Economist: Oil Windfall Taxes Are a Bad Idea

oil

hide captionHouse Select Energy Independence and Global Warming Committee hearing on Capitol Hill, April 1, 2008.

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Exxon Mobil's profit for 2007 was $40.6 billion, the largest profit ever by any company anywhere.

Windfall profits in the oil industry, coming at the same time as many Americans are struggling to keep up with oil price increases, have led many people to suggest a windfall profits tax on oil. They say it could be used to help explore new forms of energy and lessen the impact of high prices for consumers.

Energy economist Michelle Michot Foss says a windfall profits tax is a terrible idea that stems from misconceptions about how the oil industry works.

Foss says people simply don't understand the tremendous costs of doing business and what the industry does with the money it makes. "Overall, something like 90 percent of what the industry makes gets reinvested in its core businesses," she says. "If they didn't do this, they'd have to shut down."

She also says that when it comes to profitability, the oil industry is fourth, not first, led by beverages and tobacco products, pharmaceuticals and electric equipment.

Foss says that most people incorrectly lump the entire oil industry into one category. Right now, she says, the refining industry is in a big slump. She also says that reports of large executive salaries are overblown and the exceptions prove the rule, because the high salaries go to people who can manage companies through bad times.

A windfall profits tax, says Foss, "would not help at all, and it could have a negative effect and be very detrimental."

Foss is chief energy economist and head of the Center for Energy Economics at the University of Texas at Austin. She spoke to NPR's Bryant Park Project as part of a continuing series of interviews about the high price of oil.

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