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

Election crowd pleasing = higher pump prices?

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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 reason isn't going to get much airplay but let's give it the old school try anyway.

The first and absolutely most vital thing we have to remember about the oil business is that it is big. Really big. That's solar system type big where this bowling ball is the Sun and that guy four blocks away with the peanut represents the earth to scale sort of thing. 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. Shareholder's equity (i.e., the capital employed within the business) is north of $120 billion: the reason the profits number is a huge one is because the business itself is a huge one.

So what 'windfall' is this?

We also need to remember that these are the numbers at the very top of the cycle. Oil has gone from being worth less than spit to a figure that has achieved the almost impossible, reducing the amount Americans drive, in around a decade. Even with this top of the cycle aspect the oil business as a whole is only the 60th most profitable sector in the US. So where does all this fury that there must be windfall taxes come from? Is it simply that people don't realise how much money is used to make those profits? That big numbers confuse people? Or are we just tied up in the usual election year nonsenses?

The second thing we need to know about the oil business is that it already pays a great deal in taxes. While these numbers can be argued with (for there are foreign taxes in there too), Exxon paid $32 billion or so in taxes in the quarter it made the $12 billion. Indeed, you can put it another way. Exxon alone pays more in income taxes (or at least will, this year) than the bottom 50 per cent of all taxpayers in the US.

Just so that I'm not accused of being entirely in Exxon's pay, British Gas (which pumps the gas out from under the North Sea) has the highest tax rate of all companies in the FTSE 100 (think London's version of the Dow, ish) at 57 per cent, and it pays 75 per cent profits tax on its actual gas extraction.

So there's at least one thing to ponder: given that they already pay hefty taxes, why is there this screaming that they should pay more?

More taxes, higher prices

We could and should go further of course. 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. Given that the companies (I deliberately leave out the effects of the governments and companies which make up OPEC) are operating in a competitive market these prices aren't being caused by either collusion or gouging: they're being caused by supply and demand. More people want to use $30, $50, $90 oil than there is oil to go around at that price so markets do their magic thing, prices adjust and supply meets demand.

So, to lower those prices we'd rather like there to be either an increase in supply or a reduction in demand, yes? An increase in supply is going to come from someone, anyone, actually going out and finding more of the blessed stuff, or, if you want to be all technical about it, how to pump up more from the reservoirs than we already do (we never actually do get everything out of an oil or gas patch, although we've been getting better. We used to get maybe 10 per cent, now the best run fields get maybe 40 per cent). But both of these things cost money to do. So, umm, taking more tax out of the profits of those who look for more is going to help in what way? These cries for higher taxes seem to be missing the most basic point about how markets allocate capital.

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