Obama Energy Gimmickry 2

Ronald Bailey | August 6, 2008

The Washington Post editorial page takes Sen. Barack Obama to task for his silly idea to tap the Strategic Petroleum Reserve and his counterproductive windfall profits tax on oil companies proposal:

There were good ideas in the energy plan Sen. Barack Obama unveiled Monday. The most important of these is a cap-and-trade system for greenhouse gases that would auction off 100 percent of emission credits. The Illinois Democrat also announced a strong commitment to alternative energy sources and a stepped-up conservation effort. But then there were his proposals for a "windfall profits tax" on oil companies and his call to release oil from the Strategic Petroleum Reserve.

Modifying his previous opposition to tapping the reserve, Mr. Obama would swap more-expensive light crude held there for cheaper heavy crude "with the goal of bringing down prices at the pump." President Bill Clinton did such a swap in September 2000 -- yes, just before another presidential election -- and President Bush released oil in 2005 after Hurricane Katrina. Both moves led to drops in the spot price of crude but not the sort of relief at the pump that Mr. Obama promises. Even if they had, any relief from Mr. Obama's plan would be temporary while compromising a reserve intended to protect against disruptions in supply caused by wars, boycotts and the like.

Meanwhile, thanks to high crude oil prices, energy companies are, indeed, reaping immense profits. In the second quarter of 2008, Exxon and Shell each made over $11.5 billion. However, Mr. Obama's proposal to take some of this money from Big Oil and distribute it, like Robin Hood, to hard-pressed American families doesn't make economic sense. To be sure, Mr. Obama would not copy the tax enacted under President Jimmy Carter in 1980, which netted $40 billion before its repeal in 1988 while imposing huge administrative burdens -- and retarding domestic oil production. Mr. Carter's tax was levied per-barrel, so it directly increased the marginal cost of producing crude -- and made figuring out which barrels to tax ridiculously complicated. Mr. Obama wants a surtax on net oil company profits above a "reasonable" level. The tax would be set high enough to raise $65 billion over the next five years, and the revenue would fund a one-shot tax rebate that Mr. Obama would like to give to families and individuals this year.

Making Exxon surrender money that is now falling into its lap would not necessarily affect its longer-term plans or incentives. Indeed, some of Big Oil's "windfall" already will go to the government: The more profit the companies earn, the more corporate income tax they pay. But to add a five-year tax increase on top of that to pay for a one-year gift to voters would, indeed, increase the cost of doing business. That cost would be passed along in forgone investment in new production, lower dividends for pension funds and other shareholders, and higher prices at the pump -- thus socking it to the consumers whom the plan is supposed to help. If oil prices fall, there might be no windfall profits to tax. Then the Obama rebate would have to be paid for through spending cuts, taxes on something else or borrowing.

When his presumptive Republican opponent, Sen. John McCain (R-Ariz.), proposed a gas tax holiday as a way to reduce the high cost of driving, Mr. Obama showed political courage and intellectual honesty by refusing to sign on to that obvious gimmick. "It's an idea to get them through an election," Mr. Obama said. Now he has two such gimmicks of his own.

Post columnist Ruth Marcus also piles on:

As for a windfall-profits tax, if you want to produce more energy, it hardly makes sense to give oil companies less incentive to make investments. Nor does it make sense to tax companies because market conditions boost their profits -- any more than homeowners and shareholders should be penalized for selling during a boom.

Obama, too, has descended to misleading. He accuses McCain of wanting to give $4 billion in tax breaks to oil companies -- without mentioning that this is no special oil-only deal, just part of McCain's proposal for an overall reduction in the corporate tax rate, something Obama has said he'd consider. Does that put him in the pocket of Big Oil, too?

Forget cheaper gas, by November the candidates will be promising every voter whiter teeth, a full head of lustrous hair, and a great sex life.  

Comments

Josh|8.6.08 @ 10:10AM|#

Sign me up!! My teeth need a good cleaning, my hair is starting to sprout some grays, and who says no to a great sex life???

|8.6.08 @ 10:11AM|#

There were good ideas in the energy plan Sen. Barack Obama unveiled Monday. The most important of these is a cap-and-trade system for greenhouse gases that would auction off 100 percent of emission credits.

Wow. Lost me in the second sentence. Not quite a record, but close.

|8.6.08 @ 10:23AM|#

If oil prices fall, there might be no windfall profits to tax. Then the Obama rebate would have to be paid for through spending cuts, taxes on something else or borrowing.

spending cuts

spending cuts

spending cuts

"Huh? What? I'm awake, Ma'am, honest."

bubba|8.6.08 @ 10:37AM|#

Devil's Advocate:

If taxes on profits are high, and investment in infrastructure is pre-tax, couldn't a windfall profit tax actually spur greater investment? At least in the short term as a mechanism to reduce tax burden?

Oh, and Paris Hilton for SecEnergy

The Extispicator|8.6.08 @ 10:45AM|#

I DUNT CARE WHAT IT DUZ! JUST GIMME A CHECK WITH "BIG OIL" ON THE MEMO LINE! THEY DUNT NEED THEIR BIG GREEDY PROFITS AS MUCH AS I NEED A NEW WWE T-SHIRT.

|8.6.08 @ 10:48AM|#

bubba,

The dirty little secret nobody wants to talk about is that what you describe is precisely what Obama's plan is aimed at.

Investments in alternative energy sources in particular.

Obama doesn't want to draw attention to this, because bashing big oil and Republican tax breaks is a winning theme. It's sort of like his "anti-NAFTA" rhetoric during the primaries - he's using "feel your pain" and "stand up to the big guys" rhetoric to make a wonky center-left position look like some populist charge.

The Republicans don't want to point it out, because they want to present the proposal as a tax on energy that will produce government revenue by raising prices, and ignore the need to address the underlying problem.

The libertarians and the Beltway journalists don't want to point it out, because they want to cast the Democrat as not understanding economics and hating corporations.

|8.6.08 @ 10:53AM|#

doom
Dooom
DOOOOM

Nigel Watt|8.6.08 @ 11:05AM|#

Are we to pretend that this windfall profits tax will be post-investment purely? Surely there will be a fairly complex system of determining what can be taxed and what can't.

|8.6.08 @ 11:41AM|#

"I'm rich! Sally- get the Maybach dealer on the phone!"

|8.6.08 @ 11:57AM|#

If taxes on profits are high, and investment in infrastructure is pre-tax

Capital investment is not deductible as an expense in the current year. It is amortized/depreciated over several years, so it is not pre-tax.

Income taxes do not incentivize investment, they burden it and disincentivize it, by (a) diverting the cash that could be invested and (b) reducing the after-tax return on investment.

This is not rocket science, folks. The only way to incentivize investment in oil through the tax code is with the kind of "special tax breaks" that Obama is against.

|8.6.08 @ 12:06PM|#

If gas prices are at record highs, shouldn't the government realize quite a profit by releasing oil from the SPR that it bought back when oil was cheap? How about doing that and using the money for tax cuts or interstate bridges that don't fall down or something.

|8.6.08 @ 12:18PM|#

But Nick if they sold that oil from the SPR that they bought real cheap at a much higher price shouldn't they also have to pay a "windfall" tax or maybe they could be sued for gouging us. You know because the oil companies, in many peoples minds, should not be allowed to sell their product at a price much higher than they bought it. Shouldn't gov't have to play by the same rules.

|8.6.08 @ 12:20PM|#

As hard as it may be for the left/socialists to believe, there ain't no such thing as windfall profits. People invested money in Exxon and Shell and it turns out that they are performing well.

Get over it. People who got in on Google's IPO probably have done better than Exxon investors over the same period of time.

Neu Mejican|8.6.08 @ 12:32PM|#

The only way to incentivize investment in oil through the tax code is with the kind of "special tax breaks" that Obama is against.

I believe that is because Obama would be against investment in oil, and would prefer investment in alternative energy.

No?

|8.6.08 @ 12:34PM|#

Social engineering, via tinkering with the tax code, is what has made this country great.

|8.6.08 @ 12:43PM|#

That's not an energy gimmick.

THIS is an energy gimmick:

House Republicans on Tuesday said their protest of Nancy Pelosi's decision not to allow a vote on expanded offshore oil drilling has helped lower gas prices.

Heading into a third day of speeches in the near-empty chamber, Republicans acknowledged that the average price of gas and oil has declined in recent weeks. But they claimed credit for part of that reduction.

"I think the market is responding to the fact that we are here talking," said Rep. John Shadegg (R-Ariz.) at a joint press conference with other GOP lawmakers.

stuartl|8.6.08 @ 12:47PM|#

If gas prices are at record highs, shouldn't the government realize quite a profit by releasing oil from the SPR that it bought back when oil was cheap? How about doing that and using the money for tax cuts or interstate bridges that don't fall down or something.

But wouldn't that make them evil speculators who are driving up the price of oil? We will need a windfall profit tax on the government as well.

Jordan|8.6.08 @ 12:52PM|#

That's not an energy gimmick.

THIS is an energy gimmick:

Hey, look over here!

robc|8.6.08 @ 12:54PM|#

joe,

Cant they both be gimmicks?

Well I see you've played knifey spoony before!

|8.6.08 @ 1:14PM|#

I just thought it was funny, that's all.

|8.6.08 @ 2:20PM|#

Days like this make me feel sorry for joe.

Keep on fighting the good fight, or whatever fight you're fighting.

|8.6.08 @ 5:08PM|#

I thought Obama was against those evil speculators?

Guess what, folks: Releasing oil from the SPR, assuming you're going to replace it later, IS speculating. Obama thinks the government should play the futures market by essentially selling future oil today. What if he depletes the SPR, and then the price of oil goes to $200 when it needs to be refilled? Won't that be fun? And what kind of political pressure would there be at that point to NOT refill it? Then you won't have a reserve left for a true emergency, such as a supply disruption that prevents essential industry and services from getting the oil it needs to function at all.

Not only that, but if the SPR begins to be depleted, the market will react by increasing the price of oil, because this will drive the futures price up (i.e. take out 700 million bbl today, and the market will increase the estimate of future demand by the 700 million bbl needed to refill the SPR. This will increase the futures price of oil, which will increase the current price as well).

Furthermore, any oil released from the SPR will equally benefit China and India and everyone else, because the oil market is global and fungible. So the effect on prices at home will be negligible, and it will introduce distortions in the price market and lower the incentive to conserve by whatever amount it does manage to lower prices.

All in all, it's an absolutely horrible idea. A far worse gimmick than McCain's tax break, because it involves actually speculating with a volatile commodity.

It would only make sense if the current price of oil was due to a spike in demand because of a natural event, and you could have every expectation of oil dropping in price once the crisis is passed. In that case, releasing oil from the SPR at low supply times and replenishing it at high supply is kind of a Keynesian volatility reducer. But if the price of oil is on a steady upward slope, releasing oil from the SPR in a non-crisis situation is idiotic.

|8.6.08 @ 5:28PM|#

If I was an oil company executive and they enacted a windfall profits tax (in essence raising my corporate tax rate when oil prices were high to say 50%, from perhaps 35% today). Here are things it is very rational to do;

1) Move the company headquarters to a different country where taxes are lower (lots of transition costs, no benefit of the US legal or financial system, but could be worthwhile if the tax was high enough).

2) Take on an enormous amount of debt, and issue a huge 1-time dividend. The large amount of interest payments will shield future income from taxation. We could also do a massive stock-buy back with our cash instead and trade equity holders for debt holders

3) Since future profits will be taxed heavily, forget about future profits. Massively increase corporate overhead, salaries for executives, cash bonuses etc...

4) Diversify. Presumably business outside of oil won't suffer this tax. So use the cash flow we are generating today (and borrow a bunch more to get interest leverage) and buy other cheap businesses. In today's market these would be consumer facing businesses and financials. Another alternative would be that if we bought enough non-oil companies, maybe we could get the whole venture treated as a non-oil business.

The rational thing would not be to invest in additional oil assets as that would only increase future profits and therefore the amount of tax we are required to pay. I would guess that tax lawyers, and I-Bankers who focus on restructuring would get lots of work.

Juanita Wayback Machine|8.6.08 @ 10:40PM|#

"Juanita | October 9, 2007, 10:48am | #

There does'nt be any global warmings. All these imaginery problems what we got here just be a liberals plot to keep bush from fightin for our freedoms in Iraq."