On Obama’s hopes of taxing windfall profits

Mr. Obama didn’t bother to define “reasonable,” and neither did Dick Durbin, the second-ranking Senate Democrat, when he recently declared that “The oil companies need to know that there is a limit on how much profit they can take in this economy.” Really? This extraordinary redefinition of free-market success could use some parsing.

Although the WSJ’s opinion is not from today (it was published on Monday), it nonetheless lucidly explains the questionable nature of Mr Obama’s latest economic proposals. In one he suggests giving Americans a stimulus check in the value ranging from $500 to $1000 (depending on circumstances) which should be paid for from the proceeds of a new, so called windfall, tax imposed on Big Oil. Big Oil is a group of America’s largest oil companies and is often a subject of criticism for its notably large nominal profits; its most prominent member, Exxon-Mobile, suffered a severe criticism last week when it unveiled its quarterly financial results that showed the company earned $11.8 billion, the largest profit ever. This fact allowed Obama to find a persuasive scapegoat in his agenda of striving to help average people; he proposed tax every oil company which profits grow by more than 10% and which doesn’t “sufficiently invest in exploration of renewable energy sources” by 25%. I call this ludicrous and am further convinced that Obama is nothing but a prime-time celebrity that is willing to sell his soul to whatever might win him the votes of undecided voters. The Wall Street Journal analyzes the background of Obama’s latest idea and ridicules its obviously flawed nature.

Congress to nationalize American oil industry?

Not yet, but some are apparently thinking about it. That should really solve the energy problems!

At another point, Ms. Waters [Democratic Congresswoman from California] brazenly suggested that perhaps the American oil industry should be nationalized, acknowledging that it was an “extreme step” but one that might be necessary if outsize profits and exorbitant gasoline prices continued.

Oil closed above $130 for the first time

According to Bloomberg, Nymex Crude Future closed at $133.75 per barrel, $4.77 or 3.70% up from yesterday.

Reasons for such bullish market?

1) Oil is mysteriously disappearing from the Gulf. One day the reserves are surprisingly high, the next day they vanish. It’s uncertain why.

2) Falling dollar is causing stress to the petrobarons who are afraid that soon their profits from oil sale will be worthless. They increase the oil prices and cause the dollar to plummet even further.

3) and Irrationality. People are afraid the prices will surge even further, thus stocking themselves with “cheap oil.” Goldman Sachs was right two weeks ago when it reported that the price is driven by real demand rather than speculators.

I am wondering what effect will today’s hike have on the overall price levels in next month. $130 was viewed as another psychological barrier passing which will clear the way to new highs. Although some expect a major correction soon, I don’t believe it will be significant enough to considerably influence the prices one pays at the gas station where people feel it the most. The Czech dailies currently print bold headlines warning people the cost non-premium gasoline could quickly exceed 34/l and possibly landing above 35 Kc/l during the summer. From the Czech point of view that looks like a significant sudden increase even though the it’s more gradual than it appears upon a cursory look. The falling dollar had been falling dramatically in the period between January and April, thus compensating for the increasing prices of crude oil. But the fall has slowed (and dollar even rebounded for a short period of time) and exposed the Czechs to the harsh reality of the situation on the commodity marketplace. Who is to blame? The Czech National Bank. Why? For its stoic impassiveness, possible consequences of which I have already discussed in detail in one of the previous posts.