A proposal for the windfall profits

I just want to take a second to explain myself here. Some of you took this post to mean that I don't believe that the oil companies have made windfall profits this year. Of course I know they did, and even if I didn't before, I certainly can't refute the recent Exxon and Shell announcements. My point in that previous post was that I am frustrated that politicians have decided to focus all of their interest in energy issues on the windfall profits, rather than on more important concerns, like, say, whether or not the Saudis have as much oil as they say they do. As I said in the comments to my earlier post, lowering gasoline prices for the consumer now just doesn't make any sense given the larger supply issues that keep emerging.

Still, on the topic of windfall profits, Gristmill reported a good one today:

At a press conference this afternoon, Secretary of the Interior Gale Norton came up with another creative reason to open the Arctic Refuge to drilling: The oil companies need some place to invest their record profits!
The blurb that they're referring to comes from E&E News PM:
The government should open more areas where oil companies can invest their surging profits in new domestic supplies, including the Arctic National Wildlife Refuge, Interior Secretary Gale Norton said today.

"It does not make sense for the country to say we have got the high profits, but we are not going to let you invest it anywhere," Norton said in a short interview. "We should have a place for that investment to occur. ANWR is certainly one place that that makes sense."

This is so stupid, even that Freakonomics guys should argue against this. Here's the logic of the Windfall Profits Tax: Gas prices are high. The people who sell that gas are making a huge profit. Let's tax those profits and hope gas prices go down.

What we need is some new logic: American dependence on oil is responsible for many of our environmental and national security problems. Let's tax that oil at the end user level to reduce our dependence and fund infrastructure improvement that will help us build a sustainable society.

My question to the group is: What would a windfall profits tax do to pump prices? I assume that the oil companies would simply pass on the extra costs to end users. So maybe this is a good idea?

Ianqui -- I agree with what you wrote but I am having some second thoughts about windfall profits after having seen the ExxonMobil numbers today. In my view, a tax on some of these revenues would do very nicely to help get people who can't pay their home heating bills through the 05/06 winter.
No, a tax on oil company revenues would be an idiotic idea.  We shouldn't do anything that encourages oil consumption.  This is basic economics.  If the government were to lower the gasoline tax, there would be less of an incentive to conserve.  With higher demand than there would otherwise be, the price of gasoline increases, which nullifies the effect of lowering the tax in the first place!
And another thing. ANWR is really a kind of joke, isn't it? We might as well save it for future generations. What, there's maybe 9 bbo URR up there? Screw it. I'm kind of tired of a government of the corporations, by the corporations and for the corporations. I shall quote Lincoln who, speaking of the Civil War, I just paraphrased.
It is rather for us to be here dedicated to the great task remaining before us -- that from these honored dead we take increased devotion to that cause for which they gave the last full measure of devotion -- that we here highly resolve that these dead shall not have died in vain -- that this nation, under God, shall have a new birth of freedom -- and that government of the people, by the people, for the people, shall not perish from the earth.
The great cause is now Oil Depletion. The honored dead are in Iraq. The freedom is energy independence and sanity. These are sentiments that I can live with and that are entirely relevant to the problems that lie before us.
Regarding ANWR, I read an interview with Matt Simmons about three months ago, and he made a point about ANWR that I haven't seen anywhere else.

Essentially, his point was that the Alaskan Pipeline was engineered to have a minimum flow rate of 500,000 bpd.  You have to pump that much in every day to keep the internal pressure high enough to lift the crude over the Brooks Range.  Thus, once North Slope production drops below 450-500,000 bpd, we lose all of it in one fell swoop.

Looked at that way, ANWR becomes kind of a no-brainer.  Which sucks, becauseI think drilling there is an otherwise shitty idea.  

I believe the technical phrase used was "becomes the world's biggest chapstick".
Maybe we should build methane to gasoline refineries on the North Slope? Construction season is way short up there, so barge them in after building them in the Seattle area? They are just H2S removal and oxygen plants and cooling towers and catalyst plants as far as I know, nothing that can't be barged in.
I was listening to CNBC this morning about the world record profits. Holy cow! Not bad for 90 days work! But the opposite side reports that this is bad thing? suddenly making a profit is a bad thing? Are they to be restricted on how much they can make? Oh my goodness, congress just passes a new energy bill, reducing the requirements to build refineries.pretty much streamlining the process to apply and get approved. (which is a good thing).

Uhhh, guess what those big mean and evil oil companies are going to report in April 06, (first qtr results)? reckon to guess?

So now they forbidden to make a profit at other peoples expense? Are they suppose to roll their profits back into helping sustain those who don't really help themselves? Thus becoming a welfare supporting company?
thats not the american way!

Re: "Are they suppose to roll their profits back into helping sustain those who don't really help themselves?"

Perhaps you might consider your own psychological state and whether you could, conceivably, be out of your mind.

This gets to a very fundamental issue. Are we devoted to ideologies or are we concerned with people?

Perhaps a better question for you, geewiz, would be this: Are you the beneficiary of a culture that makes corporation profits sancrosanct and allows these corporations to operate not in the public good but simply to make as much money as possible on a quarterly basis for their stakeholders?

If that's the best homo sapiens can do, fuck it.
Bravo Dave.  What a depressing world to live in:  Greed is good, nobody owes anything to anyone (or to the nation), there is no common good, those who have less are lazy & worthless & deserve their lot, take what ever you can get away with, use up everything and give nothing back.  We really are fucked.  Attitudes like that, that profit is good, no matter how ill gotten the gains, no matter how extreme and unreasonable, are why I say there will be no societal solution.  Any society that is insane enough to permit such an obscene taking of national wealth (from a captive population with no practical alternatives) will NEVER have the capability to prepare for what's coming, even if it's in 20yrs.  

This obsession with accumulating wealth above all other things is a national character flaw.

Look, for the most part this is not a captive population. The vast majority of those who are getting in trouble are the ones who have willfully overextended themselves - in distance from work and in house size - expressly for the purpose of making huge windfall profits on real estate. In the short term, I invite all of these folks to feel free to borrow against their ever-increasing equity, because we don't owe them a subsidy just so they can leave a larger inheritance to their children, who are no more deserving than anyone else's children. In the slightly longer term these folks need to reconsider their own greed and lavish lifestyles.

Whatever comes next in terms of energy supply looks like it is going to be expensive, whether it is lower quality hydrocarbons, nuclear, windmills, solar panels, whatever. Handing out huge subsidies to consumers of energy - such as all these bellyaching massively overhoused suburbanites - while punishing suppliers of energy - be they oil companies or whoever - is obviously a recipe for much worse trouble than we can really stand. Those grand houses aren't going to be heated and cooled if Seventies-style foolishness takes the energy supply away. Read the closing chapter of Simmons - energy supply "bridging" is going to take all the windfall profits that can be found, plus a whole vast lot more.

I really do not understand this point of view that holds, simultaneously, that windfalls that arise from producing  (extracting) something, i.e. these grand and probably transitory oil co. reports, are immoral and worthy of high dudgeon, but yet the tremendous windfall profits that arise from  hoarding and consuming something, namely oil-soaked gargantuan remote real estate, should not only be held sacrosanct as examples of the American way, but should also be supplemented  with all manner of enormous special subsidies and deductions.

My commuting distance is long because I am unwilling to live in the sprawl zone created next to the industrial park where my job is located.  Engineering jobs are scarce, so I'm stuck with it for now, but I commute in a 36mpg car I paid off years ago.  Probably I should leave the manufacturing world and get a service job.  

Both the sprawl and the industrial park where I work were once some of the best farm land anywhere.  We have subsidized the industries that created the sprawl, as well as the petro industry for decades.  Now, when it looks like this might not work out anymore, were all worried about the corporations and their investors, but it's tough shit for the people who drank the coolaid and bought into that lifestyle.

Show me a plan to raise fuel prices that has an element of human decency in it, and uses the money to work on the basic issues we face, and I'm all over it.  I'd love to use my engineering ablities to work on the problems.  But it ain't gonna happen, so I'll keep as much of my money as I can to plan for my family's future.  We're going to need it.  

We can legalize building higher density if we want to. We can adjust taxes to encourage moving closer to where we work if we want to.
Lack of cheap oil is a problem. The other two are policies.
It's a national character flaw that is very difficult to overcome, however, because Americans have had that basic message inculcated for generations now using every conceivable propaganda conduit.  It is for that reason that every single instance of hypocrisy associated with the free-market ideology versus the way the world really works needs to be bluntly and vehemently denounced.  Thus, for example, as I pointed out a few weeks ago, it is glaringly  hypocritical for anyone who has historically profited from US oil production to sing the praises of the free market, since the wealth thus gained was largely enabled by the free-market restricting mechanism of the Texas Railroad Commission.  In the absence of that, there were times during the 1930s when oil was cheaper than water (if I remember correctly from Dan Yergin's book).  This charge of hypocrisy is also applicable any time the Federal Reserve acts to regulate the economy.  In consequence of this, Alan Greenspan has no business whatsoever being the free-market ideologue that he is; it is utter hypocrisy.
Profits must be put in context relative to sales, and relative to investment as well.  Making $10 profit on $40 of sales is one thing, and making $10 on $20 of sales is another.

Go ahead, compare profits to sales in the energy industry versus other industries.  Relative to total sales, the energy industry DOES NOT make obscene profits.  Furthermore, looking at the amount of investment required in the energy field, this level of profit is nothing spectacular.

I do not recall anyone suggesting that Microsoft's profit margin, or Coca Cola's profit margin, for example, were too high and should be subject to windfall profits taxes.  How about Google?  How about the sacrosanct tax free profit you get on the first $500k you made on the home you just sold?  That one is really obscene.

The idea of windfall profits is a bad idea.  Folks we need to get more investment in energy (and a whole lot of conservation).  Anyone interested should look back at the price controls and WPT of the 1970s and see what the effect was then.  It did not help.  

WPT will have exactly the opposite effect of what we need.

You may be right, so how are we going to help people who need that help to pay their winter energy bills right now? Do these people matter or not?
Re: "[we need] more investment in energy"

Since I'm angry today that ExxonMobil just made a profit higher than the GDP of many third world (developing) countries, I'm going to continue here.

Beyond conservation, which is a good idea, what does more investment mean? The oil companies have already given up on most of that. There aren't any more promising prospective areas for new discoveries anymore. A lot of you folks here at TOD might pay attention to what I'm about to say. Bubba and, before him, the legendary J, industry insiders, have made this abundantly clear. So does all subsequent research. More investment does not translate into more discoveries and production. So, what could more investment mean? -- a list of suggestions below.

Invade Iraq? ANWR? A war with Iran? Drill a wildcat in my living room in Boulder, Colorado? Coal bed methane in the Western States? Oil Shales? Make Alberta, Canada the 51st state? Exploit the (diminishing) reserves in the Gulf of Mexico? Assassinate Hugo Chavez? Exploit the Wolverine field in Utah (less than 1 bbo)? Take a serious military interest in Azerbaijan, Khazakhstan and the entire Caspian region? Tell the Chinese to stop using so much oil? Screw the Indians? Bribe Putin? Disarm the Nigerian rebels? Use our Navy to patrol the Gulf of Guinea? Take over Saudi Arabia? or failing that, Kuwait, the UAE and Quatar? Pray? I think you get the idea.

Perhaps you might reconsider your idea of what "investment" is all about at this point.
hey dave....i feel the same frustration that you do...but i also understand the reality of the situation...TODer's are an idealistic bunch...but the reality is that this country and most certainly it's administration are not of our mindset...so i would say everything on your list is within the scope of "action" for those bozos...heil bush!
Ha! Microsoft is a perfect example. The OS line was $12.2 billion and the profit (before taxes) was $9.4 billion. THe Microsoft Office line plus servers for office workers, etc., was $11 billion in revenue with $7.9 billion in profits (before taxes).

Want to talk about obscene? Call Bill Gates.

 the primary objective of any business is to make money! is there a limit to how much they should make? Is there any obligation of any company, besides making money, to take care of the people other than employees and   shareholders!

What I am getting at is this:
IF the driving public can't afford gasoline, is it Exxons, or any other oil company's  responsibility, to make sure the public can afford gasoline? Because they made a profit? exorbant or not.  

I say NO! it's not!

The markets will drive the price, either we can afford it or we can't. But if we can't afford the price  doesn't mean the oil company is required to subsidize those who can't afford it.  

I disagree that the selling of oil operates as a free market.   The consumers at any given time have very little choice as to whether to buy the product or not, nor opportunities to buy it from a competitor at a better price.  Further, if one includes the enormous expenses of taxpayer money spent over the years - such as the use of the military to keep the world safe for petroleum from time to time, cost for environmental clean up, etc. - one sees that this is a perfect example of an industry that should be limited and controlled.  Profits above what are reasonable should be invested in R&D for alternate energy and building infrastructure.  
Now consider this, what if i lost my job. and i can't get another because my aviation industry has been abolished. I need shelter, food, etc. The basics. but i can't afford gas, do i go without?  I need some gas man, i am in hurting status. or maybe I am lazy, i refuse to help myself, who is gonna take care of me? see where i am going with this?

We help those who help themselves. You don't help your self? TOUGH!
these are some serious conditions, with serious consequences. it will cut any of us to the root of our very soul! And the kicker is we will see it with our very eye's!

Since I didn't see a whole lot of government handouts back in the mid-1980s during the brutal petroleum industry slump, does this mean that if we give the government some of our "windfall" back, then the next time we have losses, we can expect the government to make us whole?

I think not. Leave the energy companies to invest their windfall profits however they want, or hell, let them go to Vegas and put it all on number 17.

Bottom line: it's THEIR money, made by putting THEIR capital at risk. It's called return on investment. You wouldn't want a bunch of folks trying to tell you how to spend YOUR money if YOUR business became wildly successful after 20+ years of abysmal returns.

Besides, if you want a say in the companies, buy some stock and vote in the shareholder meetings, like any company.

(And don't say that highway funds are a handout to the oil industry: that tax is largely taken straight from the sale of fuel, a use tax as it were.)

I guess I was one who disagreed with portions of you earlier post.  My point is that as a nation we are presently spending stupefying sums of money in stupid energy-related ways, like the war in Iraq and on huge profits for oil companies.  Then consider the portion of our GDP we spend on defense, much of which would not be needed if we were not gearing up for future oil wars and defending ourselves against those we have abused to support our habit over the last century.  Not to mention tax giveaways to the wealthy, etc.  Yet I should pay more for fuel?  Better to burn the money in my wood stove than spend it this way.

I fully agree that it would be better to focus on more important issues like where we really are in the scheme of oil depletion, but the oil industry profit issue is real, and the politicians did not invent it.  It's kind of like saying "sure we stole your car, but you should really be worrying that your house is on fire".  Does that make the former OK?

Why is it that people in hugely subsidized industries are always the first to cry "free market"?  If you want to keep the pump prices higher to reduce consumption, just make the oil companies pay an appropriate share of the tax money spent to keep them in business.  If that does not bankrupt them, it will surely drive up the cost.

I'm not concerned at all about taxing excess profits in such a situation, I'm far more concerned with what we're doing with all the tax money we spend now, and why we are not dealing with changing our energy infrastructure.  Rebuild the rail systems, fund R&D, something, anything responsible.  But until then, I'm focused on protecting my family, and not interested in giving more money to be wasted.

If Big Oil truly operated in a free market environment devoid of government subsidies, then shouldn't Big Oil be billed for a  large percentage of our annual defense budget -  on the basis that a large chunk of that defense spending is directly or indirectly the result of our need to protect those areas in the Middle East where we get much of our oil?

Big Oil benefits from our military presence in the Middle East, but it is the American taxpayer who pays for that presence. Thus, Big Oil is getting free protection by the government, which constitutes a government subsidy.

Now, one might say, "What's the difference - it's all going come out of the conusmer's pocket sooner or later, one way or the other?" Well, the difference, as people who make economics a religion would say, is that the free market price of a product should convey accurate information about the costs that when into the making of that product. As it is, we are paying a great deal more (in real dollars, not abstract social/environment costs) for our gasoline than what is indicated by the price at the pump. So this extra cost has already been passed on to you - even before you put the nozzle in your gas tank!  

In protecting its supply of oil, the government is providing a valuable service to Big Oil, so why shouldn't Big Oil be the one to directly pay for that service? Of course if they were to do that and raise the price of gas accordingly, then I would demand that my federal income taxes be lowered by a corresponding amount.

Perhaps if Big Oil had to foot part of the bill for our big adventure in Iraq, they wouldn't be so anxious to support an administration bent on foreign intervention. The truist stament of all time is: It's always easy to spend someone else's money.

I would say, Ianqui, that irrespective of the economic Darwinists here that windfall profits should be taxed.  The tax would be used for investment in changeover technologies.  If the oil majors dropped the cost of energy instead of paying the tax (which is what you seem to be talking about), then I would say that is all to the good.  This will lower the cost of investment for those who are willing to invest in alternate energy, and also keep the poor from freezing to death.  If they try to pass the tax on to maintain their profits it will bring the blowup and the inevitable price controls on that much sooner.
I don't know that I agree with you. My own feeling is that no matter what happens, we should not be lowering the cost of gasoline. As we've discussed on TOD many times, there are many other industrialized nations where the price of gas is at least 2x what we pay in the US, and I think that we should be headed in that direction too. As Roscoe Bartlett said, we'd be hard-pressed to argue that their lifestyles aren't as good as ours.

Unlike Dick Cheney, I don't believe that the American way of life is non-negotiable, if that way of life means massive sprawl and McMansions. Why should we be entitled to a lifestyle that's so wasteful of our non-renewable resources and doesn't seem to be making us happier overall (as odograph and Dave and others have pointed out before)?

If keeping the price of gas high is going to making people learn to conserve, then I'm all for it. If the high price of gas makes public transport more feasible, then I support that too. If it makes people move closer to urban areas to reduce the commute, I even think that's worth it.

The evil oil company is us, we the people.  I am a general partner in this business, normally called a shareholder.  I have invested in ExxonMobil for 35 years including dividend reinvestment in the past.  I am retired and the income from my business investment is about 1/3 of my total income including pension and social security.  The proposed excess profits tax is confiscation of after tax earned money.  That's right, the 10% of sales is after paying federal income tax.  If I remember correctly, about 3/4 of Exxons business is overseas.  The excess profits tax wants to confiscate money earned overseas and brought back into the US.  If 10% of sales is excess profit then confiscate everything over 8% of sales.  Then revise the law that no company, business, or individual can keep more than 8% of the gross sales.  That would include sales of real estate, your house.  If you bought your house 20 years ago for $100,000 and sold it next year for $300,000, you would be allowed to keep $24,000 of profit.  The other $176,000 would be confiscated by the excess profits tax.

As a share holder I will propose that ExxonMobil break itself into two companies, US ond foreign.  The largest company will be located overseas and not subject to US confiscation of foreign profits.  The US company will oversee the rapid progression, with no profits, of the US into freezing in the dark with the empty automobiles abandoned on the off ramps.

To roughly qoute Mark Twain:

"Show me war a man git his corn pone from, an ah'll show yo war he git his 'pinions!"

I'd just like to note that ExxonMobil has indeed done some investment with the money they make. Although the budget is paltry, there is investment in a rather effective propaganda campaign to discredit climate change science.
The key word in this discussion is 'windfall'.  Did US oil companies reap a windfall - or is it mideast OPEC members getting most of the windfall, OPEC members who are not taking the risk of building refineries, OPEC members which get costly protection from the US military paid by taxes (excepting Venezuela and a few others)?

Exxon paid more in taxes in the third quarter, $13 billion, than it earned $10 billion.  Is it still under taxed?  And when profits drop in the future, as they surely will when their oil/gas fields deplete, do we intend to provide refuinds for windfall losses?  

Just some questions, the answers depend on what kind of future you envision.

Here is a post that I found interesting:

http://finance.messages.yahoo.com/bbs?.mm=FN&action=m&board=7081371&tid=cwei&sid=708 1371&mid=135948

I'll insert the text here:

"In ExxonMobil's third quarter release, sales year-to-date were $271 billion. Earnings were $25 billion (9% of sales) while total taxes paid were $73 billion (27%). Profits and taxes relative to sales are a reasonable metric to report because those who believe they are being 'gouged' likely think that a large portion of the prices they pay wind up in the shareholder's pocket. In fact, it is only 9 cents on the dollar, while various politicians and government employees around the world plunder thrice that.

In return for those 9 cents on the dollar, the shareholders fund an enterprise that finds oil thousands of feet underground, often miles offshore and in dangerous and foreign lands. Then it transports it, refines it, and finally makes it available at a convenient location and a competitive price.

To the directors, officers, and employees of ExxonMobil: you guys run a first class outfit in a tough, risky, unglamorous and competitive industry.

To the shareholders: your company benefits me by making energy available at competitive prices. Thanks and best of luck with your investment.

In return for their 27 cents on the dollar, the politicians litigate, snarl operations in red tape, scapegoat the owners, and generally make a nuisance of themselves. To the politicians and their media fellow travelers: you can probably guess what I think of you."

One other interesting table:

Company         Sales (B)   Profits (B)  Return on Sales
ExxonMobil      $100        $9.00        9.90%
ConocoPhillips  $49.7       $3.80        7.65%
Microsoft          $9.7        $3.14        32.2%

Also consider the personal wealth of the execs.  I think Bill Gates' net worth is about 100x that of Lee Raymond (CEO of Exxon).

Maybe the WPT should be across the board, and based upon a metric other than merely profits?  Maybe based on return on sales?

Personally, I think the gov't should butt out.  That includes stopping WPT and ending the subsidies to the energy business -- as posters have pointed out, the gov't uses military force which those companies benefit from but do not pay for directly.

Some other differences:

If a container ship full of Microsoft operating systems ruptures of the coast, what are the comparitive cost differences to clean up the oil vs all those CDs?

When was the last time we had to use the military to install a dictator freindly to the US software industry?  

Can't wait to see those protesters with signs reading "No war for Windows"!

I can fairly easily forgo my next Microsoft purchase (and will).  So can most everyone else, so I would imagine MS will be hit hard if the fuel costs start to erode consumers' available cash.

I'm not aware of any actual wars yet to install the American version of intellectual property law, but plenty of rather successful efforts have been made to remake patent, trademark, and copyright law around the world to suit the desires of Disney, MS, etc.  We just might install an RIAA-friendly dictator someday.