The only silver lining that has developed economically in the past 3 months is the consistently falling oil prices due to the fear within the industry that the economy will continue to slow and global demand will fall. As of this morning October 10th, oil prices had fallen by over 40% to just under $83 per barrel. Although this is welcome news for the American Public as gas prices continue to fall to near $3/gallon in many area, the political impact is not being discussed.
Falling oil prices have essentially destroyed Senator Obama's theoretical funding for his Energy policy and should once again highlight a brutal truth about his call for a Windfall Profits Tax. Obama's energy policy is based upon 2 ideas:
#1) A $150 Billion investment in the green industry, and
#2) A $500/person energy rebate that would cost $75 billion.
In March, Obama proposed that he would pay for his $150 billion green investment through a Windfall Profits Tax. His economic advisers suggested that the tax would generate around $15 billion per year. But when oil prices spiked during the summer, Obama changed his rhetoric and began promising a $500/person energy rebate that would be paid for over a five year period by the same windfall profits tax.
We're not going to discuss the economic history behind the windfall profits tax and it's utter failure during it's first existence. Instead lets look at the reality that as oil prices fall they highlight the fact that Obama's energy funding only works if Oil Prices remain inflated.
Obama's Windfall profits tax is based upon placing a 20%-25% tax on every barrel of oil consumed in the United States that costs more that $80 per barrel. Obama expects his WPT to generate $150 billion over ten years; over 7 times larger than the $2 billion/year that Hillary Clinton had proposed. As a result, this means that OIL PRICES MUST REMAIN MORE THAN $80 PER BARREL FOR THE TAX TO WORK!
As a reminder, when Democrats took control of congress in 2006, promising lower energy costs, a barrel of oil was trading around $60. As a result, if oil prices fall to $80 will Obama praise the falling prices, will he alter his proposals, how will he now cover the cost of these plans during a time in which the deficit will likely balloon to over $1 trillion.
Now for the dirty little secret about Obama's proposed WPT. The tax is a tax on production. The tax is not based upon a levy against oil company profits, but rather the price of a barrel of oil. Although Obama has stated that the tax would generate around $15 billion per year, the reality is that if oil prices spiked that tax would generate massive revenue and cause a massive exodus of oil production and importation from the US.
Let's assume today's oil price $83 per barrel and the lower amount of Obama's 20% tax. The tax would generate around 60 Cents per barrel. Considering that the US consumer 20 million barrels per day, the WPT would generate $4.4 Billion dollars per year; far short of the amount needed to fund Obama's energy proposals.
Now let's assume that oil jumped to $120 per barrel; the tax would now generate $8 per barrel. Considering US consumption, that would result in a tax of $58.4 Billion per year; over 1/3 of the entire oil industries profits last year. That is why the WPT is dangerous.
No oil company would ever choose to produce oil domestically in the U.S. or to import oil into the U.S. under conditions in which they could produce or export oil to nations that do not pose such a penalty. Just as with the first WPT, collection efforts would create huge costs and massive bureaucracy, domestic production and importation would fall and revenue would never meet expectations.
Falling oil prices are good news for the American public and should serve as a wake up call that only way that Senator Obama's energy plans would work are if prices remained artificially high and if oil companies were to magically accept the destruction of their profits.
October 10th, 2008
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