No windfall tax on oil and gas companies

As the world’s economies move into recovery after the pandemic, the demand for energy has risen, after it fell during the pandemic lockdowns. This has resulted in surging demand for oil and gas and healthy profits for the oil and gas companies. Because of a shortfall in supply, there have been big price rises, and the combination of higher energy bills coinciding with increased profits for energy companies has led to demands for a windfall tax on them.

Early season apples that fall from a tree are regarded as a ‘free’ bonus to the regular crop, and when some companies gain from lucky circumstances to which they did not contribute, their gains are similarly described as ‘windfall.’  Governments, always on the lookout for money, are tempted to impose one-off taxes on what they regard as “unmerited” profits. Naturally, the Labour Party, seeing a pot of money, wants to take some of it, and this time the Liberal-Democrats have added their small voice to the chorus

A proposed windfall tax on energy profits to be redistributed to the poor struggling consumers has a superficial populist appeal. It looks like one of those “robbing the rich to aid the poor” taxes, but it is not. At the end of every tax is a wallet or purse; this is because people pay taxes, companies do not. The taxes levied on them are collected from shareholders, customers or employees, and the energy companies would pass on the increased taxes to them.

Many of the shareholders in energy companies are pension funds. This means that the windfall tax would in fact be paid in part by pensioners. Some part of it will no doubt part be paid through increased prices to customers. Thus, what looks like a tax on so-called “fat-cats” is in fact a tax ultimately paid by quite ordinary people.

There is, however, a more serious downside to an energy windfall tax. It is that it would reduce investment in the industry. At a time when new sources of supply should be being developed, the funds will go to pay the levy, rather than be put to work investing in new sources of supply. What looks like a short-term gain for the Treasury would result in long-term damage to the industry and to our future energy supply.

Oil and gas producers are already very heavily taxed, paying 40% on their profits since Gordon Brown added an extra 10% in one of his famous stealth taxes. This is double the rate that other companies are taxed at. If we want companies to invest in research development, and to put money into new sources of energy supply, we should not be taking from them the funds they would otherwise use to do this with.

What is needed to secure our future energy supplies is a stream of new sources of supply and new methods of energy production that will enable us to produce it and use it more cleanly. This takes investment, and the way to secure that investment is not to make the industry less attractive to investors, which is precisely what a windfall tax would do. This tax would do the opposite of what it intends.