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The New York Times: Big Rise in Profit Places Oil Giants on the Defensive: "Another oil giant, Royal Dutch Shell, reported a 68 percent jump in profits yesterday, to $9.03 billion.": Friday 28 October 2005

Published: October 28, 2005

 

A sudden interruption in oil supplies sent prices and profits skyrocketing, prompting Exxon's chief executive to call a news conference right after his company announced that it had chalked up record earnings.

"I am not embarrassed," he said. "This is no windfall."

That was January 1974, a few months after Arab oil producers cut back on supplies and imposed their short-lived embargo on exports to the United States. Oil executives, including J. K. Jamieson, Exxon's chief executive at the time, were put on the defensive, forced to justify their soaring profits while the nation was facing its first energy crisis.

Three decades later, their successors are again facing contentions that oil companies are making too much money and have failed to expand production.

Politicians and other critics are asking why the industry allowed its refining capacity to tighten.

Exxon Mobil, the world's largest oil company, said yesterday that its third-quarter net income jumped 75 percent, to $9.92 billion. Its profit in the first nine months of this year - $25.42 billion - already equals its full-year earnings for 2004. This year's sales, which topped $100 billion in the last quarter, are expected to exceed those of Wal-Mart.

Another oil giant, Royal Dutch Shell, reported a 68 percent jump in profits yesterday, to $9.03 billion. Chevron is expected to post a profit of more than $4 billion today.

This year is shaping up as an exceptionally lucrative one for the oil industry, thanks to strong global demand, tight supplies and high prices for oil and natural gas. While the idea that the Bush administration was considering imposing a windfall profits tax was knocked down yesterday by officials, longstanding resentments against Big Oil are resurfacing and could end up imposing some additional burdens on the industry.

The sense that government should step in to curb the phenomenal wealth and power often enjoyed by oil companies goes back to Exxon Mobil's corporate ancestor from the late 19th century, the Rockefeller oil trust known as Standard Oil.

Today, Republicans and Democrats alike, aware of the politically sensitive issue of high energy prices, are putting increasing pressure on the oil and gas industry to return some of its profits. The ideas include forcing the industry to invest in more refining capacity, to increase inventories to cushion energy shocks, or to provide money directly to the government program that helps low-income people pay heating bills.

Simmering resentment of the oil industry has heated up as gas lines reappeared in some cities this summer and gas prices rose above $3 a gallon, a record even when adjusted for inflation. Gasoline prices, already well above what Americans are accustomed to, spiked after two Gulf Coast hurricanes curbed domestic production and briefly pushed oil prices above $70 a barrel.

This winter, Americans can expect to pay much more for heating their homes than they did last year.

Senator Bill Frist, the Republican leader, said yesterday that executives of major oil companies will be summoned to Capitol Hill to testify about high energy prices. Some of Mr. Frist's language harked back to the 1970's and early 1980's when cries of price gouging at gasoline pumps were common.

"If there are those who abuse the free enterprise system to advantage themselves and their businesses at the expense of all Americans," he said, "they ought to be exposed, and they ought to be ashamed."

Senator Chuck Schumer, Democrat of New York, was even more heated: "Big Oil behemoths are making out like bandits, while the average American family is getting killed by high gas prices, and soon-to-be-record heating oil prices."

This week, J. Dennis Hastert, Republican of Illinois and the speaker of the House, called on companies to build or expand refineries in the United States and explain when a pipeline deal will be reached to bring oil and natural gas from Alaska.

Oil companies, however, bristle at suggestions they should be taxed more. The last time a windfall tax was imposed on the industry, intended to punish it by capturing additional revenue beyond the taxes collected through the normal corporate income tax, was the period 1980 to 1988.

Oil executives, echoing arguments heard in boardrooms around the world, say their business is highly volatile, with alternating periods of high and low prices. Only seven years ago, oil was at $10 a barrel.

"What happens when we don't have a year like this one?" asked Red Cavaney, the president of the American Petroleum Institute, the industry's main lobbying group.

The lure of higher margins from the refining business - rather than Mr. Hastert's encouragements - prompted one Houston energy concern, Marathon Oil, to announce plans to expand its refinery in Garyville, La. The company expects to increase production there to 425,000 barrels a day by 2009 from 245,000 barrels a day currently.

Exxon was forced to defend its record of investing in refining capacity. The company said it had increased capacity at its existing refineries by 2 percent a year over the last decade, bringing in an additional 400,000 barrels a day through successive expansions.

For the full year, Exxon plans to invest about $18 billion for both exploration and refining, a 21 percent gain from last year.

"You have to look over a longer term," Henry Hubble, Exxon Mobil's vice president for investor relations, said in a conference call with analysts yesterday. "If you're trying to encourage supply growth, it seems odd to put in disincentives. You've got to let the market work."

For the last quarter, the company said its capital investments totaled $4.4 billion, up 22 percent from the quarter last year.

But in a sign that oil companies are making more money than they can plow back into their business, Exxon returned $6.8 billion to shareholders either by buying back shares or paying dividends.

In an interview on Fox News 10 days ago, Lee R. Raymond, Exxon's chief executive, sought to quell some of the criticism. "Profit is not a dirty word," he said. "And it's absolutely required in our industry to have an adequate level of profit to be able to continue to invest."

Later in the program, when asked whether Exxon's profits were "obscene," he said: "No, I don't think they're obscene. I don't think they're obscene at all."

On Tuesday, the chief executive of BP, Lord John Browne, also tried to dismiss the issue of higher taxes. BP reported that its third-quarter profit rose 34 percent, to $6.46 billion.

When asked how much pressure he was feeling about a windfall tax, Lord Browne quickly replied, "None." He said higher prices would have a cooling effect on demand, which would lower prices, and make a windfall tax unnecessary.

But not everyone is persuaded by the argument that higher taxes would stunt investments and curb future production.

"The industry says a windfall profit tax would limit investments," said Philip K. Verleger, a consultant and a former senior adviser on energy policy at the Treasury Department. "That's wrong."

"You can come up with a tax that would not impact investments but might in fact stimulate them," Mr. Verleger added. "You allow the industry to recoup its investments and make a good return. Then you look at incremental revenue and tax that."

Because of the hurricanes, Exxon said that its average oil and natural gas production fell 4.7 percent in the quarter. The company produced 2.45 million barrels of oil a day. Natural gas production fell 9 percent, to 7.7 million cubic feet per day. But Exxon said its production in the quarter would still have dropped 1 percent, excluding the effect of the hurricanes.

Senator Jack Reed, Democrat of Rhode Island, yesterday called on eight of the largest American energy concerns, including Citgo Petroleum, which is controlled by the government of Venezuela, to contribute 10 percent of their profits to heating-aid programs this winter.

But Samuel W. Bodman, the energy secretary, said he was against any effort to impose taxes on the oil industry as a way of assisting poor families with energy costs. He said the Bush administration was considering requiring the industry to keep emergency stockpiles of gasoline and other refined products to guard against supply disruptions.

This year's backlash may be reminiscent of what the industry went through during the oil shocks of the 1970's. But oil companies, subject to price controls throughout much of the decade, seem better able to fend off their critics today.

"Our public image," Mr. Jamieson, the Exxon chief executive in 1974, said then, "is at a low ebb."

Heather Timmons contributed reporting from London for this article.

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