger profits, as a percentage of revenue, than oil companies did during their recent record-setting quarter. In 2004, Exxon Mobil earned more money than any other company on the Fortune 500 list of largest corporations, $25.33 billion. By another measure of profitability, gross profit margin, the company ranked 127th, according to The Washington Post.

The same year, Altria Group, the maker of Marlboro cigarettes made 22 cents of profit for every dollar of revenue. Merck, a pharmaceutical company, made 25.3 cents and Citigroup, a financial services company made, 15.7 cents, according to the paper. Exxon Mobil Corp., by comparison, earned 9.8 cents for every dollar of revenue.

Oil companies are now an easy target, but politics should not trump economics.