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Hugo Chavez's Very Excellent Windfall Oil Profit Tax

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Hugo Chavez is not a friend of ours, but he does come up with some good ideas. As reported in the Wall Street Journal ("Venezuela Passes New Oil Tax," 04.16.08), on Tuesday, at his direction, Venezuela's National Assembly passed an oil windfall profits tax that will be assessed against all of Venezuela's oil producers ranging from the state oil firm Petroleos de Venezuela and extending to its foreign partners such as BP, Chevron, Total, etc.

The tax is levied when the price of benchmark Brent crude rises above $70/barrel. The state will take 50% of the difference between this level and the monthly average of the final sales price above the $70 level. As the price exceeds $100, the government's participation rises to 60%.

Before you have Adam Smith turning over in his grave, consider the following. Were the price of oil a true reflection of market forces your point would be well taken. But patently, it is not. It is a manipulated price, the result of collusion of the OPEC cartel as Venezuela knows well, being one of OPEC's most hawkish members. There are further strong indications (Congress, when are you going to investigate this seriously?) that the price of oil is being pushed ever higher by targeted trading in the commodity pits. And now with the rise of sovereign wealth funds, the one-way direction of oil price trading becomes even more suspect (please see "Oil at $111 a Barrel. We Are Being 'Sovereignly Screwed," 03.17.08)

In any case, we are dealing with a commodity that has left all ballast of free market determination far behind. The results are profits for oil companies that are so egregious that they surpass all definition of "windfall profits." If monopoly collusion is viewed by our laws as illegal, then the monopoly/cartel induced oil prices we are currently experiencing and paying for at the pump are in effect crooked profits and it is time our government acts to redress this injustice visited on all of us, and finally begins to level the playing field.

How ironic, in our ongoing saga with the oil barons, that we need Hugo to show us the way.