Do not listen to Big Oil’s whining for tax cuts

It’s all so tiresome and predictable. This blog focuses on the UK, but it could apply to any oil and gas producing country.

The Guardian has a headline that is more to the point:  Oil industry calls for North Sea tax cuts. Meanwhile, the lobbying arm of the British financial services industry fine upstanding British newspaper City A.M. has an innocuous-sounding headline: Government commissions “urgent review” into North Sea oil after BP job cuts, making similar points. 

Both articles cite Malcolm Webb, the head of lobby group Oil and Gas UK:

“Some companies are paying 80 per cent as the highest tax rate on fields in the North Sea. We would like to see 30 per cent as the top tax rate and our industry treated as the same as any other.”

If you’ve been living in a cave for the last few months, the news here is that world oil prices have more than halved to less than $50 a barrel. The oil companies don’t like it, and are screaming for government tax subsidies.

There has been an awful lot of this around recently, of course. The worrying thing is that politicians are always liable to fall for such nonsense. And it is economic nonsense, from top to bottom. We’ve even seen union members, of all people, calling for corporate tax cuts here.

The Economist magazine has got it right, in its cover article this week: this is a once in a generation political opportunity to get serious about carbon taxes.

So why are tax cuts for Big Oil a truly silly idea? There are several reasons.

First, this is about national policy. A tax is not a cost to a nation. It is a transfer within it. Let’s say there is a tax cut worth $5 billion. That is a transfer from ordinary UK taxpayers (who will then have to suffer higher personal taxes, or higher deficits, or reduced public services) towards the mostly wealthy shareholders and executives of large oil firms. A large proportion of those shareholders are foreigners. So it’s a net transfer of wealth upwards, and out of the country.

Second, oilfields don’t have legs. They won’t run away if you tax them. That is why U.S. companies had to grin and bear it when OPEC countries finally realised this in the 1970s, and massively hiked their take. They threatened all sorts of mayhem and ‘we’ll take our investment elsewhere’ – but when their bluff was called, they stayed, when they were given the opportunity.  That is why small African countries like Angola can tax the industry till the pips squeak, while still finding that they have to fight off the scrambling investors.

Third, we are substantially talking about corporation tax here. Corporation tax is a tax on profits. If there are no profits, there are no tax. If there are profits, then the companies are strong enough to pay tax. This isn’t rocket science.

Fourth, to the extent that there are cutbacks and a reduction in production, the oil will stay in the ground. National incomes may fall, but national resources in the ground will be preserved. There is no net national loss.

Fifth — and this is a doozy — look at this paragraph from The Economist’s leader article this week:

“The most straightforward piece of reform, pretty much everywhere, is simply to remove all the subsidies for producing or consuming fossil fuels. Last year governments around the world threw $550 billion down that rathole—on everything from holding down the price of petrol in poor countries to encouraging companies to search for oil. By one count, such handouts led to extra consumption that was responsible for 36% of global carbon emissions in 1980-2010.
. . .
Why should American taxpayers pay for Exxon to find hydrocarbons? All these subsidies should be binned.”

Good grief.  A tax cut, below what a democratic society would demand, is a subsidy. Just stop it.

Sixth, rents. Quite a lot of investment in North Sea oil was made long ago, and the firms have been sitting pretty since then, earning easy windfall rental income from high prices. Shareholders and corporate bosses have earned a sense of entitlement about their earnings, and have been rewarded far too richly on the back of this windfall, for far too long. Every economist since Adam Smith has advocated taxing unearned rents, hard and strong.

Seventh, cutting back on subsidies for fossil fuels would spur investment in renewable energy, which would be an unalloyed benefit. We’re not talking about giving subsidies to renewables: we’re talking about taking away the subsidies to fossil fuels.

Here is what must be done – and urgently. The window of opportunity may not be around for long. Back to The Economist: we don’t agree with all of its arguments, but this one is spot on.

“Politicians, for the most part, have refused to raise taxes on fossil fuels in recent years, on the grounds that making driving or heating homes more expensive would not only annoy voters but also hurt the economy. With petrol and natural gas getting cheaper by the day, that excuse has gone. Higher taxes would encourage conservation, dampen future price swings and provide a more sensible way for governments to raise money.”

For more on why this is a once in a generation opportunity to impose carbon taxes, read The Oil Price Opportunity, on Project Syndicate.

It took us just a few minutes to think of these reasons; we could probably think up a few more.

Tax cuts for Big Oil. Sheer folly.