Britain mulls windfall tax on oil firms

A growing number of lawmakers are calling for energy companies to pay for fuel costs borne by poor Britons.

from the September 4, 2008 edition

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Energy is different, claim windfall tax proponents. First, it benefits from factors that have nothing to do with good management, entrepreneurship or product development (the surge in oil price). BP reported first half profits last month of £6.7 billion ($12 billion) – or £37 million ($66 million) a day. The Centrica power utility recorded first half profits of almost £1 billion ($1.8 billion) – and then raised gas prices 35 percent.

Second, the service it provides is a vital necessity. Recent hikes in gas and electricity prices mean average bills will soar to more than $2,500 a year. Retirees in particular will suffer – already more than 2 million older households live in 'fuel poverty' (they spend more than 10 percent of their income heating their homes).

"This is about fairness," says Gordon Lishman, director general of the Age Concern charity. "Energy companies are making healthy profits while people up and down the country are struggling to pay their bills and fuel poverty levels are escalating."

Individual energy companies are reluctant to be drawn on the issue before it has become formal government policy. "Tax is a matter for governments," said one BP spokesman, even though clearly its remittance is a matter for companies.

Tax may scare investors

But industry associations and experts cite several reasons why the energy sector is being unfairly treated, and why windfall taxes could be disastrous.

Mr. Porter says British electricity companies are readying £100 billion ($1.8 billion) of investment on new power stations, and that every pound "extorted" from them would have to be found elsewhere – presumably from customers. He adds that the tax would send a poor signal to global investors about the quality of the British investment environment. "[Britain] could be downgraded as a suitable place to invest."

For a generation, Britain has relied on North Sea oil and gas. With fields depleting, costs of extraction are rising.

"North Sea oil and gas fields are already proving harder and more expensive to tap and if the government is serious about Britain's energy producing capabilities then a move like this will not help," says Julian Lee, a senior energy analyst with the London-based Center for Global Energy Studies. Big companies like Shell and BP would in any case argue that Britain has no jurisdiction over the majority of their assets – and profits – which are generated overseas.

History provides few examples of a windfall tax with a happy ending. A US windfall tax in the 1980s raised far less than had been hoped for, and resulted in domestic oil production falling sharply. In Britain, a levy was imposed on privatized utilities by the new Labour government in 1997, though on that occasion the justification given was that these companies had been sold off too cheaply. A levy three years later, in the form of third-generation mobile licenses, hammered the telecom sector and deprived it of billions of pounds needed for investment.

A better solution, according to a group of local officials, would be to impose an annual levy on energy firms to fund a program to insulate British homes. That way, fuel bills would fall and companies would be able to spread the tax hit over the years.

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