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Cutting the throat of the black gold goose

March 31st, 2011 Posted in Economics, Energy by

Hammer of the oil companies George Osborne is a greater environmentalist than economist. Or is he?

The impact of the his 12% hike in the North Sea supplementary charge; on top of two 10% rises by Gordon Brown last decade, has seen a roll call of firms suspending or scrapping major investment deals in British waters.

City AM has been following the stories over the last week, the most significant of which was a £10bn investment in Mariner and Bressay by Statoil.

The short term impacts on the UK tax take are unclear. Existing fields facing marginal tax rates of 62-81% will continue to produce. In the short run the world price of oil is more important than investment.

In the long run the Chancellor will be testing to destruction… again… the problem that high taxes don’t work. Investors don’t tend to volunteer to make their money work more for the Government than them.

A view strongly expressed previously by the Scottish Liberal Democrats, who campaigned vigorously against Gordon Brown’s looting. They may be wondering why a Scottish Liberal Democrat Chief Secretary to the Treasury didn’t stop this, knowing has he does, that when the rate, last doubled investment in the North Sea fell 25%.

But isn’t this good for low carbon energy?

The answer is no.

First oil and gas companies are international. Investment moves around the world looking for the best returns. That movement is limited by cost and national monopolies, but as some opportunities become more expensive, others such as oil sands and deep water drilling become more attractive. No carbon is saved, it just gets drilled elsewhere. Some of those alternatives produce more CO2, in production, than drilling the North Sea.

New opportunities in the North Sea are already expensive due to natural considerations; the hostile climate West of Shetland for example. And in decline. Creating fiscal barriers on top of that, whilst Barack Obama for example is offering tax breaks, is uncompetitive.

No low carbon technologies are yet in a cost effective position to displace oil and gas as primary fuel sources for transport and electricity generation. They will get there, one day, but to do so require investment. That investment in turn, whether public or private, depends on economic growth.

High taxes kill growth. Efficient investment requires exploiting the skills and advantages you already have. Offshore wind for example benefits directly from offshore oil and gas engineering. For green energy to be the future we need energy companies to be successful today.

In the medium term the likely impact of the Osborne tax will be less tax revenue. That could be masked if global oil prices continue to rise, but there will still be a dead-weight loss. If prices fall, it could be dramatic. Gas prices for example are already much lower than oil.

It would be better if oil and gas were treated on a level playing field with other businesses, with special taxes reserved for concrete market failures like mitigating carbon, not revenue raising.

Where hypothecation is useful perhaps it should be towards investment in future energy sources, not reducing taxes at the pump or other pet projects. The Treasury and public sector should be taking the hit on keeping down the cost of living, not the providers of jobs and growth.

The current North Sea Fiscal regime is over complex. The erratic behaviour of successive Chancellors can give industry no confidence in future stability. That loss of confidence, in some respects, is even more worrying than the rise. This is one piece of populism that has backfired badly. The Government should think again.

2 Responses to “Cutting the throat of the black gold goose”

  1. Leslie K. Clark Says:

    There has been a lot of chatter about the electoral effects of going into coalition with the Conservatives could have on the Scottish Lib Dems but I fear its policies like this that could do more damage. One poll has put us in 5th place behind the Greens!

    Tavish Scott MSP criticised the government for not consulting oil firms; the Leader of Aberdeen City Council John Stewart believes it to be “ill-considered”; and North-east MPs Malcolm Bruce and Sir Robert Smith both voted against the tax rise in the Commons.

    I understand that there is a crisis meeting in London tonight involving offshore industry leaders, the Energy Secretary and Scottish Secretary…

  2. Jack Hughes Says:

    Does anyone outside the westminster bubble still believe this carbon nonsense?