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Oil firms' profits too high
Bismarck Tribune
Editorial Board
November 4, 2005

Tradition says: When a hard wind blows through an orchard and ripe apples fall to the ground, the farmer promptly gathers them up and is spared the work of picking them off the trees, and it's called a windfall.

The major oil companies have had their own kind of windfall - nothing to do with apples falling down but with the companies' profits from oil going up. The wind in the windfall has come from market forces and even from hurricanes. The benefit from the unexpected gain is certainly not to any farmer or any other consumer but only to Exxon Mobil and the other majors. Exxon Mobil reported a $9.9 billion profit for the past quarter. Together, the oil companies are gathering $7 billion a month in profits.

We're a long way removed from a windfall of apples. This kind of profiting sticks in the country's craw. It would be in the oil companies' own best interest if they chose to invest a large amount of profit in production of more energy so that maybe the price could come down.

The windfall profits are indeed provoking responses: Anger on the part of consumers, and from lawmakers the threat of congressional action. It comes from both Democrats and Republicans in Congress.

Senate Majority Leader Bill Frist has demanded hearings for energy company officials to face questioning.

Sen. Byron Dorgan is leading the Democrats' response. The North Dakotan has introduced legislation allowing for three years a 50 percent excise levy on oil companies' profits when the price of crude oil exceeds $40 a barrel. There is provision made in the bill for the companies to avoid the tax by the amount they invest their profits in producing energy by drilling for oil or natural gas, building new oil refineries or producing renewable energy forms. The proceeds would be rebated to consumers under Dorgan's plan.

It's problematic that a law should coerce a corporation in its decision of what it does with its profit. It can be argued that the federal tax code does much the same thing, offering comparable incentives for business investment rather than owing the corporation tax.

But energy companies, reporting a previously unheard of level of profit, are not justified in simply turning the current level of earnings into dividends.

The prices of gasoline, heating oil, other petroleum products and natural gas should honestly reflect the relationship between supply and demand.

We've been down the road before of taxing windfall oil profits. The crude oil windfall profit tax passed in 1980 produced a good deal of revenue during its lifetime, but economics scholars have divided opinions over whether it was this tax or market forces that gradually brought down the price of crude oil in the 1980s.

The big concern now is whether consumers can afford to wait patiently for a market adjustment.

I didn't know where the word "windfall" came from. Now I do. :) I get a bit giddy when I learn something new. Back to the real world.

As we all know oil companies have record profits. They told us it was because of high demand and low supply. But we now know that's simply not true. It seems because they bought off the GOP congress and president. They were right.

Back to the economics of rising prices. The price of oil rises when demand increases or supply falls. Using simple economy theory we can learn neither happen. First, if supply was low, gas companies would have to pay more for oil and their profits would fall (or stay the same if they passed the price to us). But instead, prices soared and so did their profits. This tells us there was no shortage of supply.

If higher demand was the problem, the oil companies would have had to buy oil from more expensive sources and their operating costs would have soared. Since profits soared we can be positive they didn't have to buy more expensive oil (or at a minimum they raised prices a hell of a lot higher than the market demanded).

So what's really going on here. The oil companies (and the GOP) have wanted to drill in the Arctic for years. The only way they could get (dumb) Americans to go along with this insanity was to increase gas prices. In other words, the higher prices you paid at the pump were the price you paid so the Senate to open up the Arctic to drilling. Damn sick huh?