U.S. Needs a New Bargain With Big Oil

During the OPEC oil embargo more than 30 years ago, the price of crude rocketed to historic highs in the world market while the controlled domestic price hovered below $4 per barrel. A few years later, the oil industry and the U.S. government reached a bipartisan deal: Domestic oil prices would be allowed to float in exchange for a windfall-profits tax, with 25 percent of the bounty earmarked to help the poorest Americans who depended on hydrocarbons to keep warm. At the heart of the pact was the recognition that no one had a right to charge whatever they wanted for a commodity that the United States could not live without.

But federal fuel assistance never received the full funding committed under the deal.

Three decades later, we have reached another extraordinary moment. With crude oil prices tripling over the last five years -- breaking through the $100-per-barrel mark in recent months -- the top 10 domestic producers have generated an eye-popping $818 billion in pretax profits over the same period. In 2007 alone, the top 10 petro-giants operating in the United States generated $1.4 trillion in revenues and more than $200 billion in pretax profits. ExxonMobil is recognized as the most profitable company in the history of global commerce; its 2007 profits of $40.6 billion eclipsed its own 2006 record net income of $39.5 billion.

Meanwhile, extraction costs are still $15 to $20 per barrel, and demand for U.S. petroleum products is approaching 21 million barrels per day. The industry has harvested profits it didn't sow -- they have come primarily as a result of price run-ups, not innovation or efficiencies.

The surge in value has made oil executives and shareholders extremely happy, but at what price for the people? A congressional forum last fall in Boston produced riveting testimony from a mother, an Iraq War veteran, whose husband still serves in the Persian Gulf. Her second child was born sickly and frail, requiring extensive hospitalization and intensive aftercare. But one of the prescriptions -- a warm home -- proved unaffordable for the young mother, who had to move in with her mother to keep her children warm and healthy.

Record tax revenues and royalties from energy companies flow into federal coffers, and $15 billion in taxpayer subsidies (such as, for example, sales-tax breaks for petroleum products) continue to increase industry profitability. The time is long overdue for a 21st-century bargain with big oil -- and not just to benefit the poor.

Energy purchases account for more than half the U.S. national trade deficit, sending hundreds of billions of U.S. dollars into the pockets of unstable and uncertain regimes in dangerous neighborhoods of the world. Investment in renewable energy as a percentage of capital investment amounted to less than 1 percent at ExxonMobil, BP, ConocoPhillips, Shell and Chevron in 2006.

What the United States needs now is a clear-eyed acknowledgement that, even as it moves toward a postpetroleum economy, it still needs oil. Investment in developing new oil sources is increasing, but not nearly as fast as compensation to shareholders, up an astounding 700 percent from 1996 to 2006 for the top seven domestic producers.

Reasonable trade-offs are possible. Political leaders need to make strategic concessions on domestic exploration or be willing to encourage multinational oil companies to develop supplies abroad, where production costs are much cheaper.

But concessions on expanded exploration and production must be linked to a commensurate industry investment in renewable energy and carbon sequestration. And policymakers should tie leasing and royalty rates on federal lands to oil prices, to ensure that as the value of the fossil fuels increases, so does the revenue to support the rapid development of alternative energy sources.

Political leaders also need better oversight of domestic oil trading markets. Speculation has exacerbated the run-up in the price of oil -- as much as a $25-per-barrel premium, according to the U.S. Senate Subcommittee on Investigations. To reduce this impact and increase transparency in oil trading, Congress should subject over-the-counter electronic trades to increased federal reporting and oversight requirements.

Finally, U.S. political leaders should work with the oil companies to become better caretakers of those most harmed by rising energy prices. When we at Citizens Energy write to oil companies to ask that a small slice of their profits be used to help the poor -- the same message sent by a bipartisan group of 10 U.S. senators to the industry in 2005 -- the usual response is that the proper source of aid is the federal Low Income Home Energy Assistance Program.

That's the same program that was shortchanged at its birth some three decades ago. If the oil industry marshaled its robust phalanx of Washington lobbyists to push as hard for increased federal fuel aid as they fight to retain their subsidies, the low-income program could expand beyond the 5 million families it currently serves -- less than 20 percent of those eligible -- and increase a benefit that today buys less energy than ever.

More than a century ago, U.S. President Theodore Roosevelt raised the wrath of his own class in taking down Standard Oil and the petroleum oligarchs for the good of the nation. The new social compact did not destroy the industry, it simply managed it for the good of the country.

Twice before in U.S. history, outsized profits by big oil prompted the government to step in to protect our nation by redrawing the corporate compact with petroleum barons. Such a moment has arrived again. The United States needs a new bargain with big oil that serves the interests of its economy, its environment and its most vulnerable citizens.

Joseph P. Kennedy II is president, CEO and founder of the nonprofit Citizens Energy Corporation, which for 30 years has provided energy assistance to the poor. He contributed this comment to The Wall Street Journal.