Gas Prices

On November 9, 2005, executives from the five major oil companies operating in the country were brought before the United States Senate. The subsequent hearing was the culmination of months of record oil company profits, rising gas prices at the pumps, and growing consumer frustration. For example, ExxonMobil, the largest of the oil companies, made a record third-quarter 2005 profit of $9,920,000,000, an increase of 75% compared to last year. That’s 9.92 billion dollars, the highest profit ever recorded for a company in a single quarter. The five companies together brought in 25 billion dollars in profit in the quarter. All of this at a time when the average price per gallon nationwide, according to AAA, has increased by 37% from the same time last year, and at the time of writing is $2.37/gallon, down from its post-Katrina high of $3.12.

I admit that, like most Americans, I’m pissed off about higher gas prices, and when I see the huge profits oil companies are making it doesn’t help cheer me up one bit. In the days after Hurricane Katrina, for example, I found myself having to pay $3.29/gallon. The average gas price in nearby Atlanta was reported to be even higher: well over $4/gallon. Even with these high prices, I considered myself lucky compared to some; family and friends in my home town of Jackson, MS were being forced to wait in 5 and 6 hour long lines just to fill up, in addition to paying the high prices.

With stories like these from angry consumers across the nation, Senators finally have started to act. There are many proposals that are now out there, including requiring oil companies to invest in refining capacity and to have stockpiles of gas ready in case of another big event like Hurricane Katrina, and the most widely discussed and considered proposal, a profits windfall tax.

While the specifics of a profits windfall tax differ, the general concept is the same: to tax profits over a specified amount that oil companies make. The tax being called for by Senators Byron Dorgan (D-ND) and Chris Dodd (D-Conn) would be a three-year tax of 50 percent for any profit the oil companies made for oil sold over $40 a barrel. The revenue would then be returned to consumers in the form of an income tax rebate. Supporters of the tax say that because oil companies would want to pay as little on the tax as possible, it would increase industry investments into refining capacity and therefore also decrease gas prices in the long run. Also, the income tax rebates would help offset some of the costs that families have been paying in higher gas prices and will pay in higher winter heating costs.

Critics of the tax on oil companies argue that despite having enormous profits, the profit margins of the companies are in line with those of other industries. For example, ExxonMobil’s profit margin in the third quarter was 9.8 percent (they also had a record 100 billion dollars in sales) while that of Citigroup’s was 15.7 percent and Merck’s was 25.3 percent. Many critics also contend that the tax would actually decrease investment into exploration and refining capacity. They say oil companies wouldn’t see the lowered profits as enough of an incentive to accept the risks and high costs involved. In turn, they argue, gas prices would actually rise in the long-term because of the tax. The critics do have some history to back up their claims. In 1980, President Carter signed into law a Crude Oil Windfall Profit Tax. The effect was decreased investment by oil companies and the bill was repealed in the late 1980’s. The difference between the tax signed into law by Carter and the proposed tax is that the new tax wouldn’t apply to oil discovered after the law would take effect and therefore not limit oil companies’ incentive for exploration.

Despite all of the talk from politicians of both parties, the likelihood of a profits windfall tax being enacted is low. The president has already come out and said that he would veto any such legislation. Unfortunately, I don’t know of a solution to the problem of high gas prices. I do know that something has to be done, and that considering a profit windfall tax is a start, but the government needs to keep the discussion going until a suitable answer is found. I don’t want to have to consider a move to Caracas, Venezuela. The price of gas there according to CNN/Money? 12 cents/gallon.