Big Oil's Big Profits Stir Political Pressure

Jan. 25, 2006 — -- A gusher of impressive quarterly and annual profits for the oil industry is going to attract a lot of attention on Wall Street and Capitol Hill in the coming week.

ConocoPhillips kicked off the fourth-quarter earnings season for big oil on Wednesday with an impressive $13.5 billion annual profit, up 66 percent from its 2004 performance. The rest of the major integrated oil and gas firms will march out their end-of-year books during the coming week and a half.

Investors will likely be pleased by record profits, but a rising chorus of outrage from oil company detractors will likely spur some political heat for the firms.

"The oil companies are making great gains in this environment of high prices, but consumers are paying the price," said Athan Manuel, an environmental lobbyist at U.S. Public Interest Research Group. "These are phenomenal profits -- they're expected but completely out of line with what's right for the average American consumer who has to use their car to get to work."

It was this sentiment that spurred Congress to act last year. In November the chief executives of the five major oil companies -- ExxonMobil, ChevronTexaco, BP, Royal Dutch Shell and ConocoPhillips -- were forced to testify on their record third-quarter profits.

New Tax Proposals

The political fallout included several proposals to impose a "windfall profits tax" on the industry in an effort to compensate consumers for spending big bucks on fueling their cars and heating their homes.

After the televised hearings most of the proposals faded away, but two remain.

The measures, which have passed the Senate but not the House, would alter the current tax code to impose higher bills on big oil by reducing tax credits and trimming some accounting methods that benefit their bottom lines.

"I doubt that the House will go along with any windfall profit taxes, including the current Senate actions," said Andy LaPerriere, managing director at ISI Group. "Don't expect any legislative moves. I think that stalemate is the likely outcome. The hearings last fall were an effort by congressional Republicans to distance themselves from the energy companies."

Election-Year Pressure Expected

Even if there's a low risk of new legislation, the oil industry is trying to get out in front of the political rhetoric, which will heat up during this election year.

Its new theme is designed to humanize an industry that is seen by many as the ultimate in faceless, heartless big business.

"Some people and politicians who have been attacking the industry seem to think that our companies are owned by space aliens," said John Felmy, chief economist for the American Petroleum Institute. "It's as though simply taking money from or criticizing a company is not going to affect millions of Americans who have invested in it."

Felmy says more than 40 percent of oil company shares are owned by average-income Americans, either directly or through mutual funds or pension plans. That, they argue, means many consumers who pay more at the pump actually benefit from the industry's improved financial returns.

The industry also says government regulation would likely lead to even higher prices for consumers.

"Markets work, if you let them," said John Felmy, chief economist for the American Petroleum Institute. "Clearly, with $60 oil, anybody who can get a project into production and sell oil is going to be doing that."

New Investors Move In

The steep price of oil seems to attract significant investment in production. According to API data, the major oil companies plowed about $86 billion of their profits into expanding oil-production capacity in the U.S.

This new investment is likely the only way the industry has to cool public and political heat.

But the price of oil is set on the public markets, which use razor-thin margins between global supplies and demand as a reason for near-record prices.

Because new capacity takes years to come online -- in large part due to stiff regulation of refineries and crude production in the United States -- the national political debate over oil company profits will likely continue for the near future.