Where will big oil's big profits go?

Exxon Mobil says some windfall will go to more drilling.

After a particularly heady gush of oil- company profits, everyone from industry executives to international energy policymakers seems to be asking the same question: What should be done with all that cash?

The scale of the windfall is stunning: Exxon Mobil reported Thursday $10.36 billion in quarterly profits for the three months ending June 30. The results beat Wall Street expectations and marked, according to the Associated Press, the second-highest quarterly profit in history. The highest ever? Exxon's $10.71 billion in the fourth quarter of 2005.

It's an industrywide earnings bonanza built on the very thing – rising oil prices – that have been a source of growing consumer anxiety during a summer of $3-a-gallon gasoline.

"They're just benefiting from a strong commodity cycle and doing a very good job of it," says Lysle Brinker, an analyst with energy research firm John S. Herold. "But they don't operate in a vacuum and they realize that. They're going to get tons of spears and blow darts from political and consumer groups."

The report puts oil companies in an embarrassment-of-riches quandary. The profit surge, coupled with fears that high oil prices may be here to stay, adds political pressure to an industry that rarely wins popularity contests.

Some critics have resurrected calls for a windfall profits tax to tap some of the industry's new bounty for the public good. Other policy analysts, meanwhile, say the companies should plow the profits into drilling new wells to boost the world's tight supplies of petroleum.

Many major US-based oil companies are doing just that, to some degree. But the public scrutiny comes as oil companies face a more difficult environment for boosting output. New oil supplies will increasingly need to come from hard-to-tap reserves, or from hostile or politically volatile countries such as Venezuela, Nigeria, and Iran.

The industry is lobbying against punitive measures such as a windfall profits tax, while pointing to its new spending on exploration and development. For example, Exxon Chief Executive Officer Rex Tillerson recently said he wants to boost oil and gas production 25 percent by 2010. The company said yesterday that it will spend $20 billion this year in that effort, with Russia, Qatar, and West Africa among the key growth areas. Last year, the company put $17.7 billion into exploration and capital spending, while earning $36 billion in profits.

Even with prices high, Exxon's sales volume has soared, pushing it past Wal-Mart to gain the top slot on Fortune magazine's latest list of the largest global companies.

But Exxon is just the leader of a very wealthy pack. ConocoPhillips on Wednesday reported earnings of $5.18 billion, up 65 percent from last year's second quarter. Chevron reports its earnings Friday.

"They're minting money," says Tyson Slocum, an energy policy analyst at the consumer group Public Citizen. "It's coming at the expense of actually implementing an energy policy."

He and other critics say the US should impose new taxes, at least temporarily, to divert some of the industry's cash flow toward the solving energy challenges.

"It's not demonizing profit," Mr. Slocum says. "It's talking about what level of profit is reasonable in a special commodity."

His argument: Oil has a unique role in today's economy, in national and global security. In the US, one-third of oil is produced on government property, owned by taxpayers, he notes.

A windfall profits tax enjoys little support among economists, who say it can crush the very marketplace incentives that should prod oil firms to boost output in response to rising demand.

At the same time, some economists call for another kind of tax designed to promote American energy goals. A "carbon tax," imposed on the use of fossil fuels including oil, could spur conservation and a quest for alternative energy sources.

Any tax, on the public or on companies, is sure to face a good measure of political opposition.

In the absence of a tax, a sizeable chunk of recent profits at the US-based oil giants goes to shareholders, in the form of stock buybacks or dividend hikes. Many analysts say that's as it should be, since investors took on the business risk in the hope of such returns.

When a company like Microsoft sends money back to shareholders, it's not viewed as controversial. But oil is different, at least in the visceral response the industry evokes. Spikes in oil prices not only cause consumer outrage, they are often precursors to recessions.

Recent polls suggest that the American public blames oil companies, fairly or unfairly, for today's high energy prices.

A nationwide Quinnipiac University survey in May found that 63 percent of registered voters blamed oil companies for high gasoline prices, while 43 percent blamed oil-producing countries, 35 percent blamed President Bush, and 30 percent blamed normal supply and demand pressures. Many fewer, 19 percent, laid responsibility on "Americans who drive vehicles that use a lot of gasoline."

Reuters material was used in this story.

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