Obama's energy "plan"

Matthew Hoy
By Matthew Hoy on August 6, 2008

Sen. Barack Obama's energy plan gets a brutal reality check from The Washington Post editorial board today. The Post first assails Obama's plan to do a meaningless swap of light-crude for heavy-crude in the Strategic Petroleum Reserve and then they really lay into him.

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.

Let's set aside for a moment the economic efficacy of a windfall profits tax levied only on American companies doing anything other than handing a competitive advantage to the OPEC cartel and increasing -- not decreasing -- or dependency on foreign oil.

Let's just focus on Obama's $500/$1,000 (individuals/families) energy rebate "plan." I'm sorry, but $500 isn't going to be nearly enough to offset the difference between $2 a gallon gasoline and $4 a gallon gasoline for me. And if this "plan" were to actually go through, the $500 wouldn't be nearly enough to offset the then $5 and $6 a gallon gas prices that are sure to follow.

Economics may not be John McCain's strong suit, but that may be false modesty. His gas tax holiday gimmick wouldn't have done much good, but it wouldn't have done much damage either. Obama's plan, if enacted, could have much more far-reaching and disastrous effects.

0 comments on “Obama's energy "plan"”

  1. Now that high gas prices have increased demand for small, fuel-efficient cars, the windfall profits in the pockets of small automakers should be seized as well.



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