back to article Windfall taxing big oil: how to make the gas crisis worse

There's something about the oil business that turns even intelligent people into frothmouthed loons: they're raping the planet, shafting Joe Sixpack or, from the other side, insisting that the drill in every back yard is the very definition of America. I realise that in the middle of an election that the small still voice of …

COMMENTS

This topic is closed for new posts.
  1. Anonymous Coward
    Anonymous Coward

    Economics GCSE?

    So theory (and that theory has been around a long time, Adam Smith remarked upon it when he published in 1776) tells us that excess profits attract the competition that wipes them out...

    Indeed, in a "perfect market" with lots of small suppliers and no barriers to entry. Such as pin production. Is the oil industry like that?

  2. Richard
    Thumb Down

    Percentages

    Granted, the percentage profit is low, but you're still talking about an awful lot of money. When 1% is measurable on the $100million scale, normal thinking on margins doesn't really apply. Otherwise, by that measure, you'll probably find that a corner shop is more profitable than the entire oil industry.

    So, I think I won't be shedding any tears for the poor old oil tycoons if they have to shave a few $100,000 of their weekly shopping budget.

  3. Richard
    Alert

    Addendum

    I would like to add to my last comment that I agree that a tax isn't going to work. They should just slim their profits a bit and lower prices, unless they'd rather we froze come winter of course.

  4. Mike
    Flame

    Biggest Profit Ever

    Exonn Mobile made $11.6bn in Q2. Which is the largest profit ever recorded for a US corporation.

    I think they should be taxed more but given more tax-relief for investments into renewable energy.... Although I think their investments should go into public projects were they don't directly run or have any involvement in the project (ensuring they aren't hiding the technology)

  5. breakfast
    Thumb Up

    Hate to say it...

    I seem to inherently disagree with Mr Worstall's articles most of the time, but in this case he's pretty much spot on.

  6. Mark

    Higher gas prices? How??

    If they increase the price of petrol at the pump to make the money back, this money is taxed even more. And the windfall tax increased because they are still making, to the public's point of view, too much profit. After all, that was the reason why the windfall tax was mooted, was it not?

  7. Stuart Elliott
    IT Angle

    As a foreigner who gets elected in the US is nothing to do with me

    Yep, that pretty much covers it..

  8. Peter Dawe
    Paris Hilton

    Sloppy reasoning, undignified name calling

    While Windfall taxes may or may not be justified, this article totally fails to address the arguments in a logical and coherent manner. One of the taxes included in the article include license fees for the extraction oil. I'm sure the author isnt suggesting the end of property ownership! In addition, the issue of windfall taxes are to address a market failure problem, Big Oil is an oligarchy with the market power to manage markets. There are also able to use transfer pricing to move profits around the world, to take advantage of local tax rates.

    To call people who consider that there has been a market failure and wish to readdress the failure names, simply emphasises the authors dogmatic position.

    Better quality please

    Paris? 'cos of her energy policy

  9. Kevin Johnston

    Good grief

    A clear, lucid article explaining why businesses need to make at least some profit to stay in business and why Governments should accept that. Whatever next, a Government that only takes enough money from the populace to provide the services the community as a whole needs? A Government which acts in the best interests of the country they are honoured to be representatives of?

    As if....just like most issues which has a 'green' element, do not allow ugly facts to interfere with beautiful dramatic gestures.

  10. Anonymous Coward
    Anonymous Coward

    Interesting article

    Probably on the money - just a way to shift blame around for the economy.

    And it is not as if people really ever the value from taxation it just gets eaten, by people far worse than greedy capitalists.

    Though I also suspect whilst your figures are probably accurate as far as the public numbers go, the internal numbers are possibly a lot different. They can afford a lot of creative accounts can't they.

    Really taxing companies that make profit, just encourages companies not to show profit, never a great move for any economy.

  11. Peter Gathercole Silver badge
    Thumb Down

    Profits

    I agree about the high taxes that the energy companies pay, but when demand causes the price to rise, who actually ends up with the extra money?

    Obviously, everyone who takes a percentage cut will take a slice (including the taxman), but has the energy become more expensive to produce as a result of the extra demand? Not if they offset their own fuel costs. Are the wage bills immediatly higher? No. Are the extraction licence fees more expensive? Not immediatly.

    I conclude, then, as a result of the high demand, the energy companies do get a windfall, as most of the extra money goes to them. This can only be a benefit to their bottom line. But should they be taxed higher? Probably not, as the taxman already gets a cut of the sale of the energy, and THEN takes a cut of the over-all profits in corporation tax. So the governments win without an extra windfall tax.

    It's really just governments trying to fill the gaping holes in their bugets caused by their policies, or trying to score votes.

  12. chris
    Paris Hilton

    Enron, California, blackout

    "Given that the companies (...) are operating in a competitive market these prices aren't being caused by either collusion or gouging:"

    Because deregulated energy markets are perfect and don't include:

    * collusion of companies on the supply and demand side

    * being gamed by speculators

    * natural monopolies

    * a vast imbalance of power over the end users

    Just like when Enron was involved in the deregulation of California's electricity market and played the system till it caused constant brownouts. That would *never* happen in the country where the people who invented this absurd ideological pursuit have had more time to play the market.

    More power to the noble freemarketeers who brought us the everlasting prosperity of securitised collateral mortgage debt!

  13. Anonymous Coward
    Anonymous Coward

    you state a truth, then ignore it 'cos you don't like it?

    > Yes, I know, politics is all about pandering to the prejudices of the populace, but really, this is going much too far.

    Er, either Obama and his team are king-sized fools without two brain cells to rub together, or, by definition, this particular pandering is *not* "going much too far".

    So, the story here is "American populace (like every other populace) so dim that they're easily bought by promise of a rebate for stupidly illogical reason"

    Except, we all knew that already ...well, except for the general populace, who obviously wouldn't know that...

  14. Pete Silver badge

    even more important

    .. is that energy companies are GLOBAL.

    When most people hear "BP made record profits... " or "Centrica's profits were £X per second ...", they immediately associate the company name with their parochial experience. So, BP means the petrol station down the road, Centrica means British gas, which means "the gas board". - Wrong.

    The small part of these global energy companies that the man in the street comes across not only represent a tiny part of these businesses, but don't even make that much money. So the popular view (egged on by the shrill headlines in the Red-Tops) is that petrol prices are high - so the garages are making huge profits from british motorists - so they should be punished with "windfall" taxes.

    In fact, most of the money is made overseas, in foreign oil-fields and only comes back to the UK because we have a liberal business environment that makes it worth their while to be registered (and therefore pay tax) in the UK.

    Even funnier - when listening to the "tax them 'til the pips squeak" brigade" is that they don't realise that their pension funds are MAJOR investors in these companies. Mugging them for a windfall tax therefore has the effect of reducing the energy company's profits - which would otherwise be paid to our pension funds. Net result: more tax for the government to waste, lower pensions for us. Duh!

  15. Anonymous Coward
    Anonymous Coward

    More tax?

    To summarise:

    "Energy" is subject to more tax and duty than virtually anything else, and retail prices are high as a result. Further taxing the companies "producing" that "energy" would lead to even higher retail prices. Pretty simple.

    However the tax revenue of governments is falling due to the credit crunch. People are spending less so tax revenue falls. In the UK the loss of revenue from stamp duty alone has been estimated at £3 Billion for 2008. So the government have to find ways of increasing revenue that won't annoy the electorate. Increasing direct taxes on Joe Punter will go down like a lead balloon.

    So what do they do? Tax companies who are deeply unpopular and they hope that Joe Public will cheer them. They hope that Joe Public is too stupid to notice that, in the end, it will be he who is paying the tax.

    Simplify this and stick it on the front page of the tabloids and the government wouldn't dare implement such a stupid tax.

  16. Anonymous Coward
    Anonymous Coward

    It's all talk...

    ...just to show (non)voters that they're being 'considered', to ensure that they never quite have enough movitation to actually vote.

  17. Angus Wood
    Flame

    Good article.

    Mr Obama wants to be elected, natch, and this will be a popular thing with the voters in the USA. It doesn't have to make sense since almost everyone won't undestand the arguments and, best of all, the long-term damage will be delivered in the form of a continuation of the existing state of affairs rather than a new turn of events.

    The perfect crime.

  18. Christopher Martin
    Alert

    Corporations don't pay taxes - People pay taxes.

    This whole concept can be summed up in this one sentiment. Any tax that is leveraged upon a company is ultimately a burden of the individuals. It results in a profit loss which hurts investors (people), a price increase which hurts consumers (people), and maybe downsizing which hurts employees (people). Every corporate tax that the angry citizen wants due to his irrational hatred of large economic entities is ultimately money coming from his own pocket.

  19. pctechxp

    I agree but

    what are people suppoosed who are struggling supposed to do while the market sorts itself out?

    I'm talking about those on low to moderate incomes, petroleum (or gasoline as Americans will insist on calling it) isn't essential to life but natural gas for heating/hot water/cooking and electricity for lighting and other stuff is.

    The arguments you make are economic sense but these things take time, as you say, the price of crude has dropped because people aren't buying so it will keep decreasing until demand starts to climb again (if there is any market as if there is mass unemployment any price will be too much) when it will shoot back up fast.

    so what do you suggest for those people that are struggling?

  20. Graham Dawson

    Obama may be smart...

    ... but he's a politician, and politicians do not inhabit the real world no matter how much they claim otherwise. They inhabit a fantasy world where they believe can change things with a wave of a pen and a snap of their fingers. Nothing illustrates this more than the constant claim that "we can't drill our way out of the problem" of high oil prices. Increasing the supply doesn't solve the problem of a lack of supply?

    Right.

    And Brown with his disappearing 10 pence tax band claimed he was "helping" the very poorest amongst us, incidentally increasing the tax burden for most of them overnight. Politics, in the end, is all about taking your money and then paying you some of it back to make you stop complaining. Say what you like about the oligarchs and robber barons of old, at least they didn't steal from you with the pretence of virtue and "helping".

  21. Anonymous Coward
    Anonymous Coward

    And the retailers?

    The blame is being laid squarely at the door of the big "energy" companies, and yet the real villains appear to be the retail companies.

    Wholesale oil prices go up and petrol, electricity and gas retaillers immediately increase their prices. Petrol retaillers tell us there is a direct relationship between the wholesale price of oil and the price of fuel at the pump. The relationship between oil and gas prices is a vague and complex one, but gas retaillers tell us it's a direct one and hope for the best. Only a small amount of our electricity is generated using oil based fuels, but the electrical retaillers blame their gas suppliers for putting up their prices for the increase in the retail price of electricity.

    However the wholesale price of oil and indeed petrol falls and do we see a fall in fuel prices at the pump? Do we see a fall in domestic gas and electricity prices? No. Prices at the pump may fall, but not by as much as they rose when the wholesale price went up. The fuel retaillers now tell us that the retail price of fuel is not governed by the wholesale price of oil, but by supply and demand (seriously, if you missed it they tried this on monday). Likewise domestic "energy" stay high, and the retailers likewise inform us that wholesale oil prices have no influence on retail domestic "energy" prices.

    So basically it appears that the retaillers of "energy" are leveraging media panic in order to fleece us. Didn't that sort of thing used to be called "profiteering" and wasn't it illegal?

  22. BGrant
    Paris Hilton

    You're missing a lot of facts

    The oil market is NOT a supply/demand market. It used to be, but is now driven by speculators & artificial supply restrictions. Speculators in small numbers are good things, but there is too much speculation in oil currently, artificially driving up the cost. Who are the speculators working for, hmm?

    Yes, approx 9% profit isn't a high margin, but as the market increases in size, the profit margin is supposed to shrink. Think AT&T before the breakup.

    Economies are driven by consumption. Consumption is driven by cost. Cost is determined by the initial cost of the item/service/etc + profit + transport. For big oil, they get a profit from the transport & from the actual profit. In fact, transportation is a compenent to the creation of everything, so oil is actually making a profit FROM EVERY STAGE OF PRODUCTION FOR EVERY PRODUCT PRODUCED!!! Wankers

    Most of big oil's profits aren't from gas or diesel fuel. Most of a barrel of crude goes into other, more profitable divisions (plastics anyone), so losing a little on fuel won't impact big oil much, if at all.

    Paris - becuase even she isn't dumb enough to fall for this FUD

  23. muzchap
    Alien

    Oldest trick in the book...

    As usual these 'initiatives' are the brain farts of 'spin doctors'.

    The 'notion' that the government is giving *anything* back is ludicrous.

    You are taxed on income, you pay VAT on everything purchased and even pay an extra insurance and fuel subsidy. The government have been raking it in with the hugely infalted oil prices (abating the revelation of this countrys insolvency for a little longer).

    Therefore, the government giving families (unfair, as I pay my tax too!) a rebate to be used against 'bills' is an empty gesture.

    What the government should be doing and I applaud Russia for this, is re-nationalising energy suppliers and/or price fixing any suppliers to this country.

    By placing a necessity (and it is a necessity in this world) in the hands of shareholders, you create an artificial market which only serves to punish the consumer time and time again.

    In the next Election - I would rather vote for Anarchy, after a period of instability, I would wager a bet that people would find a decent compromise - the role of the government is soley that of spreading propoganda and misinformation creating a soceity based purely on 'fear'.

    If you haven't seen Adam Curtiss's documentaries spanning 25 years, I would urge you to - brings a whole new rationale and perspective to 'governance' by an authority...

    </ends...>

  24. John

    more tax means lower dividends too

    IANASB (I am not a stock broker), but aren't all these publicly owned energy companies the only thing keeping our pension funds going at the minute. making the companies pay more tax means they will be giving out smaller dividends, so your pension fund won't be worth as much. And lower profitability means people won't want to own the shares so much, so the price of the shares will go down.

  25. Anonymous Coward
    Anonymous Coward

    Yes, if x > 2

    "That big numbers confuse people?"

    There is that distinct possibility, yes. We have heard of the Amazonian tribe whose words for numbers amount to "one", "two", and "lots". Very amusing, until you realise how many supposedly educated, civilised people are scarcely more numerate than that. We have people who bet on the lottery; people who think that a terrorist attack is more of a threat than being run over; and (especially) people to whom government spending is just a lot of big numbers, because they never learned the trick of dividing by the number of taxpayers.

    And it's not just hoi polloi who are innumerate. Our revered leaders, most of whom these days seem to be lawyers, journalists, or other other-worldly dreamers, can't count much above single digits either. So yes, to understand these discussions better, you have to imagine that all numbers and sums sound like the adults in Peanuts - "wah wah wah..."

  26. Big Dave
    Coat

    But should "supply and demand" be left to control something...

    ...that is, pretty much, these days an 'essential' not a luxury item. Also, it ain't just supply and demand once the city boys get their fingers in the pie is it?

    This isn't like grain getting more expensive, so we eat less pasta and more potatoes. If (old) people can't afford gas, they risk death this winter. They can't burn some trees until things 'get back to normal'. If hauliers can't afford diesal they go out of business, they can't suddenly switch over to biofuel (pfft) or 'cut back a bit' until things 'get back to normal'.

    The job of the government is not to change the world, no - they can't fix the fact that we are running out of oil/gas/whatever (ignoring the OPEC stranglehold and wideboy speculators for now), but they can perhaps do something to stop people dying and losing their livelihoods while adjustments are made.

    One thing that is certain: Oil/Gas/etc. companies will not 'help out' anyone but their shareholders without being leaned upon by governments. They, and the law of supply and demand, do not have any social responsibility.

    Maybe a windfall tax or a hand with your bills won't fix things, but nor will saying "oh, it'll sort itself out if we leave it alone (and my Exxon shares are doing fine, so bug off)"

  27. Anonymous Coward
    Anonymous Coward

    There's a difference between a windfall tax and...tax

    A cogent argument but a Windfall tax is a one-off (or relatively rare anyway) that is designed to cream off excess profit (and that's profit pounds or dollars not percent) to fulfil a specific need, and do it faster than the market will manage (winter's a-comin' and the market doesn't care). Its also why in the Obama example you end up with the slightly absurd situation of taxing with one hand and rebating with the other; you're not trying to alter the underlying tax structure with the political debate that would entail.

    I'm not usually a fan of government intervention at all if it can be avoided, and certainly in the UK's case you could argue that all that extra fuel multiplier revenue the government has been earning should be more than enough to rebate families in need, but given their incredible inefficiency, Labour needs all the cash it can get.

  28. Duncan Hothersall
    Heart

    Caveats

    Many mentions of caveats, and yet a fundamentally flawed one-sided conclusion because the caveats were not explored.

    One of the biggest caveats to the central argument is that the market is NOT free, never has been and never will be. Energy markets in particular are so tightly regulated, politically controlled and militarily underwritten that it is frankly ridiculous to posit free market hypotheses as to their behaviour.

    The global oil and gas business is far more like a cabal than a free market, and that is why the windfall tax is a practical idea. It may not be the right idea for this moment, and the author makes some valid points, but it is entirely practical.

  29. Arnold Lieberman

    @Percentages

    Let's hope the pension fund your employer/you subscribe to doesn't have investments in the energy sector then!

    Such huge profits might look incredible, but that gets spread around an awfully large number in investors, so it doesn't really matter if a fund invests in 10% of 10 smaller companies or 10% of one huge company, the return for a given amount of outlay is the same.

    Apart from all of that, does anyone really belive that a windfall tax will be used to reduce the consumer's tax bill? More likely it will disappear into general government spending.

  30. Perpetual Cyclist
    Unhappy

    Sunset industry.

    I'm not really sure about taxing the oil and gas extracting (not 'producing') industry, but taxing the end user is a no-brainer. It is widely accepted that the global supply of oil excluding OPEC countries has just about peaked. Many people think OPEC is on the cusp of peak supply as well. The UK has gone from peak oil exports to oil importer in just SEVEN years. We exported our oil at $10 a barrel. We are importing OPEC oil at $113+ /barrel. We need to cut back, economically, environmentally, permanently. The £ is nose-diving even as I type, we are falling into an energetic and economic black hole.

    The only way out of this is to use a LOT LESS ENERGY. Conservation is key. Smaller cars, better insulated houses, shorter commutes, fewer energy sucking household gadgets, colder houses in winter, no air con in summer, less long distance holidays, etc.

    If the government had the balls to tax inefficient cars off the road, demand for oil would go down, the price would go down, the government could offset it's tax shortfall, the balance of payments deficit would improve, the pound would rise, further reducing the cost of oil.

    It won't happen. The government will cut oil taxes in real terms, the country will go broke. We still won't be able to afford to drive.

  31. Steve

    The classic economist's mistake.

    You're assuming that this only involves economic issues and you seem to have missed the distinction between a person and a business..

    "People are seeing that the prices they pay for energy are going up and that will of course trigger some disgruntlement. But why they should then call for higher taxes on the producers boggles the mind."

    They are calling for a windfall tax because those rising energy prices are allowing a small number of people to make extortionate profits at the expense of the most vulnerable in society.

    The oil companies are posting profits that in many cases are increasing faster than fuel bills are rising, yet at the same time they are blaming those bill increases on their rising costs. I've come across some farily esoteric maths in my time, but that doesn't add up. The fuel companies have clearly raised their prices by more than was necessary to pass on the rising costs of oil and are simply profiteering. They are a business and exist solely to make money and if they see a chance to gouge out some more profit, they'll take it. Now, if they were making luxury sports cars or or diamond necklaces, that wouldn't be an issue, but unfortunately, heat & food are not optional extras.

    It shows a real disgregard for other people to believe free market forces are the best way to deal with essential resources and frankly military grade naivity to claim that the oil industry is anything approaching a free market - it's a government subsidised cartel.

    Do you think the likes of BP and Exxon would be around if they had to pay for their own invasions and regime changes? Sure, they might chuck in a bit of token cash here and there but the big bills always land with the taxpayer.

  32. Anonymous Coward
    Flame

    @ Economics GCSE?

    I don't think he meant to imply that the oil industry is part of a theoretical perfect market, where new companies spring up like mushrooms after a rain of high prices, but rather that if the available profits become high enough some capital investors are going to seriously considder creating a new oilcompany to make them money (rather than investing in an existing one where they have to share their cake). True that any such venture might not be a vertical oil major in the first week, but they might actually sell their raw oil (if they start as an EP company) a bit lower than the rest to drum up some interest.

    Making a less-than-perfect market even more difficult to operate in isn't likely to encourage new investment, or drive any prices down. The opposite is more likely to happen.

    All those in favor of even higher oil and gas prices please raise your hoof's in the air and go 'bhaaaaaa'.

  33. Anonymous Coward
    Thumb Down

    Poor Logic

    Big profits for Exxon don't mean big reinvestment - extra profits mostly mean extra dividend payments to shareholders.

    Also, you can't just look at the end profit of $12 billion. How many extra billions were spent on buying new oil fields etc. to try to expand their market share (for the sake of trying to increase the value of their shares).

    Bad article from one of the puppets of America's oil masters....

  34. Mr Chris

    Margins

    "Yes, it's true that Exxon's recent quarterly profits were, at near $12 billion, big. It's also worth noting that turnover was $138 billion, giving them a margin on sales of 9 per cent: which isn't really, anything much to write home about. "

    Bloody hell chap, do you know what margins most businesses run on? That's a very decent margin right there compared to most.

    I stopped reading at this point as it's pretty clear you have little to no understanding of how businesses operate.

  35. Adrian Challinor
    Stop

    good article

    Tim has hit a number of nails on the right heads with this. Yes, some of the Exploration and Production (E&P) companies make large profits - but the level of their capital investment and the risks that they run are commensurately large. Finding the oil, getting a drilling rig in to thr right place, making it productive, all without totally contaminating the surrounding area is not cheap. Everyone can wish away that it is, but it simply isn't.

    Nor is it risk free. Not withstanding the technical dangers (this is a product designed to burn after all) or the E&P risks (not every well gets you a return on investment) there are commercial issues. Ask Shell how they feel about Sakhalin Island and their investments in gas extraction, or BP and their joint venture in Russia. They will tell you why they need to make profits, having just seen their investments de facto nationalised by the Russian government.

    I don't suppose people will be running to invest in the caucuses after the small tiff that Russia and Georgia had this week. Wonder what the risk factor on BPs investment in the BTC pipeline is today?

    And these companies make huge payments to the various revenue collectors in the areas they operate in.

    If governments are serious about reducing energy prices to householders, how about reducing the tax paid by consumers? Certainly in the UK, the gross tax on petrol is huge - it would be cheaper for me to fill my car with good quality french brandy (bought in France!) than petrol. But this is not going to happen - in the UK our Chancellor has already spent the windfall raised by higher market prices on proping up failing banks.

    But then, who was it who said that common sense was not a prerequisite for public office.

  36. Steve

    Stupidity: them or us?

    "Is it that those politicians, with their groups of extremely expensive and presumably highly intelligent advisors, are not intelligent enough to see that their plans are entirely counter-productive? Or is it that they know they are, but think that we the voters are too stupid to understand it ourselves? ®"

    Given the RTTM debate on speed camera effectiveness (an example from El Reg:

    http://www.theregister.co.uk/2008/08/08/speed_camera_figures/ )

    I tend towards the latter

  37. Richard
    Boffin

    Missing anything?

    Deliberately leaving out the effects of OPEC when talking about oil is like leaving out the US when talking about defence spending.

    Mind you, it's funny how defence companies never face a windfall tax in times of war. A letter to the Grauniad may be in order... ;)

  38. Chris

    Gr8

    While I agree that the free market will eventually step in and reduce these excess profits, it doesn't stop companies from amplifying any discrepancies between the cost of materiels at source and the price they are sold for to the public to generate even more excessive profits at the expense of increased poverty of the consumers.

    Also note the wording 'eventually'. Adam Smith may have the events correct, but the timing details are crucial - while waiting for the free market to correct this situation consumer poverty will likely be further increased.

    Great system for corporation, but not so great for the people suffering in the name of profit. One of the things lacking from the free market is human compassion - hence the need for governmental intervention to curb corporate excesses.

  39. n
    IT Angle

    why not?

    It's redistributing wealth from investors and private pension funds and energy company shareholders (like the author of the article funnily enough and thousands of other people) to elderly poor who are being hit hard at the expense of record oil company profits.

    Scaremongers who don't like the tax forget to mention the other option....NATIONALISATION.

    So, more tax on your highly profitable shares or nationalisation, which is it to be?

    Thought so.

    However, if as one poster suggests, any of this tax money goes on quangos, pogo-stick-to-work initiatives, or "environMENTAL" projects, i would be against it. (And i strongly suspect this money will be wasted knowing this gov.)

    All the oil company profit was not created by the companies effort (as the author points out 9% profit is not great), rather it was created by gordon brown and chums who have created conflict in oil producing and transporting countries.

    Is anyone else getting tired of this authors political ranting, check out "other articles by this author" link at the top.

    Ok mate. Your a neo-con. WE KNOW. If i want to read neo-con articles there are dedicated political websites. Why are you even employed on reg.

    IT?

  40. goggyturk

    The problem is in the usual place...

    "has the energy become more expensive to produce as a result of the extra demand?"

    Actually, yes, much more. The day rate for a semi-sub rig now in the North Sea is typically £4-500k per day and still heading North. Before the oil price started to rise you could get such equipment for £125k and the same holds true for all other resources needed to extract oil, including qualified, experienced people. There are huge expenditures and risks involved in the kinds of projects that oil companies take on these days and no guarantee that the oil price will remain at current levels (although given that a barrel of oil cost less than a barrel of mineral water until fairly recently, I contend that we're now paying closer to what we should be, but I digress..)

    The other side to this argument that nobody seems to understand, is that there is no correlation between profits made on the international oil markets and what companies like BP charge on the forecourt for petrol. They are two entirely separate businesses and can't be magically connected together to ensure a plentiful supply of cheap fuel, not least because they would end up in court for anti-competitive practices.

    If you look at the split on the forecourt, BP and Shell only run these stations (in fact they're franchises) as a marketing exercise. They make very little money out of them.

    Go and knock on Big Gord's door if you want cheap fuel.

  41. Gerard Allwein

    language

    The key to Obama making those silly promises is to follow the money (big suprise). Suppose the man gets elected and manages to pass his windfall profits tax and gets to spend the money on giving away $1000 to every family (no doubt not any "rich" families), then he gets a down payment on the next election by (1) claiming to do something for "American families" (all hail the American family, family values, apple pie, etc.), (2) solving the energy crisis (a politician doesn't have to actually fix anything before claiming s/he's fixed it), (3) smacking those big bad oil companies that are constantly spraying cute birdies and fishies with oil, (4) skimming off any excess (after the $1000 giveaway) to piss off on socially conscious, enviro-friendly, cause de jour of the whiny political class.

    Gerry

  42. Bryce Prewitt
    Heart

    Thank you.

    This article is a very nice read, especially seeing as how I'm an American who has been banging this drum for far too long to idiotic meatheads who think that the solution is to "start stringing oil men up on trees" or "nationalize the oil industry!" or some such other nonsense.

    The Obama crowd annoy the piss out of me, as well. Sigh. Why is our general public, even the so-called "intellectual" left, so easily led and ignorant? They're all a bunch of walking, talking, unthinking cliches. You would think that the portion of our populace which labels itself progressive and diplomatic would have a better solution than "tax them, tax them to hell, that'll teach the dirty buggers!" You know, a good compromise, which benefits everyone involved, doesn't punish a corporation for doing what they do best (make money), and doesn't punish the general public for forsaking public transportation and fuel efficient for more comfortable, beefier status symbols.

    Someone's gotta give at some point, but much like the debate over whether p2p is theft, I doubt anyone in power or in the next couple of generations is going to have the guts to stand up to a couple hundred million people, call them a bunch of whiny twats and do what's right.

  43. amanfromMars Silver badge

    Lies Spinning out of Control .....?

    This article paints an altogether different picture ...... http://biz.yahoo.com/ap/080812/corporations_income_tax.html

  44. Mark Silver badge

    Re: "Economics GCSE"

    The first poster is correct to criticise Tim for his analysis. You can't base an argument around a flawed economic analysis.

    To AC - its not just a case of being a capital investor wanting to invest in oil/gas production/supply. The barriers to entry are huge and include:

    - capital investment requirement

    - extraction technologies

    - exploration skills/tech

    - licensing - governments are very unlikely to license their fields to an unproven extractor - too risky.

    - access to distribution networks

    All of this is pretty much sewn up by 4/5 huge extraction/supply companies with a number of small exploration companies prospecting. Its not an industry you can just go out and buy an oil field with no experience or track record. Its an oligopoly and we're stuck with it.

    The whole issue of windfall taxing was forced (in the UK anyway) by Britsh Gas announcing devastatingly high price rises the day before Centrica announce record profits. The windfall tax isn't supposed to be an economic intervention in a market its supposed to be a disciplinary measure on a powerful player abusing its power in an oligopolistic market.

    Please Tim - stop posting such lightweight analysis. How long have you been on the payroll of the energy utilities exactly? Some of you what you say is insightful but its so one sided and limited an analysis as to be almost worthless.

  45. Matt Eagles

    Another one doesn't bite the dust.

    Much as I enjoy Mr. Worstall's assaults on the straw men of the environment I'm struggling to spot the target this time. Who, of any vague consequence, is demanding a windfall tax on the energy industries? Apart from a letter published in a newspaper (always a place to find important public policy isn't it?) and a misrepresentation of an Obama policy (Getting polluters to pay for clean up, not an oil windfall tax) I can't spot the straw man this time.

    For the next article we could have a savage attack on some chap called Dave I met in a pub once who thought that people should walk rather than drive and the world ending effect that would have on the economy.

  46. goggyturk
    Flame

    Another thought...

    If (as some people seem to think) that some shadowy cartel is artificially keeping oil prices high, just look at history. They didn't do a very good job in the late 90's, when prices fell below $10 / bbl, or even in the late 80s when a similar thing happened. If there is an evil genius at work, it hasn't done a very good job at all up until about 4 years ago (maybe). Even now, there's no certainty that prices will stay this high. My personal opinion (and it's just that, so flame away) is that prices will stabilise and even drop as Iraq begins to export more.

  47. Fred Goldstein
    Alert

    Shot down by your own numbers

    Lessee... Exxon made $12B in a quarter, that's a rate of $48B/year, and their equity is $120B. That's a 40% return on equity. Maybe triple what a typical company would hope for. Nice work if you can get it.

    It's not a free market. Exxon's boys Dick'n'Dubya blew a trillion of borrowed money to invade Iraq for the primary purpose of reducing the oil supply, thus raising prices. Warmongering scares about Iran raise prices. Russian hanky-panky raises prices. Even with a windfall profits tax, the rate of return on oil investment would be high enough to attract investment.

  48. I.M.Fantom
    Paris Hilton

    Distribute the cash to shareholders

    Last time 5 years ago they called for "excess profits taxes" on oil/gas, the refinery stocks I own all had huge special distributions to the stockholders to lower their cash holdings.

    Paris - because she's happy getting a huge distribution.

  49. jens moewes
    Heart

    The answer

    To answer your question - its the latter - the voters are too stupid to understand it.

  50. This post has been deleted by its author

  51. superguy
    Flame

    There's some merit, but missing info

    There's some merit to what's being said. The government getting involved in the market is one sure way to disrupt it and it can cause some problems.

    However, I think some points are being missed.

    Of the legislation I read, a tax on windfall profits is in the works. However, the tax seems to be graduated so it's not an across the board tax increase on all profits. Addtionally, the taxation is geared to help spur exploration and more drilling. Companies like Exxon are doing very little drilling ... they have no incentive to with high prices. Some are doing it. A lot are focusing on stock buy backs and paying huge dividends. If they invest more profits in exploration, drilling and alternative fuels, they can avoid a lot of the tax.

    Is it the right answer? I don't know. However, I know what's happening isn't working either. Points about speculation making the market crazy and breaking things are valid too. Gotta wonder how much FUD is spread about by both sides.

  52. Anonymous Coward
    Flame

    Recent new article

    "That means consumers will now pay £28.45 for an average basket at Asda (up £6.37 on last year) according to the report, £29.67 at Sainsbury’s (up £6.18) and £29.90 at Tesco (up £6.29).

    However, the fact that the price of essential commodities has rocketed in price by up to 118% in just six months ought to worry consumers more, according to experts.

    Between February and August 2008, for example, the report shows bread has soared by 27% in Sainsbury’s (from 59p to 75p), and by 22% in Tesco and Asda (from 59p to 72p).

    A (500g) bag of fusilli pasta from Tesco has risen by 41.8% (from 55p to 78p), while the supermarket has also imposed a staggering 118.9% hike on the cost of Basmati rice (from 90p to £1.97 for 1kg).

    Asda, meanwhile, has raised the price of its pasta by 27% (from 55p to 70p) and the cost of rice by 52.6% (from £1.14 to £1.74); while Sainsbury’s has hit customers with a 17.9% hike on pasta (from 67p to 79p) and a 51.2% increase on rice (from £1.25 to £1.89)."

    So all you windfall profits folks think this is just cost of liviing going up or we should be taxing the crap out of these corporations for their markups, too? Why aren't you talking to your government about the sorely underinsulated housing you got and why it costs so bloody much to heat it, eh? I'm sure that's all someone else's maximising their profits...hell, tax them, too!

  53. RRRoamer

    @Everyone...

    It is strange to see SO many people talk about the oil companies and how much POWER they have to manipulate the oil/gas prices. If this is actually true, then explain ONE THING to me:

    Why in the HELL didn't they USE this power back in the 1980's when oil was around $10/barrel and they were going broke????

    I lived in an oil town during that time. It was no picnic for ANYONE working in the oil industry (or in an oil town) during those times. That went on for a couple of decades until the recent spike in oil prices brought things back to life in these oil towns.

    Of course, the true answer (and the one a lot of folks don't want to actually talk about) is that they DON'T have this magical ability to control oil prices. The global oil market does that. And as large as each oil company is, there are WAY too many of these huge oil companies playing in the global market for a few of them to actually "manage" the oil prices.

  54. Jerry H. Appel

    Windfall roulette

    This article, while flawed, makes a valid point or two. The most valid is the idea that a Windfall Profits Tax is wrong-headed. I must say I am disappointed by Sen. Obama's political position as I expected more, but it seems his advisors are stuck in the 1970s. My brother, an oil man (mostly gas) for 30 years, made the point that we are all victims of our experiences. We all grew up with the eco-nightmares of oil spills off the cost and the Exxon Valdez, but the technology is much safer these days and faster. Sen. Obama's position is one that stinks of fear as does Sen. McCain's. Both are afraid to face the real issue, and it is costly, and painful. I've advocated this position for years, raise fuel prices. The "free" market economies of the world know only one sure behavior modification tool, price. Regulations are a failure for the most part as people either ignore them or find a way around them. Price works as world consumption declines and US consumption declines. If you raise the price artificially then you can drive down consumption even further. Try this: http://www.nytimes.com/2008/08/10/opinion/10friedman1.html

    One poster claims there are great economic barriers to getting into this and I can tell you my brother has suffered from one of them. It takes a lot of capital to get started. He and his partner took years to raise about $30 million to drill a bunch of successful gas wells. They had a great track record, met all their profit mile stones, scoped out the property, but needed $500 million to get the job done. No one would lend it to them. While he's not suffering, he could have been a whole lot wealthier, and I could have been borrowing a few bucks now and then. ;-)

  55. Herby Silver badge
    Heart

    Actually some common sense!

    Taxes are just a cost of doing business, passed on to the final consumer. How much of the price at the pump is taxes? Quite a bit! Everybody has their hand out for a tax here and a tax there. Any "windfall" will be seen at the pump as well.

  56. Mark
    Stop

    @RRRoamer

    No leverage.

    Now oil has passed its peak whilst demand continues to grow, they have leverage.

    That's not to say that is how it IS, but it is how it COULD BE.

    Ergo your question was worthless rhetoric.

  57. Anonymous Coward
    Coat

    Hugo (or is it Ceaser) Chavez has it right

    We should just take over all the oil companies equipment and make it state run. It's a utility, take it away from the oil companies. Then the government could run it at the break even point or even a loss.

    We'd see cheaper gas then!

  58. Jason
    Stop

    Too Much Profit?

    Soo.... Where does one draw the line of "too much profit"? I for one (living in a free nation, free market), enjoy the possibility of being able to make as much money as I want from my business. This doesn't mean skipping out on my responsibilities (standard taxes) by any means. However if they take "excess" profits from one company, what's to stop them from taking that from my company? Is oil special just because it's somewhat necessary now (hasn't always been necessary, probly won't be forever)?

    My arguements generally fall back to private businesses vs corporations. Corporations such as Exxon Mobile have a responsibility to shareholders for solid profit margins, in this case shareholders are mostly pension funds. However some sort of social responsibility encouragement (worker development, infrastructure improvements) would be far more beneficial than a windfall tax giving people another $1000 to spend on gas.

  59. Anonymous Coward
    Anonymous Coward

    it's all relative

    "Yes, it's true that Exxon's recent quarterly profits were, at near $12 billion, big. It's also worth noting that turnover was $138 billion, giving them a margin on sales of 9 per cent: which isn't really, anything much to write home about. "

    Bloody hell chap, do you know what margins most businesses run on? That's a very decent margin right there compared to most.

    Compare it to a software company, such as Microsoft - which is running close to 30% net profit - yet how many people are yelling at taxing the monopoly?

  60. Doug Glass
    Go

    Election Year

    It's an election year for Prez of the U.S. of A. Don't believe anything the morons say no matter how much sense it may appear to make.

    The whole process is a race to see who can out-stooopid the other and in the end the American people elect who seems to be little more than the lesser of the two evils.

  61. Andy Bright

    Yes, a windfall tax is blindingly stupid

    About as stupid as saying offering oil companies more places to look for oil will result in lower prices. Okay, it will. It'll result in petrol/gas prices being slashed by as much as 3 or 4 pence a gallon. For about a week. In ten years, which is the absolute minimum amount of time it would take to rush the 3-7 days worth of oil to the market.

    Supply issues? Not with oil there isn't. There is enough oil at the moment to adequately supply every market that wants it, and will be for at least another 3 or 4 decades. The supply problems don't start until you hit refineries.

    I'll give you the overwhelming example of why petrol/gas prices are this high.

    In Alaska (where I live) we have a little bit of oil. About enough to hand out a few billion dollars to the general population every year. Money that is made from taxing oil corporates. Alaska has no taxes and turns a profit. All good until you start buying petrol/gasoline or heating oil or electricity or natural gas.

    The average price per gallon of gasoline in the US is $3.80 (today). The average price in Alaska is $4.40, rising to $12 per gallon depending on where you live.

    We drill our own oil, we refine our own oil and we sell the gasoline produced in our own gas stations. Tell me exactly how 1/2 million people is too much demand for millions of barrels of oil per day? Tell me why we pay more, when the oil companies have no middle men, no market speculators, no anything to go through.

    Now tell me again that oil companies don't set the price of energy to what they want it to be. Tell me again that giving them more land to drill is going to lower the price of energy within ten years. What, you're going to add a clause to the permission that says they must lower prices? Because without one there's absolutely no fucking way they will. Why should they? If people are paying $110-$140 / barrel today, why should they sell for less tomorrow? Because they have more? They have more right now, more than they need to supply the market.

    Oh yes, we have a shortage in supply. Just the other day I went to fill up and the petrol station said "No, sorry, we're out, too much demand you see.". I call bullshit. In 30 years time, you might have a point about supply. Today, with maximum capacity being delivered by everyone that can deliver, not a chance is there a supply problem.

  62. J
    Dead Vulture

    Yeah, right...

    "I realise that in the middle of an election that the small still voice of reason isn't going to get much airplay"

    Funny how everyone thinks *they* are obviously that "small still voice of reason"...

    Anyway, the global casino creates the problem and then the solution advocated is to... just let the casino solve it by doing more of the same!? Sounds very reasonable indeed, natural selection at its best. And we know how that one works out for the not-so-fit.

  63. Anonymous Coward
    Coat

    How 'bout a Windfall Regime Change tax?

    'Nuff said.

  64. Matt

    I am shocked

    >Yes, approx 9% profit isn't a high margin, but as the market increases in size,

    >the profit margin is supposed to shrink. Think AT&T before the breakup.

    At the utter blissful ignorance of so many posters here are buying left wing propaganda hook, line, and sinker.

    Profit margins shrink as size grows? How on earth do you attract capital that way since by definition it would be in your economic interest to invest in other areas you can attain higher rates of return?

    AT&T before breakup was a highly regulated monopoly. It's profits weren't low due to market size, they were low because those profits were guaranteed by a complex system of regulations that assured them a set rate of return under favorable accounting rules in exchange for providing universal service and being protected from competetion.

    One recent show one proud liberal was waxing poetically about how good the high energy prices are, and she felt the pain of the working class, so we should provide them energy tax credits (i.e. tax everyone else already paying more for energy in order to encourage more consumption by others for whom the energy would be relatively cheap).

    Oh well...if energy costs do not collapse soon, next year's municipal budget season in the U.S. is going to be a hoot. Taxpayers, particularly the fixed income seniors who turn out consistently and in large numbers (unlike the mythical Obama Youth), will not tolerate even zero-increase budgets after this winter. They'll be looking to squeeze blood from the stone of municipal budgets in those communities that approve them by referendum, and even where it's all by represenative government...the city councils will be under enormous political pressure to cut taxes.

  65. David Barr
    Coat

    Over Simplified

    There's a number of things that have already been pointed out which really should go into a balanced article. However it's already a long article and far more than the average Guardian flock member would read before hitting "Stick it to the man" on their poll in favour of a windfall tax.

    Economics is apparently a dying subject in Britain, there's not enough interest in it at schools I read. In my own not in the least humble opinion, anyone without a basic grasp of economics shouldn't be allowed to vote. Worse still is our populist government who feel the need to ignore the mandate under which they were elected, and rather than become informed on issues which affect all of us, and handle them for us, they seem to worry more about being re-elected and just go for what White Van Man says he wants in The Mirror.

    Would you go to a doctor who diagnosed you with whatever you felt like you had? "Doc, I've been feeling really tired, I think I've got ME" "Ok. You've got ME" "I can't have cancer, I feel fine" "Ok, no cancer then"

  66. Michael

    Elasticity

    The problem is how inelastic demand for petroleum is. It's so critical to our daily lives that the price can increase by insane amounts, and it will only marginally affect how much people use. The same is true with water consumption, which is one of the reasons most water districts are government chartered, privately operated monopolies.

    As much as I like free markets, they don't work for public utilty goods like water, power, and gasoline. I honestly think the government should charter and regulate a gasoline monopoly with (relatively) fixed prices.

  67. Tim Worstal

    Ummm

    "Bloody hell chap, do you know what margins most businesses run on? That's a very decent margin right there compared to most."

    Perhaps you should have read further then. I do actually link to industry sector by profit margin. Oil and gas is 60 th in the list.

    "All of this is pretty much sewn up by 4/5 huge extraction/supply companies with a number of small exploration companies prospecting. Its not an industry you can just go out and buy an oil field with no experience or track record. Its an oligopoly and we're stuck with it."

    Umm, no, it's not an oligopoly.

    http://www.thehindubusinessline.com/2006/09/06/stories/2006090603850100.htm

  68. Anonymous Coward
    Flame

    @ @ RRRoamer By Mark (+tangent rant)

    I don't really want to get into a discussion on the Peak Oil theory itself, suffice to say the real world seems to differ slightly from it (I seem to remember reading in the 90's that we wouldn't have _any_ oil left by now). However, you are correct that EP companies are charging more for their crude now, and this _does_ have to do with Peak Oil, or rather, it has to do with easily drillable conventional oil supplies.

    Shell's Perdido platform in the gulf of mexico (currently under construction) will drill for oil at a dept of 8000 feet (roughly 2.5km). It already has and will continue to cost a shitload of money, not just the building of it (which is already completed), but the part that goes on the ocean floor isn't just bloody hard to successfully accomplish (e.g. expensive), 10 years ago the technology used to accomplish it didn't even exist.

    point is, go far enough back and there wasn't even any reason to drill for oil in the sea, rigs on land were both cheaper and easier to transport oil from. Then that oil started to run low, and they went to shallow waters. now they've developed the technology to go even deeper.

    Oil isn't just made into petrol or diesel (not that you made that comment, I'm just going on a tangent). Our society is based on it. In case you didn't know; everything in your house, from the shoes you wear, to the cereal that you eat, to the uranium in the reactor down the road is only possible because of oil.

    Oil is more expensive now because of 2 things: a dramatic increase in consumption (India & China, although I don't see how we can shake our fists at them and demand that they stop using oil at the same insane speed that we ourselves do), and as you mentioned yourself; easy oil has just peaked.

    Windfall tax theory goes something like this: It costs the oilcompanies more now to make 1 liter of petrol than it ever has, so the price of petrol (and all comodities that depend on oil.. in other words pretty much everything) has gone up. We will correct this by making it more difficult for oil companies to make money, and take the money away from the ones that still manage to turn a profit. This will increase competition and lower prices.

    Spot the flaw.

  69. James Butler
    Thumb Down

    Not market forces

    I agree with Fred Goldstein and others. There's collusion, alright, just not as explicit as those who seek it are used to.

    Check out any and every bit of data regarding historic oil prices and you'll note sharp increases whenever war threatens production. In particular, you will note that the current uptrend began with the invasion of Iraq. Prior to that point, with the only notable exceptions being spikes during previous oil-state war actions, oil prices have been relatively stable for decades.

    It's not so much a windfall _profits_ tax on the businesss because they are honestly "earning" too much money for the market to support, but rather the _retrieval_ of funds that have been inequitably flowing to these ogliarchies as a result of manipulation by those that run them ... including Bush, Cheney and their families.

  70. Steven Marsh
    Thumb Down

    Power Arrived In 2000 election

    Nice try Mr. Worstall, you almost pulled it off with this piece but there's a few problems. First let me address some of the comments.

    Why didn't Oil companies do something back in the 80's and 90's when prices were $10 a barrel?

    Short Answer: Because Bill Clinton was in office!!

    In 2000, the oil lobby and its unholy alliance with the Christian Reich got an Oil Man (Dick Cheney), and his bumbling sidekick (Dubya Bush) into office!

    Dick Cheney for those who don't was the CEO of the larget Oil field services company in the world, Halliburton, right before his VP duties.

    The Oil lobby is huge and powerful, it was able to put Bush/Cheney into office, that was prerequisite to todays state of affairs.

    As someone who lived in the West Texas Oil Patch during the 1980's I can tell you all about the complaints of those in the Oil Business at that time. Following the oil bust of the 1980's prices were TOO LOW to merit drilling anywhere in the US or offshore for that matter.

    Today there is a market environment that is VERY conducive drilling in the US and the Iraq war is nothing more than a resource grab that will allow US oil companies to stay in the game in the middle east as well. Ask yourself if there were no Oil in Iraq would a single US Soldier be there?

    Now, back to your article Mr. Worstall, you try to make it sound like Mr. Obama wants a windfall profits tax purely for the sake of "pandering" to the populace. But I ask this: Have you or anyone else read the actual legislation that hasn't yet been proposed? Perhaps you would find that Mr. Obama proposes taxing profits that aren't reinvested, or perhaps you would find that there is much more benefit for the American people as well as our energy future to have Oil profits invested rather than giving the already superwealthy top management a bunch of gimmes.

    Lastly, Big Oil is the root cause of much of the conflict, pollution, and other problems in the world. The Oil lobby has very successfully stifled the quest for alternatives in the US. Todays high gasoline prices are really the only thing that has caused Americans to curb their insatiable demand for gasoline and is going to spur the shift to alternatives. By my reckoning the Oil industry is vastly oversubsidized by the American taxpayer and all it produces is more headaches in terms of traffic, high food prices, and geopolitical conflict.

    For Americans much of the problems associated with Oil and energy are "new" but these are problems that have been in the making for a long time and no one can say that they really expected for the finite reserves to last forever when the demand curve has been steadily upwards and even accelerating.

    If we look at our current situation as a WAKE UP call then the time to seriously invest in alternatives to Oil is now. A windfall profit tax with exemptions for alternative energy investments will really help, so thanks for bringing some sanity to the debate MR. OBAMA

  71. Nick Andrelli

    Windfall Profits Tax

    I take a much simpler approach to corporate taxes: THERE IS NO SUCH THING AS A CORPORATE TAX!!!

    Any tax, regulatory fee, mandated spending (such as for health benefits, family leave, etc.) is just another entry on the Expense column of the corporate ledger, just like office rent, equipment purchase, salary, etc. It all gets factored in to the cost of the product or service provided by the company, and therefore is paid by the consumer.

    When McCain was proposing the "gas tax holiday" several months ago, I had to agree with Obama that it wouldn't work, because the pump price would just creep up to fill the gap caused by the missing tax. Obama said he had past experience in Illinois with this policy, and knew it wouldn't work.

    Well, we have past experience with windfall profits taxes on the oil industry, which resulted in both higher prices and an increase in the importation of foreign oil. But Mr. Obama apparently didn't learn his lesson from that experience, and wants us to go through it again. Obama is no doubt an intelligent person, but sometimes intelligent people aren't very smart. This is one of those times.

  72. Bounty

    Tax, supply demand

    I noticed that in June us American's were really into small economic cars.... Gas was high. Now the cost of gas has gone down just a bit, and suddenly we're looking at SUV's again. I'm kinda ambivilant about the windfall tax.

    Basically it's a government run savings plan. We'll pay more at the pump, then get a check later. Maybe... just maybe, it will also help curb demand, and keep us looking into alternative energy and economic cars. Problem is, it will hurt poor people (at least until they get their check.) Also anyone who drives all the time won't get the same proportion back. Same for those who don't drive, they're only paying more on everything else they buy.

  73. Anonymous Coward
    Anonymous Coward

    Unfortunate

    ... that the article is based around the idea of supply and demand when there isn't a supply shortage. Oh well.

  74. Charles Manning

    @RRRoamer

    The whole point of OPEC is to make a cartel that controls the flow of oil onto the market, keeps prices high and prevent free market competition from being effective. In other words, controlling the supply side so that it just matches demand and makes for a scarce resource.

    The cartel was not working as it intended in the 1990s (too many break away players selling oil) which drove down prices.

    For a parallel, look at the diamond industry. In some places you can pick up diamonds with little effort, but the supply chain is heavily controlled to prevent a free market.

  75. Tam Lin
    Thumb Down

    Wrong author

    Might I suggest rewriting in terms of Machiavelli rather than Smith. The only part Wealth of Nations pertains to current oil prices, windfall profits and applicable taxes is Book V. Chapter I. Section II. - On the Expense of Justice - and then only in its omission.

    True, before Jan 2001 Wealth of Nations used to largely apply to oil. But then, Mugabe used to be a nice guy, too.

  76. Anonymous Coward
    Thumb Down

    Political endorsement

    I think we know who you are going to endorse.

    So which oil company do you have stock in?

  77. Homard
    Alert

    windfall tax

    This article is spot on : the idea of a windfall tax is stupid, and it is time the airhead politicians stopped trying to fool people that it is for the greater good.

    It is not in oil (energy) companies interests for fuel prices to be too high. This encourages alternatives, be they don't use oil - don't use car so much, etc. look at alternatives - public transport, cycling, walking, electric car, etc.

    The above said, we must consider the future.

    Now I don't profess to be a greenie, and I am sceptical about 'global warming', but taking a common sense attitude to things you can arrive at the following conclusion : if you keep shitting on your own doorstep sooner or later it's going to stink, and you'll run out of toilet paper. The sun might dry the odd turd so that the rain washes it away, but sooner of later the doorstep is not going to be a nice place to be ! The Earth is much the same; it can only take so much load.

    Earth (the planet) provides us with a rich environment in which we can live for free. How much does it cost to provide a life sustaining environment in space ? These environments are not rich. I certainly wouldn't want to live there ! We get so much more, and for FREE.

    What I am trying to say is that we should strive to take care of (and appreciate) what we've got. This means that we shouldn't waste what nature gives us. We need to preserve the richness of the environment.

    The other thing to consider is that Mother Nature can wipe us off the face of the planet we are **VERY** fortunate to live on in a blink of an eye.

    Our reliance on fossil fuels is part of the present, with no attractive alternatives. Renewables will help, but ask yourself how much wind there is on a freezing cold winter night when you need lights and the power to run the central heating ? Not much, so we have to have fossil fuel parrallels to cover these situations. Don't even talk about nuclear with radioactive half-lives of thousands of years.

    So how can we help ourselves ? The only answer is cut down on our natural resource usage. To the yanks and canadians who whine about fuel prices : we've paid more in the UK than the price you whinge about for fuel for a decade, and our economy still works ! I love a V8, but you really can downsize and help yourselves with this problem. Incidentally it will make what is left last longer, and help us all. We need to repair broken items instead of throwing them away. It is cheap goods from China that has lead us to this mentality via economics. So now the west has better air quality and we rant at China about emissions, except that we create the demand for the same. How hypocritical is that ?

    The UK government wants biofuels to be included in road fuels. Is it ethical that to achieve this target biofuel crops are grown in place of food crops ? Consider that there are people starving. Using crops for fuel, given starving people does not seem right to me. Maybe I don't have enough understanding here ?

    The bottom line is that the government can do its revenue gaining exercise, under the guise of green credentials.

    However, what really needs to happen is that we all look at how to preserve our environment, be that rejection of planning permission for a new housing estate, buying a smaller more efficient car, etc. We can only keep crapping on our doorstep for so long. ***WE*** have to change now, and it is down to us to be willing to change. If we don't, we **WILL** face Mother Natures wrath, and it won't be pretty - probably an extinction level event with us as the cast.

    my 80p/L tax on this matter ! Thanks for reading !

  78. Anonymous Coward
    IT Angle

    @a few commenters

    Don't forget about the other costs of running an oil field- especially a subsea one. There's the maintainence of them (they can't just leave them down there and hope they don't leak!), powering some pipelines (keeps the oil hot so it doesn't solidify and block the pipe), running tankers, decomissioning costs (which the UK gov't has, IIRC, just mandated be set aside during construction). As well as defending their infrastructure from idiots with trawl-boards and the idiots from Greenpeace who seem to think there's a magic "off" button they can press to stem this evil black tide of relatively cheap energy.

    The Oil companies have to pay to keep this all maintained- and at the 2.5km water depth someone mentioned above that's maintaining equipment that's under ~250Bar (~3750PSI) of pressure. So not the easiest to get to in the event of a fault, and probably one of the easiest places for things to go wrong. And they've got to pay to maintain [most of] this for another quarter of a century at least.

    Lots of this (unfortunately, not the defence stuff. That'd be too much fun) requires ROVs and AUVs, hence the late-coming IT angle to this economics story :P

    Full disclosure: I work for a company that builds kickass robots to work under these conditions for the oil industry and spend a lot of time with people who do underwater pipe designs. So while I'm probably a bit biased, I can still offer another point of view for the argument against the windfall tax- they'll be looking after it for a quarter century which will cut into their profits/savings later on. So it's not all profit (all 9% of it...), some of it is deferred expenditure.

  79. P. Lee Silver badge
    Flame

    of market structures and profits

    1. Short-term vs long term - super-normal profits (those above that which are required to keep assets in an industry) can be made in the short-term. The short term is defined as "the period of time in which you cannot change fixed costs". Given the massive fixed costs inherent in the energy industry (finding an oil field, getting approval to drill, building a drilling platform, pipeline etc) that could be quite a long time.

    2. a) tax vs profit - this is a zero sum game. Either the government has it (and spends it/gives it as a tax break) or the corporations have it (and spend it/give it as dividends). The real question is political, "who does the electorate trust to distribute the money?" Even if tax did drive up future prices, you can always tax those profits too... In short, government is essentially the same as a large corporation where everyone gets one share.

    b) People mainly object to large concentrations of wealth rather than a particular return on investment percentage. There is a feeling that vast amounts of money tends to corrupt the executives, the corporations and the governments they deal with, leading to wrongful allocation of profits. Some sort of redress is required.

    c) Corporations are just a legal fiction. Taxing corporations theoretically doesn't do much that taxing people directly wouldn't do. However, its much easier to do and allows governments to access revenue generated in-country, which may otherwise be passed to overseas shareholders. While heavily taxing people may be seen as immoral, the taxation of corporations is purely a pragmatic measure. Unless of course, an industry has failed to contribute funds to the party in power...

    3. Oligopoly - a few very large companies, very similar product, huge barriers to entry and companies acting in very similar manner (with or without collusion). It looks, smells and tastes like an oligopoly. There may be new entrants - they manage to do so by being granted a legal monopoly on new oil reserves and raising billions in an IPO. Its still an oligopoly.

    4. Stupid people/lack of information - we've been told that oil speculators are driving up the price - there is no real supply shortfall. No-one in the media seems to have identified who these speculators are. Perhaps a tax on them would be more appropriate. I suspect most people hear "oil industry (speculators) are pushing up the prices of oil". It should be easy to quantify - have the energy companies' profits (revenue - cost of goods sold) jumped in line with the retail price increases?

    5. Governments (in the UK) have been telling people for ages that higher (petrol) prices reduces consumption and that's good for the environment. They can hardly complain when speculators do the very thing they have been saying is good for the environment. That said, they must be really peeved someone else is getting so much. Of course, the whole argument spurious. People give up other things such as DVD's long before driving to work and cancelling the weekend in Paris is more likely due to the spurious "airport security" taxes than anything else.

    Flames, because everything will burn eventually...

  80. Mark

    Peak Oil

    Does NOT mean "no oil". That meme is spread by those who do not wish to give credence to any problems with oil production.

    Like you.

    Peak oil means that the easy extraction is over. Up until that point, if demand went up 20%, supply could go up 20% to meet it (if someone didn't supply more, then someone else could sell more oil and make more money than those who didn't).

    After peak oil, the easy finds are unable to extract any more (rather like a balloon when it empties pushes air out less quickly) and any other sources take longer to extract (and so have a much lower rate of extraction.

    So when demand goes up 20%, supply cannot move to match it (even if they want to) and so the cost goes up as those that demand oil have to bid amongst themselves to get preferential treatment in the limited supply.

    Imagine, if you will, finding that the moon is hollow and has petroleum deposits 100miles under the surface right to the centre. But it is expensive to get that down here, expensive to refine (you won't be able to do it up there without a LOT of technology and comcomitant expense). But we now have a HUGE reserve we could exploit.

    But not worth doing so even at $200/barrel.

    And if we get to $300/bbl we only have a limited amount we can refine up there, a limited number of places we can land a ferry with the oil and a limited number of flights we can make. So we have a very limited ability to EXTRACT this and no amount of demand will make it possible.

  81. Mark

    @Tim Worstal

    If it isn't a cartel or ogliopy, how come, despite oil costs going up and competition being (in the case of no collusion), the profits have gone up for oil companies?

    The shareholders were happy with the previous profit levels. So if the base product went up 2p/gal, where's the need to up the price at the pumps more than 2p/gal? Doing it that way may reduce the % profit, but the ACTUAL PROFIT is the same. And unless they've had to tap the shareholders for money, the shareholders are still getting the same ROI they made with the company before.

    But they up the price at the pump by 4p/gal.

    Now if there wasn't a cartel/ogliopy/collusion, why did one not go and put their petrol up by not 4p but 2p? Since they will still get the same profit per gallon, their profit levels will not change. But by being cheaper than any others, they will attract more custom, selling more petrol and getting more of the market. Their profit per day will increase.

    So why did NONE OF THEM do this?

    Because of collusion/cartel/ogliopy.

  82. Gordon
    Flame

    Crooks

    Supply is deliberately restricted by the oil majors, They've Leased vast areas for drilling, and they don't drill because increased supply would be against their best interest. They petition for additional leases, so they can use "Oh Noes needz more oil" to lock up additional drilling rights they aren't going to use so they can inflate their stock price. They aren't investing in additional refining.

    Speculation also has added a significant chunk to the price of a barrel because in an inelastic demand market exploiting the leverage vast financial resources can give you to manipulate markets is a no brainer.

    Unless governments get serious about a broad portfolio of renewable and carbon neutral power, these crooks will continue to force the price higher, for something that has other better uses than burning to make things go. Maybe if they do demand would fall and we could eke out our remaining supplies.

    Wealth concentration is thermodynamically unstable.

  83. Anonymous Coward
    Pirate

    Profits?

    As any accountant or finance officer can tell you profit is an etheral thing. A reasonable accounts team can make a company profit as big or small as they need. A "friend" of mine used to do the accounts for a management consultancy firm. On a turnover of £8M they only made a (audit assured) £300K profit. None of the Aston Martin driving directors felt that this was an issue. My "friend" could have made it a £3M profit that year and got it audit assured as well. A 9% margin? given the circle jerks run between finding, drilling, refining and punting it could be any number a CEO wants and I know a "friend" who make sure it passes muster during an audit.

  84. Mr Chris

    @ Tim Worstal "Ummm"

    "Perhaps you should have read further then. I do actually link to industry sector by profit margin. Oil and gas is 60 th in the list."

    "Ummm", yourself, chap. You had the net profit margin sorted back to front - Oil is 25th on that list, at a 13% net profit margin.

  85. Janko Hrasko
    Thumb Up

    SWEET

    and the winner is....

    EL REG!

    thank you very much for sparking this fantastic debate where the article itself is just a theme teaser and more useful information can be gathered from citizen's responses.

    Nice one!

    :-)

  86. Tom Turck

    WTF? Reg paid off by big oil now too?

    WTF Reg? Since when are you supporting the big oil agenda?

  87. Martin
    Go

    Gas is still cheap in U.S.A

    I would like to enlighten my less traveled American friends that the price they pay for gas is cheap. Here in the U.K we pay what is equivalent to 11 dollars US per gallon i would be glad of gas at 4 dollars a gallon.

    The solution for the US is to ditch there clunky 5 litre engines, for instance my car gives 42 miles to the gallon top speed of 150 miles per hour and the engine is only 2 litre diesel.

  88. NarutoCanada
    IT Angle

    The sooner the oil is all used up...

    The sooner the oil is all used up, people can get on finding alternatives.

  89. Raving
    Linux

    Gas will be even cheaper in China & India

    Marvelously decent for Brits to pay $11 a gallon for gas, thereby reducing demand and lowering cost, overall.

    This Canuck salutes the mother country for stimulating the developing economies, whilst simultaneously taking, a *most* impressive carbon tax 'hit', square on the chin.

  90. Shannon Jacobs
    Alert

    High oil prices is *GOOD* public policy

    Oil is a fundamentally limited and valuable resource. I'm convinced future generations will revile us for having wasted the oil. The important value of oil is for chemicals--but we *BURNED* the oil. I'm confident they are going to compare our oil-burning policies with such misguided ideas as England's imperial policies in India and China.

    Sure, Exxon is doing the rational thing--in the *VERY* short term. That's why it's up to the government to step in when those rational business policies have long-term consequences that are disastrous for the entire nation, and even for the world in this case.

    Case in point: Denmark put high taxes on oil, and they are now living in an advanced society that imports *NO* petroleum. Not only is all of their energy produced from sustainable sources, but they have become one of the leading nations in the related technologies. (According to the NY Times where I read about this, last year one country was the home of 18 new competitors in the wind power industry--China. Think about the children--and the future.)

  91. Mark

    Re: WTF? Reg paid off by big oil now too?

    'course they have. And for a long time.

    Just look in the science section, under environment. Anything there about AGW is bashed because big oil doesn't like the idea of not burning petrol.

This topic is closed for new posts.

Biting the hand that feeds IT © 1998–2019