Exxon's Problem of Riches
Exxon’s profits came at a time when consumers in the US were feeling the increased pressure of high gasoline prices, with prices touching US$3 per gallon of gasoline. Jim Doyle, the Governor of Wisconsin, said, “Once again, Exxon Mobil has reaped the largest windfall in U.S. history at the expense of hard-working families. I hope that this news will finally convince the U.S. Congress to take action and force the oil companies to give consumers a refund.”4A few US policy makers called for an investigation of the high gasoline prices and accused the big oil companies, including Exxon, of price gouging5. U.S. Senator Byron Dorgan (Drogan) said, “There can be no more compelling evidence that the price gouging and market manipulation which has produced record oil prices is out of control, and is working to serve the forces of individual greed and corporate gluttony at the painful expense of millions of American consumers.”6 Dorgan also announced his intention to renew his effort to enact a windfall profits rebate7 for consumers. On May 03, 2006, the United States House of Representatives passed a price gouging bill that would penalize any oil company found guilty of price gouging with penalties of upto US$ 150 million.
Exxon defended its high profits by saying that it was a reasonable rate of return when compared to other industries like banking, pharmaceuticals, and real estate. A full-page ad in the New York Times on January 26, 2006, posted by the American Petroleum Institute8 (API) contained a chart that showed how many cents of profit various industries made over the last five years for each dollar of sales. While the oil and natural gas industry made 5.8 cents per US$ of sales, banking industry made 17.3 cents per US$ of sales, pharmaceuticals made 16.2 cents per US$ of sales, and real estate made 10.8 cents per US$ of sales.
According to Lee Raymond (Raymond), former Chairman and CEO of Exxon, these criticisms of Exxon stemmed from a lack of understanding of the nature of the oil industry. He said that a single quarter or a single year was not that significant for the oil industry as it operated in terms of 10-, 20-, 30-, 40-year cycles. He felt that levying a windfall profits rebate on energy companies would serve as a disincentive for investment in this industry.
[4] Deepa Bagington & Ben Berkowitz, “Record Profits Spark New Backlash against Big Oil,” www.mindfully.org, January 30, 2006.
[5] Price gouging refers to the phenomenon of pricing above the market by taking advantage of a situation where no alternative retailer is available.
[6] “Dorgan Calls ExxonMobil CEO’S $400 Million Retirement Package “Shameful,” www.dorgan.senate.gov, April 18, 2006.
[7] In November, 2005, Dorgan forced a U.S. Senate vote on a windfall profits rebate plan. The plan applied only to the major integrated oil companies, and would have imposed a 50% windfall profits tax on oil company revenue derived from sales of oil at more than US$40 per barrel. Windfall profits invested to boost domestic energy supplies would have been exempt from the tax. Revenues collected by the tax would have been rebated to consumers. The motion was defeated.
[8] The API is the main U.S. trade association for the oil and natural gas industry, representing more than 400 members involved in all aspects of the industry. It is involved in government relations on behalf of the American oil and natural gas industries.
