New pressure on 'big oil'

Oil CEOs testified before Congress Wednesday, arguing against a proposed windfall profit tax.

At a time of consumer angst about high energy costs, major oil executives Wednesday faced withering questions on Capitol Hill about their record profits, and even their paychecks.

The executives fought back, defending the virtues of unfettered markets.

The pyrotechnics punctuated what could be a new phase in the nation's debate about containing high energy costs.

At the very least, the Senate hearings pointed to difficult choices ahead regarding efforts to regulate an industry that operates at a delicate intersection of politics and economics.

Some members of Congress are urging a windfall profit tax to siphon off "big oil's" record profits at a time when consumers - read "voters" - are paying dearly at the gas pump and the basement furnace.

Few economists support the idea, and many analysts say it is unlikely to pass the Republican-controlled Congress.

Still, with such proposals coming from Republicans as well as Democrats, it's becoming clear just how deep the pocketbook anxiety about energy prices runs.

Consider that in the past six years, oil prices have gone from a post-1945 low point to near an inflation-adjusted peak. This is the volatile climate in which economics and politics can, like oil and water, be forced into an uneasy mix.

The outcome in the short run could be legislation designed to aid the hardest-hit consumers and to establish tighter oversight of energy markets.

In the long run, this year's consumer shock could prompt new actions to secure America's energy future that go beyond the energy bill enacted by President Bush and Congress just before this year's hurricanes.

"While I understand that everyone would love to punish the oil companies, I want to solve the problem," says Mark Cooper, director of research at the Consumer Federation of America. For all the populist outrage in the air, many share that desire for deeper energy answers.

Wednesday's hearing highlighted the divide between two camps in the debate over how the problem of high energy prices can be solved. At issue: How much trust should be placed in free markets? And more pointedly, how free is the market for energy?

"The price [of oil] is set on the world market by willing buyers and sellers," Exxon-Mobil CEO Lee Raymond said Wednesday. Many economists espouse faith that market-set prices send signals that, in the long run, help supply and demand reach equilibrium.

High prices and rising profits tell investors and businesses to increase supplies, and those same prices tell some consumers to curb their demand or switch to alternative fuels.

But Mr. Raymond added that "In the energy industry, time is measured in decades, based on life cycles of our projects." Companies may not choose to develop new projects based on a short-term price spike, he implied.

Mr. Cooper is skeptical that today's energy market is functioning freely. He points to the global OPEC cartel and to a US industry that has grown increasingly concentrated in recent years - with the approval of federal regulators. "That's not economics," he says.

When Raymond finished his answer to why oil prices are so high, Sen. Pete Domenici (R) of New Mexico had a blunt reply: "I don't think my constituents are going to understand your answer."

To some experts in economics, the senator's statement was sad but true.

"As someone who teaches economics, ... it's discouraging that there's so little understanding of markets out there," says Peter Van Doren, an energy expert at the Cato Institute, a libertarian think tank.

A windfall profit tax is a particularly bad idea, he says. When it was tried in the 1970s, he says, it discouraged domestic production by making it less profitable.

The same might occur today, he says, under a proposal to levy an extra tax on profits made when oil is above $40 per barrel.

"We do have a corporate income tax" already, he notes. The more money companies make, the more they pay.

Oil companies also note that they are often less profitable than other industries. According to Exxon-Mobil, in the second quarter of this year, oil and gas firms made less profit per dollar of sales than the US average - and much less than banking, drug, or software companies.

It's natural, economists say, that prices spike when supplies get tight - as has occurred this year with storms playing havoc with Gulf Coast oil and natural gas supplies.

Gasoline prices have come back to pre-storm levels, as refinery output has rebounded. But Americans still face a winter with heating bills that are hundreds of dollars above last year.

Meanwhile, many Americans see an industry closely intertwined with politics. It gave some $50 million in direct and indirect political contributions during the 2004 election cycle, according to the Center for Responsive Politics. And it is poised to reap big tax breaks from the energy law signed by President Bush in August.

Among the ideas on the table in Congress are to rescind some of those tax breaks, to create incentives to build new refineries, to add new authority to investigate price gouging, and to provide more funding to help low-income Americans heat their homes this winter.

Longer-term, debate could center on whether more needs to be done to encourage the development of alternative fuels and energy efficiency, to make the economy less dependent on oil.