According to a recent report written by David Ivanovich for the Houston Chronicle, President-elect Barack Obama has quietly shelved his proposal to institute a new windfall profits tax on oil and gas companies.
An aide for the transition team acknowledged the policy shift Tuesday, Dec. 2, after a small-business group discovered the proposal had been dropped from the incoming administration’s Web site, Ivanovich said.
“President-elect Obama announced the policy during the campaign because oil prices were above $80 per barrel,” the aide said. “They are below that now and expected to stay below that,” Ivanovich reported.
I hate to say “I told you so…,” but it simply didn’t make sense at the time of the election that Obama would seal his fate as the new Commander in Chief by instituting taxes on one of the most active industries in the U.S.
The question now is: what windfall?
Crude has fallen more than $100/bbl in the last five months and, with the current global financial crisis, there doesn’t seem to be any pot of gold at end of the rainbow. From its July high of $145, light sweet crude settled at just above $42 today according to NYMEX. Oil and gas companies are continuing to push forward, but it is uncertain what transformation will take place over the course of 2009.
Part of the fuel for Obama’s fire on the windfall profits tax plan arose from the pressure applied from record high gas prices coinciding with the oil price. In Houston, the Chronicle cited the average price for gasoline is down to $1.66/gal from its July record of $3.96/gal.
Now, we’re paying less for gas, but at what cost? The Washington, D.C.-based American Petroleum Institute (API) argued that a similar tax plan in 1980 cost the industry $38 billion in revenue. The nation also lost 1.3 billion barrels of domestically produced oil. Companies stopped operating in the U.S. and moved overseas to avoid the tax.
Ivanovich quoted Thomas Pyle, president of the Institute for Energy Research, “The president-elect’s decision to reverse course on imposing this Carter-era burden on those who explore for and produce American energy is a heartening development — both for consumers and an economy struggling to claw its way out of a recession.”
So it seems the inherent instability of the upstream oil and gas industry has stabilized current tax regimes. This is a good thing.
With exploration bans now lifted for many offshore areas in the U.S., companies are more likely than ever to drill domestically. Time will tell if Congress is willing to play along. Achieving energy independence is a difficult enough, but an increase in taxes on those companies working domestically combined with limited resource areas to explore would make energy independence unattainable under any circumstance.
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