Fireworks Expected at Wednesday's Oil Hearings

Today's Senate hearing on the high price of oil and record profits at the integrated oil firms is sure to throw some political sparks. Many on Wall Street are betting that Wednesday's action will be similar to the hearings where tobacco industry executives were called to task for the health effects of their products. Analysts expect Big Oil to be called on to answer for the economic effects of their recent record profits.

What's at stake here? The disposition of the oil companies' record profits. Some in Congress are calling for a "Windfall Profits Tax" which would tap oil company profits to provide a "rebate" to consumers. Senator Byron Dorgan's Windfall Profits Rebate Act of 2005 (S. 1631) would temporarily excise money made when a barrel of oil sold exceeds $40 per barrel. Other proposals are being discussed (oil companies supporting low-income heating assistance programs, etc.) as nearly every American has less cash in hand because of the recent run-up in gasoline and energy prices.

So how big are these profits? The most recent quarter (July to September period) saw the oil companies rake in record profits exceeding $31 billion (or more than $14 million in profits every hour during the three month period).

      ExxonMobil: $9.92 billion
      Chevron: $3.6 billion
      ConocoPhillips: $3.8 billion
      British Petroleum: $4.8 billion
      Royal Dutch Shell: $9.0 billion

During the past 10 years, oil company profits have risen significantly (up some 349 percent between 1995 and 2004), and at a pace faster than the price of oil (which has gone up 206 percent between 1995 and 2005).

One thing to keep in mind when looking at these numbers: there has been a mass consolidation in the oil industry in the past two decades. Just look at the names: ExxonMobil, ConocoPhillips, BP (formerly BP Amoco) and Chevron (formerly Chevron Texaco).

As companies combine operations, investors expect to benefit from increased efficiencies, which likely accounts for part of the increase in profits. This mass of mergers also makes it difficult to determine the long-term earnings for each company (how do you combine the annual profits of two companies in years prior to their merger?).

Who will be testifying? Lee Raymond (Chairman/CEO of ExxonMobil), David O'Reilly (Chairman/CEO of Chevron), James Mulva (Chairman/CEO of ConocoPhillips), Ross Pillari (President/CEO of BP America) and John Hofmeister (President/US Chair of Royal Dutch Shell) will be called upon to answer for the industry.

A second panel will include the chairman of the Federal Trade Commission and the state attorneys general from New Jersey, South Carolina and Arizona.

What will these people likely say? Senators are expected to rake the executives over the coals. The high price of energy is a pocketbook issue that all their constituents (individuals and businesses alike) are concerned about. They'll likely point to the record earnings and suggest that the oil companies are gouging or manipulating the world commodities markets to their benefit.

In return, the oil executives are expected to point out that they don't determine the price of oil or gas… rather, that those prices are determined by thousands of traders in a global market ruled by well-established economic principles of supply and demand.

They'll likely point out that in the past this supply and demand balance has not been in their favor, and Congress wasn't rushing in to provide financial backing to the industry… why should they be stepping in to take money when they weren't willing to dole it out before?

The fun gets under way tomorrow morning at 9:30 a.m.