Time for a windfall tax?

Last year saw a spectacular reversal of fortunes for the world’s biggest oil producers.

At one point in April 2020, just before much of the world went into lockdown, the price of a barrel of Texas crude oil briefly dipped to minus 40 dollars.

In other words, at that moment, you’d be given 40 dollars to take delivery of a barrel.

“It’s the first time the price has turned negative in history. It led to a day of chaos in the oil markets.”

BBC, April 2020

But two years later, boom times are back. Prices are high. Shareholders are getting paid.

And the UK’s oil and gas companies have a renewed purpose. They are the secure alternative to Russian energy.

That’s been reflected in the latest round of financial results which are out this week.

BP, despite having to write-off its Russian interests, posted its highest quarterly profit in more than a decade at 6.2 billion dollars. Shell posted its highest ever at 9.2 billion dollars.

They’ve exceeded expectations.

But could they also end up a victim of their own success?

***

Back in November Bernard Looney, the chief executive of BP, made the mistake of boasting to the press that his business was a “cash machine”.

In the context of rising energy bills and potentially the steepest drop in living standards on record, that didn’t go down too well…

Calls grew louder for a windfall tax – a one-off levy on oil and gas companies operating in the North Sea, the proceeds of which could be used to help cushion the blow for consumers. 

As profits soar and the cost of living crisis intensifies, a windfall tax has become a key policy for the Labour party. This was its leader, Keir Starmer, on Radio 4’s Today programme…

“When their own chief executives and directors are saying ‘we’ve got more money than we know what to do with, we’re effectively a cash point, a cash machine,’ then we’re in the realms of taxing – a windfall tax – that money they didn’t expect to make.”

Keir Starmer

It’s an attractive idea. Instead of energy companies using the extra cash to buy their own shares and boost their stock prices, why not spread it more widely, among Britain’s hard-pressed energy consumers?

Labour is arguing that increasing the oil giants’ corporation tax by 10 per cent for a year could reduce the average energy bill by £200 pounds.

The prime minister, however, has so far resisted. 

Speaking to ITV’s Good Morning Britain, Boris Johnson said it would deter companies from investing in the transition to renewable energy.

“If you put a windfall tax on the energy companies what that means is that you discourage them from making the investments that we want to see, that would, in the end, keep energy prices lower for everybody.”

Boris Johnson

But there are other reasons the government is hesitant…

First, you could argue that a sizeable portion of the British public is actually benefiting from BP and Shell’s windfall.

Here’s Bernard Looney making that case.

“These are profits that are then rewarding our shareholders who, by the way, are not some faceless institution, but pretty much anyone who has a pension, or pays into a pension in the UK is affected by that.”

Bernard Looney, CEO of BP, speaking to CNBC

The third reason is that – historically – windfall taxes haven’t been popular with traditional Conservative voters.

In 1981, Sir Geoffrey Howe, Margaret Thatcher’s first chancellor, imposed a controversial windfall tax on the banks.

And while it raised almost £2 billion in today’s money, the banks, and a number of Conservative MPs, were furious.

Regardless, Margaret Thatcher backed it.

So do the arguments against a windfall tax make sense or is it unfair to single out one sector to ease the cost of living crisis?

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BP acted relatively quickly when Russia invaded Ukraine, including getting rid of its stake in Russian energy giant Rosneft. And it came at a huge cost to the business…

“You know that we took the decision to exit Russia within 96 hours of the invasion happening and today you’re seeing the financial implications of that decision, which is a $24 billion dollar write-down on that investment.”

Bernard Looney, speaking to CNBC

BP has also pledged to invest up to £18 billion in the UK’s energy system by the end of 2030. 

That includes projects in North Sea oil and gas, offshore wind, hydrogen facilities, electric vehicle charging points and carbon capture.

But asked by the Times whether any of these planned investments wouldn’t go ahead if a windfall tax was introduced, Bernard Looney replied: “there are none that we wouldn’t do.”

So isn’t that a green light for the government to go ahead? 

This week, the chancellor Rishi Sunak broke ranks to suggest that a windfall tax was something he’d at least consider…

“What I would say is that if we don’t see that type of investment coming forward, and companies are not going to make those investments in our country and energy security, then of course that’s something I would look at and nothing is ever off the table in these things.”

Rishi Sunak, speaking to Mumsnet CEO Justine Roberts

Ultimately he’s the person holding the purse strings. Would he follow in the footsteps of Margaret Thatcher’s first chancellor and impose a windfall tax?

A lot depends on how long energy prices stay high – and how long the British public will put up with the energy companies profiting.

But it’s important to note: tax taken from oil and gas companies wouldn’t cure the cost of living crisis.

You’d need £5 billion to give 10 million lower-income households a £500 saving on their bills for a single year.

A 10 per cent rise in BP’s tax bill would produce just one-twentieth of that. 

It’s not enough.

For that reason Rishi Sunak will have to consider all the options – including a windfall tax.

Today’s story was written by Barney Macintyre and mixed by Imy Harper.

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