Oil Executives Answer Profit Inquiries at Wisconsin Hearing

Published April 1, 2006

Wisconsin Gov. Jim Doyle (D) on January 30 called on Congress to draft legislation forcing oil companies to “give consumers a refund,” shortly after he subpoenaed oil executives for a special administrative hearing in December, where the oil companies answered questions about their 2005 profits.

“I hope that this news will finally convince the U.S. Congress to take action and force the oil companies to give consumers a refund,” said Doyle in a January 30 press statement. “Middle-class families can no longer afford the prices being charged at the pump or on their heating bill, and they shouldn’t be required to subsidize these historic profits by oil companies that have taken advantage of the situation.”

The Doyle hearings came after high prices for oil, gasoline, and natural gas in fall 2005 in the aftermath of Hurricanes Katrina and Rita, combined with record quarterly profits reported by major oil companies, sparked outcries of “gouging” in Congress and several state legislatures.

Prices Below Peak

Gasoline prices in 2005 remained below their inflation-adjusted peaks of the 1980s, though they were higher than recently experienced. This was due to a variety of factors including strong demand in the United States and several developing nations, production and refining decisions by the Organization of the Petroleum Exporting Countries (OPEC), and political instabilities in a number of oil-exporting countries.

Prices spiked even higher–topping $3.00 per gallon in several regions of the country–due to hurricane damage to offshore oil platforms and Gulf Coast ports, refineries, and delivery systems.

Governor Questioned Profits

In the Wisconsin hearings, similar to congressional hearings held in November, oil company executives were asked to defend both high pump prices and their companies’ record profits. In conjunction with the hearings, many legislators called for a new “windfall profits” tax on oil company profits.

According to a report in the December Badger Herald, a publication of the University of Wisconsin-Madison, “[The governor] convened the hearing for a very simple reason: to get answers,” said Doyle press secretary Melanie Fonder. The December 1 hearings, which were administrative in nature, were not open to the public. “This is a chance to ask some high-level representatives from oil companies why [record profits] happened,” Fonder said.

“They did respond, but in many cases they didn’t present full answers,” said Ron Nilsestuen, state secretary of Agriculture, Trade, and Consumer Protection, according to the Badger Herald story. “The oil companies had problems providing answers to some of the most basic questions,” Doyle spokesperson Dan Leistikow was quoted as saying.

Hearings Were Redundant

Oil industry executives already had given detailed answers to their critics’ questions in November congressional hearings that were open to the public and widely reported in the media. In the November Senate hearings, ExxonMobil CEO Lee Raymond was among the executives from five oil companies who testified they are as much at the mercy of the global energy market as anyone. Even Exxon, the world’s largest private oil company, accounts for only 3 percent of the market, with the price of the majority of the oil it delivers being set by trading on the commodities exchange.

In addition, executives at the congressional hearings pointed out they are reinvesting most of their profits in new production, but that declining production from mature oilfields in the United States and legal restrictions on access to the areas with the most potential for large new supplies are limiting domestic investment opportunities.

Moreover, they pointed out that profit margins in the oil and gas industry were only slightly higher, at 8.2 cents per dollar of sales (pds), than the average of U.S. industry as a whole at 6.8 cents pds, and much lower than many industrial sectors such as pharmaceuticals (18.5 cents pds), banks (18 cents pds), semiconductors (14.1 cents pds), household and personal products (11.4 cents pds), telecommunications (9.1 cents pds), and even food, beverages, and tobacco (8.5 cents pds).

Governor Calls for Refunds

Nevertheless, “As far as the next step, the governor would like to see a refund of the excessive profits to the people,” said Fonder, according to the Badger Herald story.

“What we need is a windfall profits tax on government,” responded Scott Hodge, president of the Tax Foundation. “Government makes far more money per gallon than the oil companies do.”

Over the past 25 years, Hodge noted, oil companies paid more than $2.2 trillion in taxes (adjusted for inflation). That is more than three times what they earned in profits during the same period.

“The question we have to ask is if this [windfall profits tax] is a good idea. Is it political grandstanding or is there an actual economic reason for doing this?” asked University of Wisconsin political science professor Donald Downs.

‘No Evidence of Collusion’

In a January 22 commentary for CBS’s Sunday Morning program, actor and economist Ben Stein defended the oil profits. Said Stein, “Oil companies don’t set the world price of oil. That’s set in trading rooms and bank houses in New York and London. … There’s absolutely no evidence that oil companies are colluding to fix prices at artificially high levels.”

Observed Stein, “When I buy gas and it has to be brought from Nigeria or Libya or Indonesia at great risk, refined, has huge taxes on it, and then is brought to my gas station, it costs less per ounce than a bottle of water that I get at my local grocery store. Why doesn’t anyone mention that?

“As a general rule, [oil companies] have profit margins far lower than the big banks or high-tech companies,” Stein added. “And even below the average of large companies generally.”

H. Sterling Burnett ([email protected]) is a senior fellow at the National Center for Policy Analysis.