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Irish Independent: Windfall profits tax unlikely as oil prices continue to soar

Windfall profits tax unlikely as oil prices continue to soar
Irish Independent; May 11, 2006

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Despite a 40pc hike in the cost of oil this year, ministers reject calls for a tax as companies generate profits of $17bn – $8m an hour -in the first quarter

EUROPEAN Union finance ministers last week rejected a proposal to impose a windfall profit tax on oil companies benefiting from record prices. The calls for a windfall tax came as the increase in the price of oil reached almost 40pc in a year, setting a new record of $75.35 a barrel last month.

There is nothing new in the idea of such a tax. Governments have regularly tapped in to industries such as oil when events conspire to drive their profits to stratospheric levels. But with an oil-friendly President in the White House, it comes as something of a surprise that the US, as much as Europe, has taken the lead in the debate over whether to tax the record profits currently being generated by the likes of BP and ExxonMobil.

The impact of the oil price hike on consumers is dramatic and, according to European Commission data, a permanent 25pc rise in oil prices cuts at least 0.3pc off European economic growth. It is little wonder, then, that the latest dramatic surge in crude prices has prompted calls for a windfall tax on big oil profits.

Those profits are huge. Between them, the biggest US oil companies had combined first-quarter profits of more than $17bn, or about $8m an hour.

Over the first quarter of this year the world's five largest oil companies earned almost $29bn in profits between them, which translates to $4.46 for every person on the planet.

Royal Dutch Shell plc, Europe's second-largest oil company, last week reported a 3pc rise in first-quarter profits to $6.89bn. And the world's largest oil firm, ExxonMobil, reported profits of $8.4bn in the first quarter, a feat which prompted one Texan judge to call for a boycott of the company's filling stations.

Even in the spiritual home of the industry, companies are not immune from criticism. President Bush, usually a fierce advocate of the oil industry, described high petrol prices as a “hidden tax on the working people”. He has stopped filling the US strategic reserve in an attempt to get more oil onto the open market in the hope that this will help bring down prices.

But while he has taken this limited action, he is not about to give in to calls for the industry to be taxed, rejecting the suggestion and stating that the companies should use the extra profits to invest in new refineries.

Even so, BP and Shell look set to be dragged into the row over high petrol prices after a US Senate committee demanded to see tax returns from the 15 largest oil companies as part of an inquiry into industry profits and soaring prices.

Many American politicians are considering measures that would see oil companies stripped of $2bn in tax breaks, created when Washington wanted to encourage exploration in the Gulf of Mexico.

Also being discussed is a provision to change accounting rules for oil inventories that would force the five biggest – ExxonMobil, BP, Shell, Chevron and ConocoPhillips – to pay $4.8bn more in taxes over the next five years.

But in Europe it appears that any action will be left to individual governments, as there appears to be little appetite for the imposition of a tax on oil profits at the European level.

And even if there was, it would need the full support of the EU 25 to go through, something which appears extremely unlikely. Indeed, EU tax proposals often founder on the need for unanimity among the 25 members. Past tax plans that ended up being shelved include a bond-withholding tax that Britain vetoed in the 1990s and a French proposal last year for an airline-ticket tax that found few backers.

An oil company tax is not realistic

An oil company tax is not realistic, Austrian Finance Minister Karl-Heinz Grasser said. “It's not really a proposal that has a big chance of being implemented. If it's possible to have such a tax on a worldwide basis, then I think we could discuss it.”

But ministers from the Netherlands, Spain, Greece and Austria last week dismissed such a policy. “We already tax oil,” Dutch Finance Minister Gerrit Zalm said, pointing out that any such move could have severe complications for the EU tax system later on. “If you tax companies when they make high profits, what do you do when they make low profits? You would then be giving them a subsidy when the oil price is low,” he argued.

One country which has never shied away from imposing windfall taxes on its oil industry is Britain, which has regularly dipped into the North Sea oil bonanza when the price of crude has surged.

As recently as last year British Chancellor Gordon Brown made a GBP6.5bn tax raid on North Sea oil companies, his second such move inside the last three years. Brown announced his windfall tax in the pre-Budget report in November, claiming the industry was reaping a 40pc return on its capital because of high prices.

Predictably, the move drew sharp criticism from the industry which claimed the actual return was closer to 32pc and the tax was blamed for a reduction in North Sea output in subsequent months.

Brian Cowen has no such oil province to tax, and even if he did it is unlikely he could circumvent the tight offshore licensing terms which were introduced in a bid to stimulate interest in Irish offshore exploration.

That would leave placing a tax on profits from oil and gas distribution rather than production and there is no evidence to suggest that those engaged in this end of the business are making excessive profits – that is mostly the preserve of those who are pumping the stuff out of the ground.

Certainly there are plenty of cases where filling stations have profiteered on the back of the high crude price, but that is more a matter for consumer regulation than taxation.

Indeed, the only Irish oil producer of note, Tullow Oil, garners most of its revenues in the UK and, as a major player in the North Sea gas industry, was one of the companies hit by Gordon Brown's windfall tax.

Explorer

It is worth noting that Tullow, which started out as an Irish-based explorer, examining the potential of the Castlecomer coalfield for gas production, has invested little or nothing in the Irish offshore search. Of course it may do so in future, but right now the industry here has little to tax and, as BP chief executive Lord Browne said recently, taxing the profits of oil companies could endanger their future investment in exploration.

As we approach peak oil production – the point after which the world's reserves go into terminal decline – the industry argues that windfall taxes are counter-productive.

This is more so in Ireland's case because we have yet to find commercially viable oil reserves and, until we do, the option to burden the industry with a windfall tax will simply not exist.

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