The UK Is Taxing an Oil Windfall That Doesn't Exist
What's an 'unusually high' oil price?
The answer will dictate the moribund British oil industry's future. Once a source of national pride and economic security, the North Sea today faces a grim future under the weight of inflated taxes targeting unusually high prices.
In May 2022, weeks after the Russian invasion of Ukraine pushed Brent crude to $139 a barrel, the government, then controlled by the Conservative party, slapped a windfall tax on producers. The Energy Profits Levy took the North Sea petroleum industry's tax rate to 65%. It was supposed to continue until the end of 2025. But soon after, the government hiked the tax again — to 75% — and delayed its sunset until 2028. Finally, last year, the Labour government increased the rate to 78% and extended it to 2030.
The impact has been devastating. Historic names of the North Sea are announcing they will shut down all production far earlier than expected. Others are cutting spending and firing workers. Oil output has fallen to a 48-year low.
Now the government wants a rethink: a new system that adapts to different price levels, providing certainty to companies and their investors. Thus why it's asking what unusually high prices mean, so it can create a tiered rate. The fiscal review is part of a broader consultation about the North Sea, where green policy, energy security and tax revenue collide.
Everyone involved in the ongoing consultation, from oil companies to green activists, is coming up with their own answers. Surely, there's a mathematical formula that solves the question of what unusually high prices are. But there's also common sense.
Back in 1964, the US Supreme Court faced a tricky controversy. A case required answering a delicate question: What's 'obscenity'? The court hesitated with a definition. But Justice Potter Stewart found a way out with a famous common-sense precedent: 'I know it when I see it.'
Well, look at the market now and you won't see obscenely high oil prices. In nominal terms, Brent is changing hands at around $65 a barrel, the same level as 20 years ago. Adjust the price to account for the inflation and, in real terms, oil is today cheaper than it was in the mid-1980s. Simply put, the UK is taxing a windfall that doesn't exist.
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