Fool Blog: Let's Tax the Pants Off Big Oil

ExxonMobil (NYSE: XOM  ) released earnings last week that turned some heads. Thanks to record high prices for natural gas and oil, the integrated energy giant made $11.7 billion in the quarter -- the most profitable quarter for any public company ever.

And that angered some people.

Presidential candidate Barack Obama called Exxon's money-making abilities "outrageous" over the weekend, as did Senator Joe Lieberman on Meet the Press. And Obama proposed a $1,000 energy rebate for working couples that would be funded by "a windfall profits penalty on oil selling at or over $80 per barrel."

Is such a move anti-capitalist, or necessary to return sanity to the market?

Tim Hanson: Overlooked in the attack on Exxon's record earnings is the fact that the company's stock actually dropped on the report since it fell short of analyst expectations. Further, the company's net margin in the quarter was just 8.5%, which ranks the company in just the 69th percentile in that category among all public companies. That's good, but not great, and certainly not worthy of a company deserving a "profit penalty."

The fact is that oil exploration and production is a capital intensive and cyclical industry. Thanks to sustained high prices in recent years, E&P companies have been able to search for and find reserves in places that were once uneconomical, such as the very deep water. In 2006, for example, Chevron (NYSE: CVX  ) , Devon Energy (NYSE: DVN  ) , and Statoil announced that they had drilled a successful test well called Jack 2 in the Gulf of Mexico through 7,000 feet of water and another 20,000 feet of earth. It was hailed at the time as the largest U.S. oil find in 40 years.

Yet progress on the Jack project has been slow-going as a result of a lack of supply of deepwater rigs and, I would guess, uncertainty about the economics of extracting oil from such deepwater given the threat of an $80 per barrel price cap.

While the current energy crisis is painful, the solution is not price caps or profit penalties. Rather, if we give entrepreneurs the opportunity to make money by finding creative ways to extract oil from exotic places or invent viable long-lasting batteries for electric cars, they will tap the capital markets and get after a solution. In the meantime, as consumers, we need to adapt.

Joe Magyer: We Americans are a funny bunch. Coca-Cola sells us sugar-water that rots our guts and fattens our children -- earning a near-20% rip in the process -- and we praise it as an American icon. Exxon risks billions annually in the quest to provide us with essential hydrocarbons, facing down wily dictators and geological challenges worthy of a History Channel special in the process. Its reward? Thin margins and being lambasted as the epitome of greed and corporate irresponsibility.

The biggest irony in this whole traveshamockery is that we're all stakeholders in the success of Exxon and its Big Oil peers. People tend to forget (or ignore) that Exxon, ConocoPhillips (NYSE: COP  ) , and friends are publicly traded companies. That's right: Exxon isn't a clandestine organization owned by a small group of Texans who boast world-class ivory collections. If you're invested in an index fund or part of a defined-benefit pension plan, you own ExxonMobil.

And your stake in Big Oil's success doesn't stop with your Exxon shares. Did you enjoy your economic stimulus check? According to The Wall Street Journal, Exxon alone paid nearly $65 billion in U.S. taxes between 2003 and 2007. For perspective, that dwarfs the total tax bills paid by both Wal-Mart (NYSE: WMT  ) and General Electric.

Finally, chew on this: You think gas prices are expensive now? Slap an arbitrary, reactionary windfall tax on oil at above $80 a barrel, and you'll find out what real gas pains feel like.

Brian Richards: This idea is a little bit like the McGriddle -- while I like the concept of bacon and eggs sandwiched between syrup-infused pancakes, the reality disappoints. After all, the theory behind taxing the greedy oil barons and rewarding Joe Consumer sounds good -- who doesn't like a good Robin Hood story? -- but it's a bit outdated.

For the record, I don't think this will ever go through, even though the idea plays well to some voters. For one (and as both Tim and Joe point out), the entire basis for this tax is mistaken -- it looks at profits, rather than profit margins. Exxon's margins are almost half those of McDonald's (NYSE: MCD  ) , for example. (By the way, this windfall tax issue isn't unique to America -- BP (NYSE: BP  ) is facing the same issue.)

From gold to fertilizer, commodity prices have been on an absolute tear over the past year. But with the costs of filling up a gas tank, heating your home, or racing your cigarette boat at very high levels, the tax issue is (unsurprisingly) being arbitrarily applied to one particular commodity -- oil. As Warren Buffett recently said on CNBC, "I don't think that picking anybody that's had a commodity that's increased in price a lot and saying that there's a special tax because of that makes any sense."

In other words: Why not coal or steel or copper or the farmers benefiting from soaring food prices? Because even though they may do business in an identical fashion, and even though they may sell products that we need just as much as oil, and even though they may have better profit margins, they don't have the gaudy, headline-inducing profits of an Exxon.

Finally, the U.S. tried a windfall profits tax in the 1980s, and it didn't work out so well. Complying with the tax code was a burden for both the company and the IRS, and one study found that the tax back then had the effect of "increasing American dependence on foreign oil sources by 8% to 16%" because it decreased domestic production.

That's one thing we definitely do not want.

What do you think? Share your comments in the box below.

None of our bloggers (Tim, Joe, or Brian) owns shares of any company mentioned. Coca-Cola and Wal-Mart are Motley Fool Inside Value recommendations. StatoilHydro is an Income Investor recommendation. The Fool has a disclosure policy.


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Comments from our Foolish Readers

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  • Report this Comment On August 06, 2008, at 12:35 PM, sjr1210 wrote:

    I agree that the windfax tax proposed by Obama is simply a way to rile the voters and get them on his side. Brilliant campaign, stupid for the American people in the long run. The golden boy of the media is really just telling people what they want to hear.

    However, I do think the added tax benefits oil companies receive need to be stopped. The fact is we ARE paying for high fuel prices as well as the tax breaks. Years ago when oil was a steady, but struggling, industry, tax incentives were a necessary thing to keep the black gold rolling in. But now with the profit margins in a much better place, the tax breaks need to be phased out. If the tax breaks are to continue, then it should be to encourage alternative energy projects, not for oil exploration or fossil fuels. The sooner decrease our use of oil, including domestic oil, the better. It would be ideal for our domestic security (oil fields wouldn't be a target for future terrorists if our country is attacked) as well as our environment. So long as there is the possibility that gas prices could head north of $4 per gallon, the WHOLE economy suffers. I want XOM and BP and the ilk to do well, but I want them to do well in a different type of fuel.

  • Report this Comment On August 06, 2008, at 12:54 PM, realmcswane wrote:

    Lets see. We tax the profits of companies who provide an increasingly scarce commodity, because the price is going up. Then, we give that money to consumers so they can buy even more of that commodity and relieve them of price-induced pain which might have created the incentive to use less....

    Brilliant! A recipe for higher long-term prices! And a perfect way to assure future shortages will be as painful as possible!

  • Report this Comment On August 06, 2008, at 1:08 PM, kwill10 wrote:

    Does this remind anyone else of drug importation from Canada? We make it temporarily better for consumers by punishing the big, bad, corporation. But, the big, bad, corporation has to either make money or go bankrupt, and thus ultimately prices would go up one way or another anyway. Of course, not until after the votes are counted, so the politicians hope.

  • Report this Comment On August 06, 2008, at 3:09 PM, oddsneds wrote:

    Tax breaks are just another form of subsidy. When the gov't subsidizes something it is offsetting part of the natural price. Tax breaks therefore are reducing the price of gas.

    If you increase the taxes on, or take away the tax breaks given to companies producing something purchased and consumed, there is only one result: higher prices paid by the consumer. It's true for alcohol products, true for tobacco products, and it's true for oil products.

  • Report this Comment On August 06, 2008, at 3:10 PM, TMFAleph1 wrote:

    Taxing "excessive" profits? Sounds like a promising first step towards a planned economy. Obama's absurd suggestion is rather frightening. Hayek must be turning in his grave.

    Alex Dumortier (XMFMarathonMan)

  • Report this Comment On August 06, 2008, at 3:10 PM, pondee619 wrote:

    Want to curtail the current energy crisis? Tax gasoline at the pump. Keep the price at, at least, $4.00 per gallon. Once gas got to $4.00, and above, people got serious about conserving. The hummers, et al, were taken off the road, people considered mass transit, car pooling, hybreds, alternate fuels and planned their car trips more carefully. Should gas fall below $4.00 for any period of time, all of our bad habits will return.

    Americans will not conserve a comodity which is perceived as plentiful. That perception comes from price. Why would anyone have bought a Hummer a few years ago? Because gas was less expensive and, therefore, more plentiful. "I can use as much as I can afford".

    Keep the gas price high and let Americans, with all their industry, devise a new way around. Without that price incentive, the change will only come much more slowly.

    Let the oil companies keep their profits. They need them to continue to keep us supplied until we wise up.

  • Report this Comment On August 06, 2008, at 4:25 PM, tholepin wrote:

    In 1708, if a government had increased the tax on livery stables, farmers who raised oats and hay, and imposed an excise tax on the horse, it would have cost more to own a horse. Everything transported by horses would have gone up in price, thus slowing the economy, but it wouldn't have brought the horseless carriage any sooner because the technology wasn't ready. These things come in their own good time. You can't force them.

  • Report this Comment On August 06, 2008, at 5:42 PM, DwntwnDL wrote:

    Populist pap laid on heavy by the media reinforces the ignorant juvenile response. Energy has been an issue for over 30 years now that the pressure is starting to mount a bit here everyone is screaming like chicken little gone amok. Hopefully McCain's people will move beyond air pressure gauge props by showing the voters some respect and actually elucidate the obvious effects of brash, uninformed pandering.

  • Report this Comment On August 06, 2008, at 6:00 PM, JohnC84 wrote:

    If Americans think they have reason to be angry about high gas prices, look at the poor Canadians. Their gas prices are a good 20-30 higher and they actually EXPORT oil to the US! Look, all the cheap crude is gone. We need higher prices to make newer, more risky plays economic. It's a balancing act for sure. But if we don;t look for more oil NOW, we are really going to pay through the hose

    A windfall profit tax on Coke? Hmmmm.

  • Report this Comment On August 06, 2008, at 9:31 PM, maiday2000 wrote:

    An intelligent story and 10 responses with merit and rationality? Maybe there is hope for this country yet.

  • Report this Comment On August 06, 2008, at 10:30 PM, michlav1 wrote:

    Personally, I don't think gas prices are high enough. I agree with the earlier commenter that oil prices should stay at least $4. So you had to garage or sell your Hummer, boo hoo to you. I've known people who bought those gas guzzlers when prices were really low and I told them they would get bitten in the ass, I didn't know the bite would be quite this big so quickly. Folks complain about Obama's oil policy...McCain's is better? Ruin the environment so we can pretend we'll wind up with cheaper oil?! Not going to happen folks. 10-15+ years down the road is the earliest we'd see any kind of relief and it probably wouldn't happen then. If all of you who were of voting age during the 70s had gotten it together and sacrificed, our alternative energies would be a lot further along then it is now.

  • Report this Comment On August 06, 2008, at 11:51 PM, amckane wrote:

    Forget the windfall profits tax idea. It's wrong for any industry. We should, like earlier posts have indicated, lose all these tax breaks and subsidies on things like oil, peanuts, and sugar, etc. It would help out many while hurting a relative few, and be a big step toward "free trade". Furthermore, if you hate seeing Exxon's profits so large, buy a bicycle, and use it for your local commutes and errands. Your kids will love it! Mine do. It will be a fine day in America when no one cares what the price of gasoline is.

  • Report this Comment On August 07, 2008, at 12:30 AM, Mary08 wrote:

    In the Newz...

    The technology giant Apele had a most profitable quarter. People waited in line to buy the very pricey Phone.

    And that angered some people.

    Presidential candidate Barack Obama called Apele's money-making abilities "outrageous" over the weekend, as did Senator Joe Lieberman on Meet the Press.

    And Obama proposed a $1,000 technology rebate for all couples, that would be funded by a windfall profits penalty on tech companies

    selling at or over $500.00 per Phone.

  • Report this Comment On August 07, 2008, at 1:09 PM, n0name64 wrote:

    Do the ones talking about taking away "tax breaks" have any idea what they are talking about? The main "tax break" that Pelosi, Reid, and their mascot Obama have publicly announced that they want to take away is a deduction for U.S. manufacturing activities that applies to all U.S. manufacturers, not just oil companies. It's Chavez-style expropriation, and a great way to say "don't build any more refineries here!" The oil companies are just passing along the cost of the increase in crude to the customer. So is the U.S. government, which makes more in taxes from a gallon of gas than the oil companies (about 13 cents versus 7 cents). By this logic, we should impose a windfall profits tax on Congress. Maybe that would make them less greedy for our money.

  • Report this Comment On August 08, 2008, at 2:44 PM, stevemustangred wrote:

    The philosphy of the windfall oil profits tax seems to indicate that the taxed profits should be redistributed to the "poor" refiners like VLO whose profit margins have been squeezed to keep the price of gasolline down in the face of higher oil prices.

    Tongue in Cheek...

  • Report this Comment On August 08, 2008, at 3:01 PM, 6damon9 wrote:

    I believe Obama's tax-to-rebate proposal is a misguided gimmick. As a capitalist & investor with a personal stake in the industry, I think it's great that they are doing well, and I don't want policies that will diminish my returns without providing any long term benefit.

    On the other hand, it's clear to me we've developed into a nation with an unhealthy and disproportionately high dependence on hydrocarbons. Many other countries have or are developing this same addiction - though the USA is clearly the most gluttonous consumer - at a time when world supply of this finite resource can not increase significantly and, in fact, is guaranteed to diminish in the future. Add in the environmental and national security considerations, and the often overlooked fact that this precious resource is more than fuel - it's an essential feedstock for so many things - and you have a recipe for disaster. This is truely an existential risk for our nation that we must not ignore.

    Therefore, I'm in favor of policies that will strongly encourage and accelerate the transition from our fossil fuel-based economy to one that is powered by renewable energy. Consistent with a long term investment strategy, I'm even willing to make some sacrifices in the short term to realize this goal. If we embrace this mindset as a nation it will pay dividends for generations to come; if we don't, our nation's twilight years will be uncomfortable indeed.

  • Report this Comment On August 08, 2008, at 3:16 PM, BaratadiBurracha wrote:

    tholepin is a genius, so is n0name64, too bad people have had a historically hard time understanding and realizing genius when confronted by it.

    wanna blame someone for oil price??? CONGRESS, you numbnuts!!!

    We have spent BILLIONS over the last four DECADES researching ALTERNATIVE energy, and guess what? We're not there yet, we're on our way, though.

    Do you want to speed up this process? keeping oil above $4 is NOT the answer!!

    The answer is GOOD EDUCATION!!! something unfortunately we are lacking as of late in our great and wondrous nation.

    Let us reform our educational "FANNIE MAE" before we need to bail our country out of MASS RETARDATION and COOL-AID DRINKAGE.

    For now a quick fix: REJECT CONVENTIONAL WISDOM!! GO FIND THE DARN TRUTH, DON'T JUST ACCEPT PEOPLE'S (THE MEDIA, POLITICIANS) WORD, see if they speak from wisdom or if they seek to deceive you, me, and everyone else for their own ill-gotten gains.

    the ONLY real windfall profit is TAXES.

    Interestingly, rejecting conventional wisdom is what a Fool is all about...

  • Report this Comment On August 08, 2008, at 3:47 PM, Sinfest wrote:

    Rejecting some government policy simply because it would hurt "share-holders" is an incredibly selfish and dishonest way to debate the merits of said policy.

    I appreciate your argument about profit margin but I think you're wrong to believe that the "free-market" and proper monetary incentives are all that's needed to make the next breakthrough in sustainable energy. All too often, folks at the Fool repeat the mantra that free-markets and pure unregulated capitalism will solve everything.

    The bottom line is that there's a finite amount of oil in the world and it's not coming back, so concerns that plan X is bad because it will adversely affect oil prices in the short term should take a backseat, especially if plan X can provide much needed capital to better forms of fuel than oil.

  • Report this Comment On August 08, 2008, at 10:32 PM, dividendgrowth wrote:

    Getting away from fossil fuels is our nation's top priority

    Big oil should be taxed and the tax money needs to be invested in such a way as to make the Big Oil obsolete one day.

    Either the Big Oil invests the money by themselves or the government does it for them.

    Don't assume the laissez-faire market is always right. Aren't we all aware that WS never looks more than 2 quarters down the road?

  • Report this Comment On August 09, 2008, at 1:22 PM, kolosos35 wrote:

    What is under the ground in America, belongs to the American people.

    Lease land for peanuts, Why?

    Commodity companies should be payed a percentage of what they find, the rest of the profit belongs to the American people.

    Yes you can buy their stock, but for most that is easyer said then done.

    The present way CEO's get a $400,000,000 retirement package, while most Americans at the end of the food chain can't get health care.

    The name of the game here is "don't argue with a man who has the knife, and the watermellon"

    Psychopathic crooks, and politicians rule....

  • Report this Comment On August 10, 2008, at 9:39 AM, Harbinger0 wrote:

    WHO IS JOHN GALT?

  • Report this Comment On August 10, 2008, at 1:19 PM, Harbinger0 wrote:

    Who is John Galt?

  • Report this Comment On August 10, 2008, at 1:23 PM, Harbinger0 wrote:

    Who is John Galt?

  • Report this Comment On August 10, 2008, at 1:26 PM, Harbinger0 wrote:

    Who is John Galt?

  • Report this Comment On August 11, 2008, at 6:55 PM, robinjoe wrote:

    We are increasingly governed by children.

  • Report this Comment On August 12, 2008, at 11:53 AM, chk2595 wrote:

    More of a scarce commodity means a lower price. Econ 101 says to drill now. Congress and the law and rule makers are stumbleing block to cheaper energy costs. The polar bear and coastal views are costing us at the pump.

    We can put enough socialist laws and rules on the books to make investment in energy to cause them to move from the USA and headquarter in other more favorable places. Obama simply has a short term solution with long range sure failure. While we may not drill our way out of shortages, there is not enough wind and solar to replace hydro carbons.

    The experts are not in Washington or politics.

  • Report this Comment On August 12, 2008, at 12:52 PM, jyates1959 wrote:

    You don't penalize folks for making money legally.

    The idea of having a windfall tax is just another way to tax those who work and give it to those who for the most part choose not to work.

    The Democrats along with their leader Obama are just pandering to the emotions of the population that is feeling the pinch of high fuel prices that we have enjoyed being lower in the US than nearly every other nation on Earth.

    It's easier to feel outraged by the earnings of big business than to understand the reasons and rewards of profit in a market based economy.

  • Report this Comment On August 12, 2008, at 2:42 PM, fibreoptik wrote:

    Does anyone actually give a DAMN about the environment and future impact the (mis)use of copious amounts of fuel (read: Humvees, NASCAR etc.) will have on the future of our children.

    This is NOT just about money, profit margins and gratuitous fun anymore people! Grow up!

  • Report this Comment On August 12, 2008, at 2:43 PM, fibreoptik wrote:

    Does anyone actually give a DAMN about the environment and future impact the (mis)use of copious amounts of fuel (read: Humvees, NASCAR etc.) will have on the future of our children.

    This is NOT just about money, profit margins and gratuitous fun anymore people! Grow up!

  • Report this Comment On August 12, 2008, at 3:39 PM, Darwood11 wrote:

    To take a cynical view, I suspect this presents a potential windfall for the politicians who propose it: 1) Gain some political points from a public that is reeling from high energy prices; 2) Gain some tax revenues which can be used to fund the politicians favorite hole; 3) Divert attention and avoid real, pressing problems while seemingly addressing real problems!

  • Report this Comment On August 12, 2008, at 7:47 PM, yattaboy wrote:

    There was a time I might have also said, "Stick it to the oil companies". But I considered this:

    Gas costs $4/gallon. Around 25% of the price of gas depends on refining, shipping etc. Of this 25% pie slice, "The Oil Companies" make their profit, which may amount to 5% of the price of gas. So, assuming we just stick it to big oil and tax 100% of their earnings, the price of gas drops 5%. What would that fix? It's the horrible $100+/barrel oil and federal and state taxes that still make up over 75% of the price of gas. Now just imagine we took this radical action and taxed CVX and Exxon as said -- they would cease any and all further investment. They'd have no money to do it with.

    Now, oil companies do a rotten job of communicating the above. And $4/gallon IS expensive for a product that was more or less perfected about 100 years ago. But here in the good ol' USA, we are the only country where people commute 50, 80, even 100 miles per day, and do so in a pickup truck. We've been pretty lucky to have cheap gas over the last 20 years. Next door Canada and way-down under Australia each have bustling economies, yet gasoline currently costs $6/gallon in each country. I think the real answer is we have to adjust to expensive oil, and when it costs so much, collossal amounts of research and development are poured into alternatives -- like solar and wind, whose electric power can run cars instead of gasoline. Don't look now. We're about 10 years away still, but the day is not far off when this will all be a vague memory.

  • Report this Comment On August 12, 2008, at 8:34 PM, MisterFugu wrote:

    you gotta be kiidding me, belong to the american people???? When did the US become socialist?

    Free market, democratic systems have always prevailed in the long run, and I believe they always will.

  • Report this Comment On August 13, 2008, at 10:30 AM, LHo7415993 wrote:

    The real question is why is the US Taxpayer paying them to drill? Considering the record profits and record high gas prices why should the taxpayer be giving them tax breaks and paying for them to drill in alaska?

  • Report this Comment On August 13, 2008, at 10:32 AM, qroger wrote:

    I was skimming through and saw the arguments that these are publically traded companies so if there is a villain, he is us. However, it is interesting to look at companies as organisms that are operating in ways consistent with Darwins theories of "evolution". Evolution works as a process that rewards behaviors and mutations that are beneficial to the organism, and penalizes behaviors that are less beneficial even if the organism is completely unaware of the change. This is an incremetal process but this drift occasionally produces organisms so specialized that a small change in the environment results in their extinction.

    The surviving oil companies are operating in a manner best suited to preserve their existance, which is not the same thing as the public good, or even maximum inflation of the bottom line. Obviously, if they make too much money, they are targets for taxation. Better that they distribute billions to management (or hopefully to dividends), than taxes.

    If there is currently a problem, it is that the producers have such an influence on the regulators and taxers that evolutionary excesses are not punished by changes in the environment, ie, the market. If the system was a pure interaction between the market and the companies, many banks would now be gone. We are in some sort of a new environment where there is little separation between buisiness and government. Rather than have an enlarged profit, has Exxon used the money to buy the government, or public opinion?

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