Obama Proposes $15 Billion Windfall Tax on Oil Profits

I've been focusing more and more on the economy and healthcare recently, because it seems things are starting to really come into focus.

The Democrats, of course, are craving a return to big government liberalism, but the scope of some of the proposed programs on the Democratic side really do auger a radical shift in the public philosophy.

Bloomberg, for example, reports that Barack Obama campaign's proposing a $15 billion windfall profit tax on "big oil," which would then be used to fund aggressive social policy redistribution:

Democratic presidential candidate Barack Obama's proposal for a windfall profits tax on oil companies could cost $15 billion a year at last year's profit levels, a campaign adviser said.

The plan would target profit from the biggest oil companies by taxing each barrel of oil costing more than $80, according to a fact sheet on the proposal. The tax would help pay for a $1,000 tax cut for working families, an expansion of the earned- income tax credit and assistance for people who can't afford their energy bills.

``The profits right now are so remarkable that one could trim them 10 percent or so, which would turn out to be somewhere in the $15 billion range,'' said Jason Grumet, an adviser to the Obama campaign.

Obama's plan may be three times larger than the $50 billion, 10-year plan contemplated by his Democratic rival, New York Senator Hillary Clinton. Republican candidate John McCain, an Arizona senator, has no plan to raise oil and gas industry taxes, said his economic adviser, Douglas Holtz-Eakin.

It's hard to argue against middle-class relief from rising costs, for example, in retail gasoline, but the notion that it's economically logical to tax corporate profits for economic distribution is more than populist, it's part of the ideology of economic class struggle, currently making a come back in the raging currency on the left for "progressive" politics.

But to really get an idea of the left's confiscatory folly, spend some time reading the Wall Street Journal's outstanding editorial today on Exxon's recent corporate receipts.

It turns out that descendents of John D. Rockeffer, who are major stakeholders in Exxon, have warmed to some of the au courant policy proposals for "green" energy, and they've pressured the Exxon board to reorient corporate investment priorities toward "fuels of the future." This comes just as the company "reported a 17% rise in first-quarter profit, to $10.9 billion":

Could it be that the heirs of John D. Rockefeller's Standard Oil empire (founded 1870) are angry that Exxon's management made them too much money? Probably not. Instead, the family warns that the company will lose out to competitors in the future if it doesn't shift its climate-change policies and invest more in alternative energy....

The well-to-do Rockefellers have embraced the eco-enthusiasms of the day, and perhaps for some of them this is one way of assuaging any guilt over a multibillion-dollar fortune built on carbon....

But even if they're not dressing up their political goals as concern about Exxon's long-term viability, it's useful to ask whether their agenda serves the interests of all shareholders, which is maximizing returns on investment. Certainly Exxon's earnings are high in absolute terms, given surging crude oil prices, but they have to be compared to the huge capital requirements for exploration and development. In 2007, the company spent nearly $21 billion on exploration and capital spending, and that will increase by at least 20% over the next five years or so.

Such long-range strategy to span both up and down cycles is essential because profits fall when commodity prices dip. That happened in the 1990s, with oil crashing below $20 a barrel after the altitudes of the 1970s. The oil majors and their shareholders swallowed these declines, as they should have.

Against such market fluctuations and supply shocks, what's distinguished Exxon is its discipline. The company is known for its careful budgeting and for avoiding speculative risks. More than others, Exxon seems to be guided by the fact that the current historic rise in oil and gas prices won't last forever, and that its spending decisions need to make sense in a world of $60 or even $30 per barrel oil. Such business prudence has paid off. Exxon's earnings per dollar of sales stood at 10% for 2007, compared to 8.3% for the larger oil and gas industry and 7.8% for the Dow Jones Industrial Average for major industries.

It's the prerogative of shareholders like the Rockefellers, even those without a major equity stake, to second-guess Exxon's results. Still, they've also got plenty of other investment opportunities, and they're welcome to try out Vinod Khosla and the other venture capitalists pursuing "clean tech." But these energy sources still can't compete economically with oil despite government handouts and other regulatory props, and the Chapter 11 courts are littered with companies that made such energy bets.

Anyway, a company that specializes in oil and gas isn't necessarily the best situated to operate, say, wind turbines. It may lack the expertise, or the fads might divert management focus from the main business. But even if Exxon chose to diversify more into alternatives, it would still be far more profitable to continue providing a product that the world can't do without. The notion that the carbon era is coming to an end is for the foreseeable future little more than a fantasy. Everyone – from the U.S. Energy Information Agency to the U.N. – agrees that fossil fuels will still account for as much as 80% of the world's energy needs though 2030, even with efficiency gains and major growth in alternatives.

Note that in over twenty year from now, the great bulk of the world's energy needs will still be derived from traditional fossil fuels.

But it's not the environment here to which I'm concerned.

The Journal's piece offers a reasonable look at corporate practices that are rational in terms of corporate viability, but also crucially important in the sense of the longer-term public good.

"Big oil" did not drive world petroleum markets to record highs. Increases in global demand, supply shortages in old-line producing states, domestic refinery incapacities, and the ramifications of international politics, have all affected the recent surges in fuel prices in the United States.

The Democrats' proposals to levy confiscatory corporate oil taxes reflect classic Robin Hood economics. But for all the talk of tax "fairness," sooner or later the costs of social policy largesse will be felt by middle-income Americans across the spectrum, in higher prices, higher taxes, and continuing out-of-control demands for greater government entitlements.