As oil profits soar, scrutiny rises

October 27, 2005

Many oil companies have seen their rigs get battered in the Gulf of Mexico this hurricane season. But now, the companies are facing a new kind of storm, as Congress wants to show constituents it is concerned about oil companies reporting record profits.

At the moment, it's mainly just a windstorm. Warnings swirl about price gouging. Some in Congress are urging the oil companies to reinvest their profits in new US refineries and energy sources. But some Democrats are also proposing windfall profits taxes, which would make the companies either spend their money on new energy projects or send it to the US Treasury.

The debate comes just before the winter heating season arrives - a time when many Americans will be paying considerably more to stay warm. It may also have a longer-term effect, forcing the oil companies to commit themselves to projects that could eventually help lower costs for consumers. Over the short term, it could also prompt the companies to lower their profit margins in an effort to deflect yet more criticism.

"We see the energy companies keeping their heads down a bit and not playing up the spectacular nature of these earnings," says John Killduff, an energy trader at FIMAT USA in New York.

There is no question that most of the oil companies are reporting mammoth increases in third-quarter profits. Wednesday, ConocoPhillips, the nation's third-largest oil company, reported that quarterly profits rose 89 percent. On Tuesday, BP reported profits that soared 34 percent. Thursday, Shell and ExxonMobil will report earnings. Friday, it will be Chevron's turn.

The main factor for the oil companies is the high price of oil, which peaked near $70 a barrel during the quarter. Since then, oil prices have dropped slightly. As of late Wednesday morning, oil prices were $62.30 on the futures market. This is still considerably higher than last year.

Reflecting higher oil prices, gasoline prices spiked as well, rising to more than $3 a gallon in many places. Today, GasPriceWatch.com reports the national average is $2.49 a gallon.

The soaring profits have already attracted the attention of many members of Congress. On Tuesday, House Speaker Dennis Hastert warned companies that any price gouging is "unacceptable, and any company who does it will be prosecuted." He urged the oil companies to explain to the American public what they are doing to bring down the cost of oil and natural gas. And he urged them to build new refineries and pipelines.

Other Republicans at the press conference indicated such investments may be set to happen. Rep. Joe Barton (R) of Texas, chairman of the House Energy and Commerce Committee, said he had met with oil and gas companies. "I expect early next spring you'll see some announcements," he said. However, he added, "almost to a person they say, 'Why should I put up $1 billion [the cost of a new refinery] if I know it's going to take five to 10 years to get a decision on whether I can build a refinery?' "

One reason the companies might be more inclined to spend money is the threat of windfall profits taxes, similar to those passed in 1980. Those were repealed in 1988 when President Reagan signed a trade bill. This September, Sen. Byron Dorgan (D) of North Dakota introduced new legislation. It would give consumers a tax-rebate check through a three-year, 50 percent excise tax on oil-company profits. He defines windfall profits as the portion of the price of a barrel of oil that exceeds $40.

"We need this because I believe the current profits are the highest they have ever been, and at the same time the oil companies are accumulating all this gain, there is a lot of pain for consumers," says Senator Dorgan in an interview.

Some consumer grass-roots groups are urging Congress on. "We haven't seen anything yet: Wait until people get their home heating bills," predicts Tyson Slocum, energy research director at Public Citizen in Washington.

But Mr. Killduff, the energy trader, thinks it would be bad policy. "If we are in a structural supply shortage, the last thing you want to do is chill investment with talk about clawing back some of the gains the companies stand to make," he says.

On the streets of New York, however, some drivers thought the idea of a windfall profits tax sounded good. "I pay more tax on every profit I make, so why shouldn't they?" says Roxanne Williams, a legal assistant and mother of twins.

Douglas Clemens, a commercial real estate broker, calls high gas prices "regressive" against people who don't make a lot of money. He says he's thinking about writing his congressman to complain. "I think that if people get angry enough and it begins to eat into other things, public sentiment will strengthen and things could possibly change."

Gail Russell Chaddock contributed to this story from Washington, as did Diana Ransom from New York.