Obama Drops Big Oil Tax as Prices Plunge

The plan was for a windfall-profits tax on oil over $80 a barrel. But even though oil is under $50 now, some are upset that the issue is being dropped

President-elect Barack Obama won't pursue a windfall-profit tax on oil companies because crude prices have dropped below $80 a barrel. The pledge to pursue taxes on Big Oil—a key constituency and benefactor of the Bush Administration—was a potent campaign issue for many left-leaning Obama supporters and a key point of populist rhetoric as gasoline prices surged above $4 per gallon this summer. But that was then. Oil has since sunk below $50 per barrel, and with the country facing a deep recession, the incoming Administration has put new taxes on the back burner.

The Obama camp won't discuss the issue directly, with an aide on the transition team acknowledging the adjustment on Dec. 3, but speaking only on the condition of anonymity. Some liberal publications have already begun criticizing Obama for false advertising during the campaign. On Dec. 2, Mother Jones posted an online blog entry: "Obama's First Policy Retreat?&quot And The Huffington Post ran "Mandate Watch: Obama Backs Off Promise to Pass Windfall Profits Tax on Big Oil,", arguing that Obama is giving the industry a free pass on profiteering.

Political Ploy or Policy Plan?

Such an announcement might be expected to outrage Obama's allies among environmental groups, but they're largely staying quiet on the incoming Administration's decision. Since crude oil prices collapsed in July—they're now down more than 60% — those groups are focusing on other ways to tame oil and gas companies' profits. "The key policy we've been advocating is ending the tens of billions of tax giveaways the oil and gas industry gets—not a windfall-profits tax," says Nick Berning, a spokesman for Friends of the Earth. "We don't oppose a special tax, but it hasn't been our focus."

Some analysts believe the proposal was more a political ploy than a serious policy plan. "We never believed the Obama camp was serious about the [the tax]," says Dan Clifton, a Washington-based analyst with Strategas Research Partners, an investment research firm. "It was a populist way to cozy up with American voters and never a real policy issue."

Obama began talking about a windfall-profits tax in April. He said he would target the biggest oil companies with a 20% tax on each barrel of oil priced above $80. The tax was designed to help fund a $1,000 tax cut for working families, an expansion of the earned-income tax credit, and assistance for people struggling to afford their energy bills. "It isn't right that oil companies are making record profits at a time when ordinary Americans are going into debt trying to pay rising energy costs," Obama told a crowd on Apr. 25 at a gas station in Indianapolis.

Indeed, the political climate was rich for targeting oil and gas companies. They profited handsomely in recent years, particularly during the third quarter of 2008 when crude prices averaged $118 per barrel. ExxonMobil (XOM) set a record for the largest quarterly profit for a U.S. company on Oct. 31 when it announced net income of $14.8 billion. That same day, Royal Dutch Shell (RDSA) also announced a 22% increase in profit, to $8.45 billion.

Environmentalists Target Tax Subsidies

But as prices began sinking below $80 amid the global economic slowdown and widespread belief that demand would plummet, the Obama camp stopped talking about a windfall-profits tax. Obama did not include revenue from such a tax in the middle-class rescue plan he introduced in mid-October. The transition team aide underscores that $80 per barrel was always the campaign's target; therefore Obama is not actually changing policy.

Crude prices have plunged from a July high of $147, touching a four-year low near $43 per barrel on Dec. 4. As the recession deepens, consumers now are more concerned with the overall state of the economy than with gas prices. That's why environmental advocates have set their sights on other targets. Like Friends of the Earth, the Sierra Club supports eliminating tax subsidies. "The point of windfall-profits tax is to address windfall profits," says Josh Dorner, a spokesman for the Sierra Club. "It makes sense that when oil prices fall below a certain level to not have the tax." Janet Larson, director of research at the Earth Policy Institute, says her group is focused on ideas such as setting a floor on oil prices. "Consumers made changes when gas went to $4 gallon," she notes. "Record numbers of people took public transport, and sales of large cars fell. The [price] volatility is reversing some of those gains."

One environmental group still found reason to critique Obama's decision. "Of course it's disappointing," says John Passacantando, executive director of Greenpeace. "Ideally you'd put in the tax when prices are low as an insurance policy for when prices spike again." He said he was disturbed to see the Independent Petroleum Association of America applauding the move. "President-elect Obama was not elected so we could read headlines that the oil industry is pleased," says Passacantando.

Prices Are Likely to Rise Again

However, oil prices may not stay low. An International Energy Agency report released last month indicated that slowing production would ultimately send prices back up. "Long term, we expect the trend to be only an increase in price," says Dorner. "If the time comes again when oil companies are making huge windfall profits at the expense of consumers, we expect to revisit that."

What's most important, say environmentalists, is addressing the matter of global warming, not the tactics used to get there. "The last eight years have been the most favorable in the history of this country for the oil and gas industry," says Berning of Friends of the Earth. "We have confidence Obama will change that."

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