America should tax Iraq war oil profits
by Nick Mottern on 27 Jul 2008 0 Comment

Hastings-on-Hudson, New York - The reality of US troops killing and dying for Iraqi oil hit US public consciousness hard on June 19, 2008, when it was announced that the occupied government of Iraq intended to award no-bid oil service contracts to ExxonMobil, Shell, BP, Chevron and Total.


Political cartoonist Jeff Danziger deftly captured the contradiction of great wealth being amassed by giant oil companies in the midst of great suffering in a drawing showing celebrating, self-indulgent oil executives riding on the backs of two US soldiers in Iraq. One soldier says to the other: “This is what they really mean by ‘Mission Accomplished.’” Danziger hit not only the essence of the US occupation in Iraq, he touched a deep vein in US political history of revulsion against war profiteering.


In World Wars I and II and the Korean War, the United States imposed excess profits taxes on corporations not only to raise money to pay for the wars, but also as an expression of simple decency, captured in a much-quoted statement of President Franklin Roosevelt in 1940: “I don't want to see a single war millionaire created in the United States as a result of this world disaster.” Stuart Brandes describes the political climate for the World War II excess profits taxation in ‘Warhogs: A History of War Profits in America.’


“As Americans debated participation in what would become the most expensive war in their history, circumstances were uniquely favorable for a successful campaign against war profiteering. The social memory of profiteering during the Civil War and the Great War still gripped the popular imagination. The anti-profiteering constituency was large, determined, and well organized in Congress. The White House was occupied by an experienced, able, and popular leader who spoke eloquently and often against profiteering. The reservoir of support for anti-profiteering measures was therefore broad and deep.” Brandes also points out that economists and politicians had gathered knowledge of how to control war profits through experience gained in World War I, and further advanced in the years just prior to and into World War II.


The result was a series of excess profits laws starting in 1940 with rates below 50 percent, rising to 90 percent in 1942, and finally in 1943 a 95 percent tax on profits on earnings above a firm's average earnings for 1936 to 1939; or an alternative tax based on revenue compared to investment. These excess profits taxes are credited in “The Cambridge Economic History of the United States” with generating two-thirds of the tax revenue from business between 1941 and 1945. Congress repealed the excess profits tax in 1945, effective January 1, 1946.


Now, more than two generations later, with national memory of war profits taxes faded, the US and world economies reel under $140 per barrel of oil prices - at their current levels in significant measure because of the Iraq War - while major privately-held oil companies pile up record profits in the midst of gross suffering on and off the battlefield.


Congress's Joint Economic Committee noted in a November 2007 report that the Iraq War has affected the world oil price by stunting Iraqi oil production and creating fear that the war will spread and further disrupt oil shipments. Nobel Laureate in economics Joseph Stiglitz and public finance expert Linda Bilmes report in “The Three Trillion Dollar War”:

”ExxonMobil and other oil companies have been among the few real beneficiaries of the (Iraq) war, as their profits and share prices have soared. Meanwhile, the economy as a whole has paid a high price.”


ExxonMobil has accumulated $163 billion in record profits in the five-year war period, not only because of the increase in oil prices but because of increased sales of petroleum products to the Pentagon, which amounted to $4.2 billion from 2003 to 2007. Shell and BP compete with ExxonMobil for leadership in Pentagon sales.


ExxonMobil, Shell, BP, Chevron and ConocoPhillips, the so-called Big Five oil producers, have benefitted far more than their smaller American competitors during the war years. A study from the James W. Baker Institute for Public Policy at Rice University reported in 2007 that the profits of the Big Five in 2006, combined, amounted to $120 billion compared to $31 billion for the next 20 largest American oil firms, combined.


The Rice report shows that as cash flow for the oil companies skyrocketed with the Iraqi invasion and the rise in world oil prices, the Big Five used the increased income not so much for development, exploration, acquisitions or increased dividends as for buying back stock, increasing the wealth of management and large shareholders. Excess war profits taxes are warranted now for the reasons they were imposed during previous wars, in the interest of decency and to capture revenue needed to respond to the demands associated with war.


Part II: Specific Excess War-Profit Tax Proposals


Based on an analysis of economist Dean Baker, co-founder of the Center for Economic and Policy Research, we estimate about 25 percent of oil company profits since the 2003 invasion of Iraq can be traced to the war's impact on world oil prices. On this basis, the excess war profit for ExxonMobil alone, between 2003 and 2008, would amount to about $40 billion.


A 25 percent excess war profits tax imposed on the Big Five oil companies - ExxonMobil, Shell, BP, Chevron and ConocoPhillips - covering the first five years of the war would capture almost $90 billion. This estimate takes into account that Shell and BP are not American companies and that excess profits taxes would be only on profits from their US operations.


As discussed in Part I (above), there is justification for focusing the tax on the Big Five because of their size compared to their smaller competitors. The Big Five had combined profits of $120 billion in 2005, compared to about $31 billion for the next 20 largest oil firms combined, according to a 2007 report from the James W. Baker Institute for Public Policy at Rice University. The report noted the Big Five “also dominate the US gasoline market with roughly 62 percent of the retail market and 50 percent of refining capacity.”


The Rice report found that the Big Five, unlike the smaller firms, have been spending a high proportion of their windfall profits on stock buybacks to enrich management and large stockholders. They were spending less, compared to their smaller competitors, on dividends, exploration, development and acquisitions. The Big Five and other oil companies have been anxious for passage of an Iraq oil law that could lead to very favorable long-term production agreements, dramatically expanding their oil reserve holdings, the basis of their profit and survival. The prize in Iraq is the third largest proven oil reserve in the world under the control of an occupied government compliant to Western oil companies. The US Energy Information Agency notes that extraction costs for Iraq are among the lowest in the world.


The Big Five and other oil companies have been importing oil from Iraq since before the invasion, purchasing it through that nation's oil company. Indeed, in late 2002, just prior to the invasion, US oil companies doubled their Iraqi imports to compensate for a drop in Venezuelan shipments. In April 2008, imports from Iraq to the US were slightly below the level at the time of the invasion. The following companies, along with the Big Five, imported Iraqi oil into the US in January 2008: Flint Hills Resources, Koch Supply & Trading Company, Marathon Petroleum, Tesoro, Total and Valero. The Big Five and Valero are constant importers of Iraqi oil, month to month; imports by the other firms are less regular.


While the current oil imports are simply an extension of pre-invasion business, the fact of the invasion raises significant ethical, legal and war-profit issues, particularly because the invasion was a violation of international law. The invasion and occupation mean that oil that was being legitimately purchased from an independent Iraqi government entity prior to the invasion has become oil being purchased from an occupied government by firms in league with the occupier, raising questions about fairness in terms and price.


The invasion also means US military forces have been, and continue to be, used to secure Iraq's oil fields for exploitation by major oil companies that might otherwise not been given these rights.


The ethical and legal issues are brought into sharp focus by the controversy that has arisen around the occupied Iraqi government's announced intention to award no-bid oil service contracts to ExxonMobil, Shell, BP, Chevron and France's Total, clearly a sign of favoritism. The wide publicity given to the sweetheart deal appears to have caused some Iraqi politicians to stall the awarding of the service contracts. Reuters reported Ali Hussain Balou, head of the Iraqi Parliament's Oil and Gas Committee, “demanded an explanation from Oil Minister Hussain al-Shahristani on plans to offer a series of short-term technical support contracts worth $500 million each to a handful of Western oil majors without competitive bidding.”


One could argue, therefore, imports of oil from Iraq to the US should be barred on ethical grounds. However, another approach, which recognizes the pre-existing oil trade between the two countries and the mutual benefit of that trade, would be to impose a 95 percent excess war profits tax on all oil imported from Iraq for as long as any US military forces, including military contractors, are on Iraqi soil. Following a precedent in World War II excess profits tax law, a base line for measuring profit on the oil imports could be an average of profits over several years prior to the invasion.


This tax would cover oil now being imported into the US from Iraq and any expansion of imports. For the Big Five, this tax would be added to the excess war profits tax applied to their annual profits across the board.


The top priorities in the use of revenue generated by these taxes should be: restoration of human services to the Iraqi people; rebuilding the Iraqi economy; aid to families of Iraqi war victims; and providing US veterans and their families, particularly the families of war casualties, with adequate income, health care and jobs.


Nick Mottern is director,

Part I & II, reprinted with permission from Truthout

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