Why Are Oil Company Profits So High?

ExxonMobile tried to quietly release their profits from the last quarter of 2008. This is probably because they made the biggest profit of any company in American history with $11.68 billion. Shell came in second with $11.56 billion. BP made $9.5 billion, Chevron made $5.98 billion and ConocoPhillips made $5.44 billion.

At a time when oil and gas prices are hitting record highs, many Americans see the record profits posted by oil companies and wonder whether they're being robbed. The reality is that the explanation of gas prices and oil profits are so confusing that economists and even Congress has struggled to understand it.

There is one aspect of oil company profits that is simple and something we should all be concerned about. For many decades, the federal government has given billions in tax credits and subsidies to the oil industry to help them in times of financial struggle. In addition, several tax loopholes exist that allow oil companies to reduce their taxable revenues while they fail to fulfill their responsibilities.

The idea behind all of these credits, subsidies and breaks was to reduce the financial risk involved in developing new oil wells and refineries. Unfortunately, the oil companies have not developed new domestic energy sources and have instead used their huge profits to buy back billions of dollars worth of their own stock to drive up its value (Read HERE). They are also using their profits to line the pockets of executives. In 2006, the retiring CEO of ExxonMobile, Lee Raymond, was granted a $400 million retirement package (Read HERE). In 2007, Exxon's sitting CEO, Rex Tillerson, made $29.3 million in salary, bonus and stock payouts (Read HERE).

Americans should be frustrated that while they are paying record prices at the pump and gas taxes, billions in federal tax money is being given away to oil companies making record profits. The tax money isn't being spent as it was intended and is instead helping to make rich executives even richer. Ideally, these tax credits, subsidies and breaks should be tied to some expectation that must be fulfilled. Look at it this way, could you claim the child tax credit if you didn't have any kids?

Currently, John McCain is offering even more tax breaks for oil companies (read HERE). It seems that somehow the oil industry has convinced McCain that they are the victims in the energy crisis. Barack Obama is suggesting a windfall profits tax that would tax the billions made by oil companies and return that money to consumers in the form of a $1,000 rebate (read HERE).