Taxing Oil Profits Could Generate $10 Billion for Katrina Efforts

Taxing Oil Profits Could Generate $10 Billion for Katrina Efforts
Center for Economic Policy and Research Press Release

Thursday 15 September 2005

Washington - Hurricane Katrina's financial impact could be reduced by $10 billion through a tax on windfall profits from the oil industry, according to calculations by the Center for Economic and Policy Research.

The calculations, which appear in a new paper, "Taxing Exxon's Windfall From Hurricane Katrina," by economist Dean Baker, are based on the sharp run-up in oil industry profits due to recent shortages of crude oil and refined products like gasoline and jet fuel. If just one-third of the industry's unexpected profits are taxed back by the government, it could raise more than $10 billion a year to finance the relief effort.

The need for public money for immediate relief and reconstruction will likely exceed $100 billion, and could run as high as $150-$200 billion (6-8 percent of the federal budget). With the federal government already facing large budget deficits, Congress is looking at new revenue sources to cover Hurricane Katrina costs, including legislation to create a tax on the oil industry's windfall profits.

Since the oil industry anticipated much lower prices when it made its investment and production decisions, it can cover its costs and make a normal profit at prices that are less than half the $60-$70 a barrel price now seen in world markets. This surge in prices has led to an unexpected glut of profits for the oil industry. The oil industry's profits were running at annual rate of $62.8 billion in the first quarter of 2005, several months before the most recent run-up in prices. This compares to an average of just $24.3 billion (in 2005 dollars) over the last five years. The world's largest oil company, Exxon Mobil, will likely have over $10 billion in profits this quarter.

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