March 3 (Bloomberg) — A deal is a deal, except when it isn't. And it almost always isn't when it comes to the oil industry and Congress.
But then that's what this industry deserves, or so goes the received wisdom. Big Oil is so cynical. It acts as though it has seen nothing new under the sun. And the industry's profits are obscene. Besides, hearings in which lawmakers torment Lee Raymond, chief executive officer of Exxon Mobil Corp., make for such good entertainment.
So onward, starting with the royalties the U.S. charges for exploring for natural gas on federal lands. Richard Pombo, Republican congressman from California, has noted recently that big oil companies are going to pay little if any royalties on billions of dollars worth of gas they pump from those lands.
Sure, it's a huge amount. But what Pombo is suggesting is that there must be something wrong with the original deal.
What Pombo and company fail to consider is that the oil companies explored for that natural gas at our invitation. Back in 1996, guessing that the country was merely on holiday from trouble in the Middle East, Congress decided the U.S. needed to end its addiction to foreign oil (nothing really is new under the petro-sun, indeed).
It dangled incentives before the despised noses of oil companies. If the companies explored in risky areas, they would not pay heavy royalties on what they found. The companies bit. That is what Pombo wants to punish today.
Such incentives are but one area where lawmakers are changing the terms. Some in Congress want to introduce a windfall-profits tax on oil companies' revenues. Others want to raise large oil companies' tax bills by limiting the use of the traditional foreign-tax credit.
A third group wants to legislate the same outcome by limiting the use of the old last-in-first-out accounting system for Exxon Mobil, Chevron Corp., ConocoPhillips, Royal Dutch Shell Plc and BP Plc. Such a change is a departure from accounting orthodoxy and would suddenly increase the taxes that oil companies owe.
The Republican-controlled Senate approved the accounting measure last fall. Olympia Snowe, Republican senator from Maine, went along with including it in tax legislation in exchange for support from colleagues on increases in home heating subsidies for the poor. Only a concerted effort by House Ways and Means Committee Chairman Bill Thomas will keep some form of excess-profits tax from going into the legislation now being cobbled together between the House and Senate.
U.S. Treasury Secretary John Snow has threatened a White House veto, but that can be counted on from a president who hasn't vetoed anything in five years in office.
The oil companies are crying foul, and it isn't hard to see why. Neither a windfall-profits tax nor an accounting switch that squeezes earnings represents a breach of contract in the legal sense. But Congress is clearly rewriting the terms of its relationship with the oil companies.
It's worth pointing out that such betrayals don't necessarily benefit Pombo's constituents, or Snowe's grannies outside Bangor.
We've been through this windfall-tax experiment before and the consequences are well understood. In 1980, Congress and President Jimmy Carter imposed an excise levy on the difference between the market price and a "base price" determined by the authorities.
The first point of the exercise was explicit: to prevent companies from profiting as oil prices rose. The other was to generate revenue for the government.
Both had so much appeal that the next president, Ronald Reagan, couldn't reverse the windfall-profits tax, even though he had spoken on the campaign trail against "price fixing and regulating and controlling" of the oil industry.
The top levy for the tax was 70 percent. As Salvatore Lazzari of the Congressional Research Service estimated in a damning paper published in 1990, the tax reduced domestic oil production 3 percent to 6 percent, while increasing oil imports as much as 16 percent. The consumer suffered too, for without the tax prices would have been lower at the pump.
But there was another result: the government got less revenue than expected. Companies deducted their windfall-profits tax against income. What's more, markets didn't cooperate with the experiment and global oil prices fell below the trigger levels for the levy. By 1986 and 1987, the windfall-profits tax was bringing in almost nothing, and Congress scrapped it.
It seems almost impolite to bring all this up, perhaps because it would embarrass lawmakers too much. But maybe not. People like Pombo can claim the innocence of the young; he was still back in California in the 1980s. His aggressiveness on the royalties issue may merely be an effort to deflect all the other criticism he gets from California's environmentalists.
This much is clear: Disingenuous congressional actions affect the price at the pump. They also affect those villains, the oil executives. It isn't just because the oil industry is such a slick business that it goes from windfall to wipeout to windfall. And it isn't just because they earn a lot that oil company executives are opportunistic cynics. By changing the rules on them so often, we made them that way.
(Amity Shlaes is a Bloomberg News columnist. The opinions expressed are her own.)
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