U.S. oil companies are reporting record profits as the price of crude oil on the world market remains above $70 a barrel. Less than 10 years ago, the price was below $20 a barrel. The U.S. Congress is looking into imposing a windfall profits tax on the companies, but close observers of the energy industry do not favor such a move.
When the top U.S. oil companies reported huge increases in profits this week, many consumer advocates cried foul. At a time when American motorists are paying record-level prices for gasoline, some in the U.S. Congress think the oil company profits should be scrutinized closely. The U.S. senate Finance Committee is seeking tax return information on top U.S. oil companies from the Internal Revenue Service and some politicians are calling for a windfall profit tax.
Of course, oil companies oppose such a move, citing similar or even higher profit increases in other industries, such as pharmaceuticals, that have not caused an uproar.
Oil industry analysts, however, say a windfall profits tax might be counterproductive. Bob Tippee, editor of Houston-based Oil and Gas Journal, says large oil company profits could benefit consumers in the end.
"Consumers are not going to cheer oil industry profits when gasoline prices are high, everybody knows that," he said. "But in fact, those profits will go into the development of future supply that consumers need."
While some of the money earned by oil companies is paid to shareholders through dividends, much of it is reinvested into exploration, acquisition and production. At its annual meeting here in Houston Wednesday, the directors of the Chevron corporation announced a 15.5-percent increase in the dividend, but also outlined plans for increased spending in development. Company executives say production can be expected to increase by three percent a year over the next five years as a result of new discoveries and ongoing development projects.
Bob Tippee says U.S. oil companies would spend more on development if they could go everywhere oil is to be found.
"There are two general problems, one is in the United States, we make the east and west coasts virtually off limits for exploration," he said. "Companies cannot drill in the Arctic National Wildlife Refuge coastal plain of Alaska. So, there are political limits in the United States and then, outside the United States, more and more exploration acreage is controlled by national oil companies.
Tippee says the high prices for crude oil in recent years has spurred many state-owned companies to develop more fields and boosted profits for U.S.-based oil services companies that often participate in such projects.
"We are already seeing some projects to increase supplies, especially in Saudi Arabia, Abu Dhabi, Kuwait, the big producers are aggressively developing new capacity which will come on stream in the next few years," he added.
Tippee says the increased supply, coupled with an expected slowdown in demand, will eventually move the price of oil lower. He says the important question is whether the demand reduction comes as a result of a worldwide recession set off by high oil prices or from a more moderate economic slowdown.