Economist: Oil Windfall Taxes Are a Bad Idea Gas prices and oil company profits are through the roof. Could higher taxes on the industry be an answer? No, says one economist.
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Economist: Oil Windfall Taxes Are a Bad Idea

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Economist: Oil Windfall Taxes Are a Bad Idea

Economist: Oil Windfall Taxes Are a Bad Idea

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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ExxonMobil had a bigger profit last year than any company in U.S. history has ever had, beating their own record, by the way. This has led more than a few people to look at how empty their wallets are, how fat the oil companies' coffers are, and say something needs to be done. All this week, we've been analyzing various solutions to the gas crisis. Today's proposed solution is a look at a windfall profits tax. With us now is Michelle Michot Foss, chief energy economist and head of the Center for Energy Economics at the University of Texas at Austin. She's been working in the industry for 30 years. Thank you for joining us, Michelle.

Dr. MICHELLE MICHOT FOSS (Chief Energy Economist and Head, Center for Energy Economics, University of Texas at Austin): You bet.

PESCA: So before we hear from you, an expert, let's hear about the thoughts of one prominent American on this issue.

(Soundbite of Obama campaign ad)

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Senator BARACK OBAMA (Democrat, Illinois; 2008 Presumptive Presidential Nominee): I'm Barack Obama. I don't take money from oil companies or Washington lobbyists, and I won't let them block change anymore. They'll pay a penalty on windfall profits. We'll invest in alternative energy...

PESCA: So, there, Barack Obama endorses the idea of windfall profits. It's gaining some steam. What do you think of the idea of taxing the oil company just because they're making so much money?

Dr. FOSS: I just think that people don't understand how the oil industry works, and I think that people hear the profit reports, and I think they don't understand the cost of business and what the industry actually does with the money that it makes. Overall, something like 90 percent of what the oil industry earns gets reinvested in its core businesses. If companies didn't do this, they'd have to shut down.

PESCA: And what the industry always tells us is that their profitability, their profit margins, are no different now than they were when gas was at, you know, a dollar 25. It's just that the net amount is a lot. But when you look at it, it's so much. I don't know if we could process 40 billion. Let's compare it to Wal-Mart, which everyone thinks of as the biggest company. They profited 12 billion. So ExxonMobil, for one, and other big oil companies are making so much money, perhaps some of that excess profit could be taken, and in the form of taxes, redistributed to alternative oil use - alternative energy uses. Is there anything to be said for that idea?

Dr. FOSS: Well, I think, first of all, actually, we need to correct something, because the most profitable industry is actually beverage and tobacco products, followed by pharmaceuticals, followed by electrical equipment. Finally, you get down to oil and natural gas. And one of the things also that people need to understand is that there are different parts of the oil business that work in different ways. And what everyone is hearing about is the impact of proceeds from the sale of raw material, the production and sale of raw material, which is the crude oil itself. But that is not what we use. What we use are products that come out of refineries.

The refining industry right now is losing money, and historically, the refining businesses operate close to breakeven and not much better than that. And so, those are the kinds of things that companies bear in mind. At times like this, when the profitability of the industry is better from the production of crude oil, that money has to go back into the business to try to improve operations in places where the companies are losing money, like refining and other downstream operations. And as I said, very few people understand how this industry works.

PESCA: Well, perhaps one of them is a guy we've been talking to all week. He is a geologist. His name is Ken Deffeyes, and he has - he knows where to find the oil. And he says, I'm not an economist. But when asked about the windfall-profits tax idea, here's what Professor Deffeyes had to say.

Dr. KEN DEFFEYES (Author, "Beyond Oil: The View from Hubbert's Peak"): When they start buying back stock, paying bigger dividends, paying large salaries to their CEOs, all these things, you say, uh-oh, they've got more money than they know what to do with.

PESCA: What about the salaries paid to executives, for one?

Dr. FOSS: Well, an average, as far as I know, within the oil industry, the salaries are actually lower overall than they are for other higher-flying industries. So most of the companies are pretty conservative. Boards of directors and large shareholder groups tend to kind of keep a pretty tight leash on what they do. And there are exceptions, and usually the exceptions reflect management skill in guiding the company through the bad times.

If I'm in the oil business and I'm buying back shares, the reason why I'm doing that is because I can't offer my shareholder a better deal somewhere else. If I'm locked out of doing business in a place where I would like to operate, and if the best use of the shareholders money is to return the money to the shareholders, that's a fiduciary obligation.

PESCA: So a windfall-profits tax, would that tax help a little, help a lot, not help at all or really hurt?

Dr. FOSS: It would not help at all, and it could have a negative effect and be very detrimental.

PESCA: Michelle Michot Foss is the chief energy economist and head of the Center for Energy Economics at the University of Texas at Austin. Thank you very much, Michelle.

Dr. FOSS: You bet.

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