The Wall Street Journal
March 22, 2008
We Need a New Bargain With Big Oil
Joseph P. Kennedy II
During the OPEC oil embargo over 30 years ago, the price of crude rocketed to historic highs in the world market while the controlled domestic price hovered below $4 a barrel. A few years later, the oil industry and the U.S. government reached a bipartisan deal: Domestic oil prices would be allowed to float in exchange for a windfall-profits tax, with 25% of the bounty earmarked to help the poorest Americans who depend on hydrocarbons to keep warm. At the heart of the pact was the recognition that no one had a right to charge whatever they wanted for a commodity that America couldn’t live without.
But federal fuel assistance, created by Republican Rep. Silvio Conte with the help of his fellow Massachusetts representative, House Speaker Tip O’Neill, never received the full funding committed under the deal.
Three decades later, we have reached another extraordinary moment. With crude oil prices tripling over the last five years -- breaking through the $100-a-barrel mark in recent months -- the top 10 domestic producers have generated an eye-popping $818 billion in pretax profits over the same period. In 2007 alone, the top 10 petro-giants operating in the U.S. generated $1.4 trillion in revenues and more than $200 billion in pretax profits. ExxonMobil is recognized as the most profitable company in the history of global commerce; its 2007 profits of $40.6 billion eclipsed its own 2006 record net income of $39.5 billion.
Meanwhile, extraction costs are still $15 to $20 a barrel and demand for U.S. petroleum products is approaching 21 million barrels a day. The industry has harvested profits it didn’t sow -- they’ve come primarily as a result of price runups, not innovation or efficiencies.
The surge in value has made oil executives and shareholders extremely happy, but at what price for Americans? A congressional forum last fall in Boston produced riveting testimony from a mother, an Iraq War veteran, whose husband still serves in the Persian Gulf. Her second child was born sickly and frail, requiring extensive hospitalization and intensive aftercare. But one of the prescriptions -- a warm home -- proved unaffordable for the young mother, who had to move with her mother to keep her children warm and healthy.
Record tax revenues and royalties from energy companies flow into federal coffers, and $15 billion in taxpayer subsidies (such as, for example, sales-tax breaks for petroleum products) continue to increase industry profitability. The time is long overdue for a 21st century bargain with Big Oil -- and not just to benefit the poor.
Energy purchases account for over half our national trade deficit, sending hundreds of billions of American dollars into the pockets of unstable and uncertain regimes in dangerous neighborhoods of the world. Investment in renewable energy as a percentage of capital investment amounted to less than 1% at ExxonMobil, BP, Conoco Phillips, Shell and Chevron in 2006.
What we need now is a clear-eyed acknowledgement that, even as we move toward a post-petroleum economy, we still need oil. Investment in developing new oil sources is increasing, but not nearly as fast as compensation to shareholders, up a whopping 700% between 1996 and 2006 for the top seven domestic producers.
Reasonable trade-offs are possible. Political leaders need to make strategic concessions on domestic exploration or be willing to encourage multinational oil companies to develop supplies abroad, where production costs are much cheaper.
But concessions on expanded exploration and production must be linked to a commensurate industry investment in renewable energy and carbon sequestration. And policy makers should tie leasing and royalty rates on federal lands to oil prices, to ensure that as the value of the fossil fuels increases, so does the revenue to support the rapid development of alternative energy sources.
Political leaders also need better oversight of domestic oil trading markets. Speculation has exacerbated the runup[sic] in the price of oil -- as much as $25 a barrel premium, according to the U.S. Senate Subcommittee on Investigations. To reduce this impact and increase transparency in oil trading, Congress should subject over-the-counter electronic trades to increased federal reporting and oversight requirements, as has been proposed by Sen. Carl Levin (D., Mich.) and others.
Finally, our political leaders should work with the oil companies to become better caretakers of those most harmed by rising energy prices. When we at Citizens Energy write to oil companies to ask that a small slice of their profits be used to help the poor -- the same message sent by a bipartisan group of 10 U.S. senators to the industry in 2005 -- the usual response is that the proper source of aid is the federal Low Income Home Energy Assistance Program (LIHEAP).
That’s the same program that was shortchanged at its birth some three decades ago. If the oil industry marshaled its robust phalanx of Washington lobbyists to push as hard for increased federal fuel aid as they fight to retain their subsidies, LIHEAP could expand beyond the five million families it currently serves -- less than 20% of those eligible -- and increase a benefit that today buys less energy than ever. In Massachusetts, for example, the maximum benefit currently buys about 320 gallons of heating oil. Two decades ago, it bought three times as much, about 1,000 gallons.
More than a century ago, President Theodore Roosevelt, a Republican reformer and environmentalist, raised the wrath of his own class in taking down Standard Oil and the petroleum oligarchs for the good of the nation. The new social compact did not destroy the industry, it simply managed it for the good of the country.
Twice before in our country’s history, outsized profits by Big Oil prompted government to step in to protect our nation by redrawing the corporate compact with petroleum barons. Such a moment has arrived again. Our nation needs a new bargain with Big Oil that serves the interests of our economy, our environment and our most vulnerable citizens.