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Soaring Oil Raises Fresh Possibility Of Windfall Profits Tax On Crude

October 21, 2009

By Max Schulz

Oil’s surge to $82 a barrel in intraday trading Wednesday is significant for two reasons.

First, it represents a 2009 high. In February, oil fetched just $34 a barrel. Second, and more ominously, prices for the first time in a year are butting up against what President Barack Obama believes is a legitimate price for a barrel of crude.

It seems so long ago when oil prices were a grave political issue, with public officials decrying how $140 oil was crushing the average American.

Republicans proposed opening up off-limits energy reserves to treat what they considered a supply-and-demand problem. Democrats suggested large companies were purposefully manipulating the price of their product. Their solution was to institute a punitive tax on so-called windfall profits.

Lost The Argument

In 2008, then-Sen. Obama made demonizing energy companies a signature campaign issue. He promised to “put a windfall profits tax on oil companies and use it to help ... families pay their heating and cooling bills and reduce energy costs.” Later, he promised a $1,000 rebate paid for by this tax. Somewhat arbitrarily, candidate Obama determined that the price at which the tax should kick in was $80.

With oil prices soaring well past $100 a barrel and gasoline at nearly $5 per gallon, this may have seemed good politics. Then the economy went into a nose dive, taking oil prices with it. By last December, President-elect Obama’s office quietly announced that a windfall profits tax was off the table.

The issue, after all, was moot. Oil trading at $40 a barrel not only didn’t come close to the new president’s threshold, it embarrassingly undercut his argument that oil prices were the product of manipulation by nefarious corporate price gougers.

But markets don’t stand still, and with oil shooting higher a year later, one should wonder if the Obama White House has any plans to resurrect its chief campaign energy initiative. Let’s hope not.

A windfall profits tax is a horrible idea for several reasons.

For one, its premise — that Big Oil holds consumers hostage — is faulty. The large international oil companies are no more able to control the price of oil than King Canute was able to control the tides. As big as Exxon Mobil and Chevron may be (and they are huge), the global oil market is quite a bit bigger.

A related rationale is that companies should be punished for making too much money. But who is Barack Obama to determine how much is too much?

During the heady days of 2008 when oil was at historic heights, the profit margin for the Big Oil giants was still just 10%. Financial services companies like Citigroup, by contrast, earned more than 30 cents in profit for every dollar taken in.

Meanwhile, the Tax Foundation has calculated that over the last three decades federal, state and local government authorities have collected more than two trillion dollars in various oil-related taxes � or roughly four times the amount of domestic profits earned by major U.S. oil companies during the same period. Just who has been reaping oil’s windfall, anyway?

Carter’s Mistake

We’ve gone down this road before, with disastrous results. In 1980, then-President Jimmy Carter signed a windfall profits tax into law, partly on the promise it would pour hundreds of billions into government coffers. It didn’t. By the time Congress pulled the plug in 1988, the tax was generating virtually no revenue.

Worse, according to government figures, it reduced annual domestic oil production, making the U.S. more dependent upon imported oil. It isn’t difficult to figure out why the tax failed. It gave companies a disincentive to invest in domestic oil exploration and production.

Why invest billions in risky projects to develop resources in places such as the Gulf of Mexico’s deep waters if you’re going to be punished for success?

President Obama is unlikely to revive the call for a windfall profits tax, at least not until oil climbs much higher and the public once again raises hell over pump prices.

Still, as the price of a barrel of oil smashes through $80, it’s worth asking what was so special about that figure when Obama pulled it out of thin air in the summer of 2008.

Original Source: http://www.investors.com/NewsAndAnalysis/Article.aspx?id=509777

 

 
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