Windfall Profit Taxes Fuel America's Addiction to Foreign Oil

March 31, 2006 — By National Center For Policy Analysis

DALLAS, TX. — As compared to other industries, profits in the oil industry are not unusual, despite claims to the contrary by proponents of a so-called "Windfall Profits Tax" (WPT) aimed at our nation's energy companies. Further, according to a new report released by the National Center for Policy Analysis (NCPA), such a tax is more likely to increase the United States' dependence on foreign oil rather than reduce it. The report can be accessed online at - http://www.ncpa.org/pub/ba/ba549/.

"There is no evidence that the oil industry has colluded to keep retail gasoline prices high," said NCPA Senior Fellow H. Sterling Burnett, who co-authored the report. "The Energy Information Agency (EIA) found that approximately 85 percent of the changes in gasoline prices in the aftermath of Hurricane Katrina were due to changes in the market price of crude oil."

While oil companies have recently enjoyed record profits, their profit margins have historically been below the market average. Between 1970 and 2003, the return on oil companies' investments averaged less than the rest of the economy. Even with recent increases in profits, they are still near the national average, according to data compiled by Standard and Poor's Compustat.

For instance, oil and gas industry profits were 8.2 percent of sales in the third quarter of 2005, 21 percent higher than the national average of 6.8 percent. By contrast:

• Household and personal-product industries, with an 11.4 percent profit, were 68 percent above the national average;
• The semiconductor industry, with a 14.1 percent profit, was 107 percent higher than the national average;
• The banking industry, with an 18 percent profit, was 165 percent higher than the national average.
• Furthermore, oil and refining company profits per gallon of gasoline sold were lower than the 23 percent average federal and state tax per gallon.