Tax Windfall Profits?

By some estimates, the 29 biggest players in the US oil industry will rake in profits of $100 billion this year. ExxonMobil just brought in record quarterly profits of $9.9 billion. A lot of this came from the $3 gasoline that was sold in the wake of Katrina but, higher than normal oil prices for the last two years, along with good refining margins, has certainly helped. Next week, some oil executives will go before the senate to try to justify their profits. Various senators, from both parties, have called for the oil and gas players to either voluntarily give up some of their profits to help people who have paid high gasoline prices, or people who will face heating bills that might be 50-70% higher this year, or some combination of the two.

What's going on?

On one hand, I'm for a windfall tax. When one industry profits from a disaster, at the expense of the rest of the nation, it seems a reasonable step to take.

However, I'm not sure Katrina was the cause of all of this. Face it, oil and gas prices, and the associated prices of gasoline and plastics and even freight shipping costs, have been going up for years now, and even absent the hurricanes, oil and gas companies would have had a very good year. If these companies gouged consumers after Katrina, they should be exposed and forced to disgorge some profits. But, I think that, though gouging is certainly possible and probably happened, Katrina didn't cause so much as it revealed a lot of what we've already known.

As the biggest user of energy and other raw materials, the US has always been able to set global prices with its own demand. Not true anymore. Often cited China and India have really added competition as purchasers of not only oil and gas but wood and steel and copper. Mostly, the US just sets the market in coffee these days. It's not just China and India, either. Argentina, in default four years ago, is recovering now, and growing. Russia is growing. Brazil is growing. I've been interviewing fund managers who buy and sell emerging market debt and stocks recently. They're happy. They believe that, fundamentally, emerging market countries are in better shape than they have been in a long time. They're growing and they're selling their products (often resource products) at higher, and higher prices.

It's been often asked, when we talk about the patterns of consumption in the US, about how much we eat, or how much electricity we use, or how much we drive or how often we build houses and office buildings, "What do we do when the rest of the world wants to live the way we're living?" Guess what? They do. Some of them are doing it. Some of them will out consume us, if only to catch up. China and India now call dibs on half of every new barrel of oil produced.

Increased demand for finite products means global inflation.

I'm all for our government investigating the energy industry, post-hurricanes and before an expensive winter. I'm cynical, too, because I doubt that politicians bought and paid for by the energy industry will, in the end, treat it too roughly. This might just be a show for constituents who are angry that they ever paid $3 a gallon for gas and who are more angry that prices rose so quickly and, though they're falling now, have fallen more slowly.

This is going long, but I would like to address one big complaint against the energy companies. First is that they haven't built new refineries in so long that they efficiently can't process oil into the gasoline, plastics and whatnot that America needs. Some will blame enviornmental regulations and "Not In My Backyard" politics for the lack of new refineries. Those people aren't entirely wrong.

But the real problem is the economics of the energy business. Refineries are expensive to build, tough to run, and often lose money. They lost a lot of money during the 1990s, when oil was cheap and seemingly plentiful. As with anything of this nature, there's a supply and demand effect and if there's enough refined oil for America then people won't pay a refiner much for their services. So, there's an incentive not to build new refineries. When an oil executive who owns refineries hears, "We don't have enough refinery capacity," they're happy. That means they can set the price. In a lot of ways, it makes no sense to build a new refinery where you've got a line of people, willing to pay top dollar, lined up outside the refineries you already own.

But, goes the reasonable objection, we need adequate capacity. It's part of our infrastructure. Yes. Yes it is. But when you choose to let private interests handle the entire infrastructure, then your infrastructure will serve their needs, rather than yours. I'm not sure if the problem is that the oil companies aren't investing enough in building that infrastructure or if it's that we as a society shouldn't have expected them to serve our needs before their own.

As for a windfall tax... our representatives need to ignore the donor lists, take the inquiry seriously and prove a case for it. If they can, it should be applied. But let's not pretend that it will restore the world economy to what it was before America found itself facing serious competition from other customers.

The real long-term solution, as Jon E. has been pointing out here, is to get out of a game we can't win and to find alternatives either for the products we're buying currently (which will go up in price, despite fluctuations, for a long time) or in the way we use those products. One oil analyst who I like a lot wrote to me that the solution will be conservation, but it'll be the type of conservation that you don't even notice -- better appliances, hybrid cars, just plain better-made pure combustion cars, or picking up a product at the store that wasn't shipped from too far away not because it wasn't shipped but because it's cheaper and just as good.