Break a market, get less. It’s not difficult to understand.
Britain’s “common good” Conservative Party is not known for its understanding of basic economics, as its recent plans to encourage “voluntary” price caps on certain food products have already reminded us.
Another Tory folly was the introduction of a windfall tax on oil and gas companies. The tax was going to be a one-off at 25 percent. It was then increased to a one-off levied at 35 percent and extended for three additional years.
There’s one-off and then there was whatever that was.
The Daily Telegraph’s Matthew Lynn takes up the story:
A little over a year ago, energy prices were soaring following the Russian invasion of Ukraine. Households were facing punishing increases in their heating bills, and the Government was coming under immense pressure to create a money-go-round.
The logic was that a windfall tax on energy companies would fund subsidies that would support households through an acute cost of living crisis. Labour and the Liberal Democrats were baying for it, as were the Scottish Nationalists, environmentalists, and many others who fail to grasp the wider effects of tax hikes.
Demonstrating the strength of a dandelion in a hurricane, Sunak and then-prime minister Boris Johnson gave in, and imposed their energy profits levy.
A dandelion in a hurricane!
As Lynn points out, Johnson and Sunak were warned that a tax raid of this kind would discourage investment in Britain’s embattled but vital North Sea oil-and-gas sector. They ignored those warnings.
And so, what has happened?
Lynn:
It turned out that all the people warning that it would be unwise to slay a golden goose were right. Investment in the North Sea has plummeted. The French energy giant Total became the first major company to pull out of the sector, followed by Chevron, and then Shell.
OEUK, the trade body for large and diversified energy companies, suggested 90pc of firms were looking to scale down investment. The largest energy producer in the North Sea, Harbour, has been shedding hundreds of jobs, after the company claimed its tax bill, which includes the levy, “all but wiped out” profits last year.
Even before the Labour leader Sir Keir Starmer came up with the ill-conceived plan to ban any fresh licences, there were very few companies willing to spend the money in the sector anyway.
Note Lynn’s point about what the Labour Party has in mind. One of the tragedies for Britain is that, as bad as the Tories are (very), Labour will be even worse. The Conservatives’ remarkable incompetence has made it close to inevitable not only that they will be succeeded by a Labour government, but, by pursuing leftish policies, that they will have made it politically possible for Labour to govern even further to the left.
As Lynn points out, it’s hard to blame the North Sea’s oil and gas companies for their reluctance to invest:
They have long been subject to an unstable tax and regulatory regime. The energy profits levy raised the headline rate to 75pc. Twenty years of intervention in the energy market have left it scarcely resembling a market at all.
Break a market, get less. (It’s not difficult to understand.)
The British government has now announced measures to alleviate the windfall tax.
The Guardian:
The chancellor hopes to boost investment in the North Sea by agreeing to suspend the windfall tax on oil profits if the market price for Brent crude falls below $71.40 (£56.77) a barrel, and gas prices fall below 54p a therm, for a period of six months.
Ah yes, “suspend.” If the government wanted a better chance of increasing investment, the word to use would have been “scrap.”
The Guardian:
The global oil price is now about $75 a barrel, and the UK’s gas price is about 64 pence p/th. These prices are well below levels recorded last year after Russia’s invasion of Ukraine, but experts believe they are likely to remain at similar levels while the war continues.
So the tax will be “suspended” when the arbitrarily determined price that triggers an arbitrarily defined “windfall” comes to an end. Great.
The Guardian:
The Guardian understands the controversial Rosebank oil project, planned by Equinor and the oil minnow Ithaca Energy, is expected to move ahead in the coming weeks in part because of the tweak in the windfall tax.
But much of the damage has already been done.
The Financial Times:
The UK government’s efforts to boost investment in the North Sea by scaling back the windfall tax on oil and gas producers have been dealt a blow as one of the basin’s leading operators blamed the levy as it halted drilling.
Ministers introduced a price floor on the windfall tax on Friday following months of lobbying from the sector, which argued it was deterring investment, and putting jobs and energy security at risk.
However, hours after the announcement Apache, operator of the Forties oilfield for the last 20 years, said it would halt all drilling in the North Sea, blaming the “challenging UK macro environment with its increasingly costly and burdensome tax and regulatory regime”.
The company confirmed that the move would lead to job losses in Aberdeen.
Apache produces about 50,000 barrels of oil equivalent per day, according to analysts Wood Mackenzie, making it the North Sea’s ninth largest operator.
Forties is one of the largest and oldest oilfields in the UK North Sea, making up part of the supply that underpins the Brent crude oil benchmark contract, and the ageing asset requires regular work to maintain production levels.
Apache’s move follows months of disquiet among producers about changes to the tax regime, with Harbour Energy, the North Sea’s largest producer warning it will shift investment to the US.
Stupid taxes have bad consequences.