Tuesday, May 31, 2011

Crying Wolf: Why oil companies should be taxed on windfalls

Oil companies, like banks, are prone to threatening behaviour, especially when it comes to taxing their gargantuan profits. Even when oil prices peak at over $100 per barrel, with production costs at only a tiny fraction of that price, they howl with anger at any attempt to tax what are undoubtedly windfall profits. When UK Chancellor of the Exchequer George Osborne proposed a Fair Fuel Stabiliser which cuts in once oil prices top $75 per barrel (with revenues offset against lower duty rates on retail petrol and diesel sales), Malcolm Webb of the Oil and Gas UK lobby group threatened that 15,000 jobs were being put at risk, and over £12 billion of investment was potentially in doubt because of loss of investor confidence.

Webb's comments are nonsensical, especially at a time when oil and gas production has seldom been so profitable. Any notion that investor confidence is in the slightest way disturbed needs to be put in context, which is what a new report by Greenpeace and Platform sets out to do.

First, despite the volatility of global commodity markets, prices remain historically high and are unlikely to fall below $75 in the foreseeable future: demand remains high and increasing; supply is constrained and the conflicts in the Middle East and North Africa continue to cast uncertainty over production in those regions.

Second, peak oil is imminent and western oil companies are forced to compete with powerful players from Asia and Latin America. This means that any talk about withdrawing investment from the North Sea region is just that, talk. Threats to reduce investment in upstream production look even less convincing when considered in the context of a 2009 oil industry survey which placed the UK at the top as the preferred country to invest in.

Third, claims made by oil and gas producers about uncompetitive tax regimes need to be taken with a double pinch of salt. In the North Sea province, wells drilled since 1993 are taxed at 62 percent on the UK side and 78 percent on the Norwegian side. Both sides share similar geologies. These rates are by no means high by international standards: the Venezuelan government imposes a rate of 95 percent when oil prices exceed $100 per barrel.

Oil and gas are natural resources. Production costs vary considerably from one field to the next, sometimes being less that $5 per barrel, in other cases exceeding $35 per barrel. In other words, production costs bear little or no relation to the prices achieved on the world markets (hovering around $100 pb at time of writing).

Oil companies boast about record profits as if this was somehow due to the innate wisdom and entrepreneurial flare of their directors. Earlier this year, announcing annual profits of $18.6 billion, Shell's chief executive Peter Voser bragged that: "There is more to come from Shell." The fact that profits had doubled over the preceding 12 months had little to do with Voser's business acumen and much to do with the imbalance between global supply and demand. Governments are absolutely within their rights to extract some of the excess unearned income from the oil and gas producers for recycling within the economy. They can, and should, see down the oil company bullies.

Read the report by Greenpeace and Platform here.


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