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What Senator Obama’s Oil-Price Relief Will Cost

Yes, We Know How to Do Math Around Here

Ok, this is pretty interesting. Senator Obama told us a few weeks ago that John McCain’s proposal for a summer-long Federal tax holiday on gasoline was nothing but empty political theater.

So now The One has given us a gesture with quite a bit more theater to it. He wants to give every adult American $500, right now. You can read his plan here.

So figure that’s about $100 billion, give or take. Not as big as this year’s fiscal stimulus which gave a momentary and already-fading bump to personal consumption expenditures. But in the same ballpark.

But this is no ordinary piece of political theater. Obama is telling us in so many words that it’s a “down-payment” on Obama’s long-run plans to restore tax fairness.

As it turns out, that means Obama intends to get the 100-or-so billion dollars not from where President Bush got the money for his fiscal stimulus (foreign central banks). Obama has a very different source in mind for the funds: Oil companies.

Let’s do the math.

Keep reading…

Obama is promising to fund an immediate disbursement of roughly $100 billion, with a tax to be assessed over five years on the profits of oil companies.

So he still has to borrow the money now. And he will fund the borrowing by (in essence) forcing oil companies to give a coupon security to the government.

I’ll take a guess here and assume that what Obama has in mind is the equivalent of a five-year note with a zero principal amount, and a annual coupon payment. That seems to be the closest match for his stated intention to assess a “five-year windfall profits tax.”

Ok, so that means that he’ll take regular payments from entities defined as “oil companies” (more on that in a moment) over a five year period. And the discounted present value of those cash flows will need to add up to $100 billion plus interest over five years (the current five-year Treasury rate is about 3.375%).

I have no idea how you’d risk-adjust these cash flows since that would be equivalent to predicting the earnings of a large range of businesses, five years ahead, in a very uncertain economy. So let’s just make up a SWAG.

I’m going to say that to fund the Obama Emergency Economic Plan, the oil industry will need to cough up about $25 billion a year for the next five years. Maybe 23 or 24.

Let’s assume they’ll stay more or less as profitable as they are now. Which companies are we looking at? Well, the largest integrated majors with a US domicile are Exxon-Mobil, Chevron-Texaco, and Conoco-Phillips. (Filling out the top five are British Petroleum and Royal Dutch Shell, neither of which is an American company.)

Add up the current annual profits at our Big Three, based on their current results. I get a number in the very rough neighborhood of $80 billion. And that annual profitability is supporting a market capitalization of the Big Three of about $720 billion.

I don’t know how Obama intends to define the oil companies exposed to his windfall tax. I can’t imagine adding in downstream companies like Valero, but I can see adding in smaller upstream companies and integrateds like Anadarko and Sun. Let’s swag that the Big Three will amount to 75% of the tax base for Obama’s mega-coupon.

So you’re going to whack out at least 30%, maybe more, of the total profitability of the Big Three in each of the next five years. That’s assuming they stay profitable. If they stumble along with the weakening economy, the percentage will be even larger.

So let’s apply the haircut to the stock prices of these companies. $720 billion would fall to the rough neighborhood of $500 billion, nearly immediately. That’s a net destruction of about $200 billion in current wealth owned by the pension funds and insurance companies that Americans depend on to pay for their retirements.

All to fund a current expenditure of about $100 billion.

Yeah. Let’s do this. At the very least, we’ll prove to everyone once and for all that Democrats shouldn’t be allowed to run the economy.

Full disclosure: I’m an XOM shareholder. I used to own a lot more, but I sold most of it a few weeks ago when I sensed that oil prices were going to start falling. What can I say? I’m good.

-Francis Cianfrocca

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