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Threat of 'Excess Profits Tax' Hurts Oil & Gas Stocks

Both Republicans and Democrats in Washington have bashed big oil for “price gouging” the public.

New York, New York (PRWEB) November 3, 2005 -- After Exxon Mobil declared record $10 billion profits in its recent quarterly report, Sen. Judd Gregg called for an excess profits tax on oil.

“With people being forced to pay $3 a gallon for gas and $2.50 for oil to heat their homes, it is infuriating that oil companies are reporting record-breaking profits.” And Sen. Byron L. Dorgan says that big oil companies are profiting in an extraordinary way “at the expense of the American consumer.”

Dr. Mark Skousen disagrees. “The worst thing government can do is step in and impose high taxes on these resources. It can only make the energy crisis worse,” he says.

As long as the government threatens new tax legislation, investors’ oil & gas investments will be vulnerable, as is evidenced by oil & gas stocks having tumbled 10-15 % in the past month.

According to Dr. Skousen, this could signal the beginning of a bear market. “It’s vital that oil & gas firms keep all their ‘excess’ profits in order to find new sources of energy and expand output,” he stresses.
Consider that:

1. In real terms, gasoline and natural gas prices are not at record levels. Gasoline prices have still not reached the level they were in 1980, in inflation-adjusted terms.

2. Gasoline prices have recently declined, thanks to increased supplies. Gasoline prices are on average 20 cents lower than they were a month ago.

3. While oil & gas companies are earning record profits, the energy sector is not especially profitable compared to other industries. Profit margins average only 7.7 % in energy, compared to 19.6 % for banks, 18.6 % for pharmaceuticals, and 17 % for software companies. Over the past five years, the oil & gas industry has consistently earned a return on investment lower than the S&P industrials.

4. Almost all of the retained earnings will be plowed back into new technology and production. According to the latest figures, a remarkable 64 % will be reinvested into drilling and exploration – to find new sources of energy to increase supplies and reduce prices.

“It’s time for somebody to tell the truth about big oil and the so-called energy crisis. And, it’s time our representatives in Washington take a refresher course in Economics 101,” says Skousen.

Dr. Mark Skousen is an economist and adjunct professor at Columbia University, and has appeared on CNBC’s Power Lunch, among others. Dr. Skousen has been editor in chief of Forecasts & Strategies – an award-winning investment newsletter – and three trading services. In 2005, he joined the advisory panel of Investment U, an e-letter with more than 270,000 subscribers.

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