Business Analysis: Bulging profits make the oil majors an easy tax target for politicians

Exxon's revenues for the third quarter were more than $100bn (£56bn), which, if annualised, would probably make it the sixteenth-biggest economy in the world this year, just behind Australia, and ahead of Russia and Taiwan. Exxon's profits were a scarcely believable $9.9bn for the quarter, or $110m a day. Shell is not far behind, with revenues of $95bn for the quarter and net profits of $9bn.

Tomorrow, executives from America's five largest oil companies, led by Exxon's combative chairman Lee Raymond, will appear before Congress to face a rare type of US public hearing. The session will also grill the heads of BP and Shell in North America. High-ranking Republicans are joining Democrats to question oil barons about record profits and to consider for the first time in 25 years levying a windfall tax on the sector. In the UK, the Pre-Budget Reportmay see Gordon Brown make a move on North Sea oil profits.

The issue is not only the massive profit figures themselves. It is the fact there is a perception that oil companies have not had to work for it. The embarrassment of riches has simply come from a runaway oil price that has much to do with Opec and geopolitics, and little to do with the ingenuity of Exxon, Shell or BP.

Martin Weale, the director of the National Institute of Economic and Social Research in London, says it is possible to argue that the profits are "abnormal" in the sense they are the result of a chance event rather than entrepreneurial activity. He estimates the Chancellor has a £10bn black hole in public finances.

Mr Weale said: "It [the oil windfall tax] is appealing. It would go down well with the constituency that the Chancellor probably wants to court: the core Labour vote. And, compared with raising council tax, VAT or National Insurance Contributions, it may prove more attractive."

Derek Leith, the head of oil taxation at Ernst & Young, the accountants, said a North Sea tax move is "more than likely". He said the most likely target is equalising the tax treatment of older and newer fields. The fields discovered before 1993 pay tax at a rate of 70 per cent, while the newer ones pay 40 per cent. "Rather than a smash and grab operation, equalising the tax treatment could be dressed up as a reform," Mr Leith said.

Mr Brown has form in this area. To howls of protest from the industry, he put an extra 10 per cent tax on North Sea oil profits in 2002. And in the last Budget he introduced a measure to bring forward tax receipts from the North Sea.

Critics of the oil corporations contend that the extra money they are enjoying is not being put to the best use. While BP will invest $14bn in 2005 in developing oil projects, the company has so far returned $15.3bn to shareholders this year through share buy-backs and dividend payments. BP points out this money goes into the pension funds of ordinary people. However, it is undeniable that the level of capital expenditure being seen in the oil industry is extremely conservative, relative to the sector's financial capacity, and is generally reckoned to be way short of the levels required to ensure adequate supply of oil in future.

The UK North Sea industry points out Mr Brown will already enjoy a windfall this year - the tax take from it will be £10bn-£11bn, double the £5bn handed to the nation's coffers last year. And £22bn will be collected in excise duty this year from petrol sold at the pump.

Michael Tholen, the economics director of the UK Offshore Operators Association, said investment suffered after the 2002 tax rise and has recovered only over the past year. He said it will be "curtains" for UK North Sea oil production by 2020 if a new tax again drives away investment, at a time when security of supply is likely to be an ever more pressing issue.

Similar arguments will be used by US oil executives, but again will not get a sympathetic hearing. A growing alliance of politicians and consumer groups is pressing for measures such as commitments from oil companies to invest more in the development of green energy. Such a tax could be be used to ratchet up investment in environmentally friendly energy, and could provide a relief pot to help consumers with winter heating bills.

The White House has signalled it is against a windfall tax. But the worry for the energy industry is that there could be enough political consensus to levy a charge on its profits which is a tax in all but name - by requiring companies to contribute to a central energy reserve.

What is really alarming for Exxon's Mr Raymond and his peers is that the hearings on Capitol Hill have been called by politicians who are normally sympathetic to big business. They include Bill Frist, the head of the Republicans in the Senate, and Dennis Hastert, the Republican Speaker in the House of Representatives.

While no high-ranking Republican has yet come out in favour of a windfall tax, plenty of Democrats and consumer bodies are lobbying for one. They include Byron Dorgan, a Democrat senator from North Dakota, who has introduced a bill calling for a three-year tax of 50 per cent for any profit oil companies make from oil sold above $40 a barrel. The pressure group Public Interest Research Group (PIRG), has calculated such a tax would have created a $24bn pot in 2005.

PIRG said in 2003 it would have cost only $8bn for all public transport users to travel free for 12 months. That's a pretty attractive argument.