Why taxing oil and gas companies increases energy costs
It’s Complicated (But Not That Complicated, Ed)
RICHARD LYON
IF YOU ARE an observer of the greenwash gases emitted continuously by the the Right Honourable Ed Miliband, Secretary of State for Energy Security and Net Zero (sic.), you will have overheard him make some startling claims recently about the relationship between energy company taxes and energy costs. Here in the UK, the Government taxes oil and gas companies on profits from oil and gas at a marginal rate of 78%. “Doesn’t this increase the cost of energy in the UK and make us poorer?”, an incredulous interviewer asks. “No”, the credulous politician replies.
In this post, we’ll look broadly at why he’s wrong.
As with all slightly complex things, the answer is slightly complex. In fact, while high taxation of both oil and gas makes us poorer, it makes us poorer in different ways.
The big difference is transportation cost. Oil is energetically dense—a litre of it contains a lot of high gradient energy. It’s also very stable. You can park a boatload of it near a large city and it can sit there perfectly safely for months. Because it’s dense and stable, it’s cheap to transport around the world in large quantities. And that means there is a global price for oil. If demand in South East Asia goes up, the price goes up. When the price goes up, someone in London fills a big tanker with oil, sails it to South East Asia, and sells it. The price goes down.
To alter the global price of oil, a British oil company would have to produce and sell so much oil relative to all the other oil production that it lowered the global price of oil. The British oil sector isn’t large enough to do that.1
So when an oil company sells its oil, it doesn’t price it like parsnips. When the government raises and lowers the tax rate, it doesn’t raise and lower the price of oil. But something else does happen when they raise taxes that makes us poorer.
An oil company sits on an inventory of reservoirs that contain oil. Depending on the geology and location, some reservoirs are cheap to develop. Some are expensive to develop. When costs—including taxes—are low, the company can extend existing reservoirs and develop new ones, sell the oil and make a profit. So it does. When tax is high, it can’t, so it doesn’t.
So when tax is low, oil from expensive reservoirs is produced, the Government can tax it, and it can spend the money it raises on schools, hospitals, houses, transportation, and energy subsidies. We get wealthier. When tax is high, there is no additional production, and so no additional tax revenue to spend on schools, hospitals, houses, transportation, and energy subsidies. We get poorer.
Things are different with gas. Gas is not energetically dense—a litre of it contains about 0.1% of the energy of diesel oil. It’s also unstable. Park a boatload of liquified gas off a major city and you have about 60 times the energy in the Hiroshima bomb that is only stable for as long as the ship’s cooling systems work. You can transport it in pipelines, but these are expensive to build and easy to blow up—remember the Nord Streams? Because it’s diffuse and unstable, gas is very expensive to transport around. And that means there is a regional price for it. Gas price is low where there is a lot of it. Gas price is high where there isn’t. And Britain has enough gas to lower the regional gas price.
The same economics of production exist for gas as for oil. Raise the tax rate, and companies produce less gas. Lower it, and they produce more. But this time, when they produce more, they affect the gas price by lowering it. Cheaper gas means cheaper electricity. So we benefit two ways: from the tax, and from the reduced energy price.
The biggest reduction we ever enjoyed in our electricity costs was after the newly privatised electricity industry installed gas power stations across the UK. It halved our electricity costs. The biggest increase we’ve ever seen was after the Government imposed “green” ideology on the electricity industry. It has tripled our electricity costs so far.
So as with every statement made by the UK Government about energy, this one is wrong. Shutting down our oil and gas exploration, and increasing taxes on existing production, makes us poorer.
This ideology immiserates us and our children. It has a name—it’s called “Net Zero”. We have to end it
Well, OK, it’s a little more nuanced. If the global oil market is very tight, even our modest production might weakly affect it temporarily. There is also some price difference because of quality and transport distance. But not enough to alter the central point—oil, unlike gas, is priced globally.
This article (Why taxing oil and gas companies increases energy costs) was created and published by Richard Lyon and is republished here under “Fair Use”
••••
The Liberty Beacon Project is now expanding at a near exponential rate, and for this we are grateful and excited! But we must also be practical. For 7 years we have not asked for any donations, and have built this project with our own funds as we grew. We are now experiencing ever increasing growing pains due to the large number of websites and projects we represent. So we have just installed donation buttons on our websites and ask that you consider this when you visit them. Nothing is too small. We thank you for all your support and your considerations … (TLB)
••••
Comment Policy: As a privately owned web site, we reserve the right to remove comments that contain spam, advertising, vulgarity, threats of violence, racism, or personal/abusive attacks on other users. This also applies to trolling, the use of more than one alias, or just intentional mischief. Enforcement of this policy is at the discretion of this websites administrators. Repeat offenders may be blocked or permanently banned without prior warning.
••••
Disclaimer: TLB websites contain copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available to our readers under the provisions of “fair use” in an effort to advance a better understanding of political, health, economic and social issues. The material on this site is distributed without profit to those who have expressed a prior interest in receiving it for research and educational purposes. If you wish to use copyrighted material for purposes other than “fair use” you must request permission from the copyright owner.
••••
Disclaimer: The information and opinions shared are for informational purposes only including, but not limited to, text, graphics, images and other material are not intended as medical advice or instruction. Nothing mentioned is intended to be a substitute for professional medical advice, diagnosis or treatment.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of The Liberty Beacon Project.
Leave a Reply