North Sea oil producers are ripe for a windfall tax. Without moving a muscle, they have benefited from a doubling in the oil price and a quintupling of the gas price over little more than a year.
There are big names in the frame, like BP and Shell, and some minnows that are now making hundreds of millions of pounds from wells offloaded a few years ago by these two lumbering giants of the industry.
If a law could be passed without too much fuss, the trading mega-companies registered in the UK or listed on the London Stock Exchange – Glencore, Trafigura and Vitol among them – would pay a slice of their multimillion-pound profits from rocketing international energy prices.
A separate windfall tax on the profits from BP and Shell’s global operations – expected to be almost £40bn between them this year – could supplement the small sums they would pay for their part digging up the North Sea.
It is clear from recent polling that the public likes the idea of taxing the energy industry’s lottery win. And knowing it is working with the grain of public opinion, Labour has rightly highlighted comments by BP boss Bernard Looney that his company is “a cash machine”.
So far the industry fightback has secured only a handful of supporters, though critically Rishi Sunak is among them.
The chancellor has made plain his opposition, citing the well-worn excuses of an industry that, just like the banking sector in the 00s, says higher taxes will prevent future investment.
The most recent example was George Osborne’s North Sea tax in 2012, which was followed by a decline in drilling. Osborne’s levy was wrongly dubbed a windfall tax – it was not a one-off, but a permanent increase to the toll on profits above the usual corporation tax rate.
In 2015, by which time the price of oil had collapsed, Osborne began backpedalling. In 2016, with panic in his eyes, he offered the industry climate-crisis-defying tax breaks on new exploration.
Company filings revealed by the Observer last year show that between 2018 and 2020, Shell and BP, which together produce more than 1.7bn tonnes of greenhouse gases a year, avoided paying any corporation tax on oil and gas production in the North Sea.
In this context, a one-year windfall tax might disturb oil and gas industry shareholders, but is unlikely to alter the investment outlook of drilling companies that judged how much to spend long before the market went into overdrive.
Sunak worries a deal struck with North Sea companies to reduce the carbon footprint of their operations will be in jeopardy. So they might demand a longer timescale? Well, they might. But the Treasury’s response should be the same: tough.
Then there are the Conservative MPs who believe it is un-Tory to consider taxing businesses this way.
Yet in 1981, Geoffrey Howe came knocking on the doors of UK banks, asking them to accept a share of the pain felt by everyone else during the worst recession since the second world war.
Howe imposed a levy that creamed off 2.5% of the banks’ non-interest-bearing current account deposits, harvesting £400m, which was about a fifth of their profits.
A year later, in a move that should be given more prominence in the current debate, Margaret Thatcher’s government announced a special tax on North Sea oil and gas, which raised £2.4bn, or about £9bn in today’s money.
Amid rising unemployment and falling living standards, and concerned about her re-election, Thatcher found widespread public support. Living standards are about to be hit again, though this time by the longest period (13 years) of decline in two centuries. It should be the case that windfall taxes are more common, not less.
Property is a particular example of a windfall that is unearned and unjustified. It is widely acknowledged that house prices have constantly outstripped general inflation since the 1980s when Britain became reliant on private housebuilders to construct 90% of homes.
Property has become the world’s biggest investment, sidelining stock markets by soaking up 80% of all investment cash globally, in large part due to the absence of any meaningful tax on rising values.
Like the energy companies, all homeowners should be prepared to give up some of their lottery win, especially when the rising cost of health and pensions over the longer term will impoverish the government without extra funds from somewhere.
Labour is sticking to a simple tax on oil and gas extractors in the North Sea that will only raise £1.2bn when – and Sunak should be mindful of this – a broader windfall tax is more than justified.
Ed Miliband and Rachel Reeves are fronting Labour’s campaign. Maybe, as Covid and Partygate give way to the cost of living crisis as the nation’s most pressing problem, it is time for Keir Starmer to add his voice.
