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Taxing Big Oil

Financial Times
Published: April 2 2008 03:00 | Last updated: April 2 2008 03:00

It is becoming a ritual: petrol prices rise and the oil industry is hauled before Congress for a kicking.

Six years into the oil bull market, Washington still struggles to frame a coherent response. President George W. Bush’s surprise at a recent briefing, when one journalist helpfully informed him that gasoline might soon reach the unheard-of price of $4 a gallon, spoke volumes.

Politicians have belatedly raised vehicle fuel efficiency standards. But they are reluctant to do more for fear of, horrors, limiting consumers’ choice about what cars they can drive. Big Oil makes a much easier target. The five majors testifying yesterday – ExxonMobil, Chevron, ConocoPhillips, Royal Dutch Shell and BP – made a collective net profit of more than $120bn last year.

A consistent line of attack is the call to remove industry tax breaks. Besides government figures showing oil companies paid in effect a tax rate of 41 per cent in 2006 – about double that for the manufacturing sector – higher taxes would actually be counterproductive to helping consumers. US energy officials reckon that 69 per cent of the cost of an average gallon of petrol relates to the cost of crude oil.

Record crude prices result more from Chinese demand interacting with geopolitical constraints on investment in new supply than any Big Oil conspiracy. The weak dollar doesn’t help either. Higher taxes at a time when the majors are already struggling to increase output would merely serve to push oil prices up further by raising the hurdle for new upstream projects.

There is no escaping the fact that, even as alternatives are being developed, oil will remain a dominant energy source for a while yet. New production, where possible, ought to be actively encouraged. And if Washington really wants to do something about $4 petrol, it would do well to make tougher choices on energy conservation.

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