One of the few bright spots in the current financial debacle has been the rapid decline of oil prices.  Earlier this year, oil hit an all-time high of $147 per barrel.  As of this morning, however, oil dropped below $76 per barrel — almost half of what it cost just a few weeks ago:

Oil prices fell on Wednesday to their lowest level in 13 months, dragged down by expectations that economic weakness will cut further into demand for crude.

U.S. crude fell to $75.62 a barrel, the lowest price since September last year. By 1144 it had pared the loss and was trading $2.67 lower at $75.96. London Brent crude dropped by $2.58 cents to $71.95.

The drop reflects the lack of confidence in the economy, as traders have bet on a recession, and recessions use less energy as manufacturing and transportation decline.  Low energy prices, though, will keep inflation in check and provide a key resource for a recovery.  It’s a mix of bad and good news, and is operating as normally as anything is at the moment on the markets.  OPEC supposedly was going to defend the $80 benchmark price, but thus far has done little to stop the slide of oil.  It may fall even further in the days ahead, and could have a bottom closer to $50 per barrel.

However, one aspect of low oil prices has not received much attention.  Barack Obama plans to spend hundreds of billions of dollars if elected President on a wide range of government initiatives.  He claims to have the resources to spend that money responsibly, in part by imposing windfall-profits taxes on Big Oil:

  • Enact a Windfall Profits Tax to Provide a $1,000 Emergency Energy Rebate to American Families:Barack Obama and Joe Biden will enact a windfall profits tax on excessive oil company profits to give American families an immediate $1,000 emergency energy rebate to help families pay rising bills. This relief would be a down payment on the Obama-Biden long-term plan to provide middle-class families with at least $1,000 per year in permanent tax relief.
  • Provide $50 billion to Jumpstart the Economy and Prevent 1 Million Americans from Losing Their Jobs: This relief would include a $25 billion State Growth Fund to prevent state and local cuts in health, education, housing, and heating assistance or counterproductive increases in property taxes, tolls or fees. The Obama-Biden relief plan will also include $25 billion in a Jobs and Growth Fund to prevent cutbacks in road and bridge maintenance and fund school re­pair – all to save more than 1 million jobs in danger of being cut.

That option seems off the table now.  The “windfall profits” tax — always a bit of a misnomer, since the average margin for American oil companies has been around a modest 8% — can’t get applied when the supposed windfall disappears.  Obama can’t redistribute wealth that doesn’t exist.

So now how does Obama pay for all of these programs, if elected President?  Taxing the rich won’t generate the kind of money he envisions in his ambitious, big-government spending spree.  Even if a capital-gains tax-rate hike actually produced more revenue, one would have to have capital gains in order to pay the tax.  After the debacle this year on the markets and in the real-estate industry, Obama won’t be seeing those kinds of revenues for years.

Either Obama will have to cancel these big-spending proposals, or he will have to impose big tax hikes on the middle class.  Even if Obama closed the Department of Defense, he couldn’t pay for the bailout package and the massive new spending he’s proposed, especially not without the hundreds of billions he predicted he would get from a windfall-profits tax on oil companies.

Obama has another option.  He could act in such a manner as to make the price of oil skyrocket again in order to claim those windfall-profits taxes.  It would produce massive stagflation in the midst of a recession and would benefit the Russians and Iranians most, but it would produce on paper the conditions Obama would need to impose his taxes and his spending programs.