Stupid, stupid, windfall tax

Yes, I know that people like Compass have been shouting for this and yes, I know that I said it was stupid when they did. So I\’m still going to say it\’s stupid when it\’s a Tory that implements it:

The Chancellor announced a £2 billion-a-year windfall levy on North Sea oil to fund an immediate cut in fuel duty of 1p per litre. He also postponed a 5p rise in fuel duty due next month and introduced a fuel price stabiliser to keep costs at the pumps down.

Windfall taxes, most especially permanent windfall taxes (for you can argue that a one off one doesn\’t change behaviour) are simply massively stupid ideas.

So, what you\’re actually saying is, oooohh, my, isn\’t this thing expensive? Which is, of course, the same as saying that there isn\’t quite as much supply as you\’d like for it to be at a price you\’d like.

And what are you going to do about this? Yes, that\’s right, you\’re taxing the excess profits of those who supply it thus making them, and possible new entrants, less likely to go and find more, so as to increase the supply and bring prices down.

This is, you\’ll have to agree, fairly stupid.

What lifts is up into the realms of rampant lunacy is that the money so raised is going to be used to reduce the price of the fuel itself: that is, to increase demand.

So, our solution to prices rising because of tight supply and increasing demand is going to be further restricting supply and increasing demand.

This was cockeyed idiocy when Compass argued for it and it\’s cockeyed idiocy now that Osborne has done it.

Why are we ruled by fuckwits?

8 comments on “Stupid, stupid, windfall tax

  1. I know I may be being stupid here and Tim’s knowledge of economics is far better than mine, but if you wanted to reduce the amount of money labelled as “Fuel Duty”, but keep the same revenues flowing into HM Treasury, isn’t this exactly the cynical ploy you would undertake?

    As sure as eggs is eggs, the 5p that is charged to the oil company will result in a 5p increase in the underlying cost of fuel as the tax will be passed onto the consumer via our good old friend ‘tax incidence’ (as Tim keeps banging on about it, quite rightly too).

    Budgets are usually (but not always) economic paper shuffling exercises and rarely will you see large structural changes or big tax cuts except prior to an election.

    George (Gideon) Osborne has done nothing more than he was allowed to, robbed Peter to pay Paul and given the banks and oil companies a good tax kicking which will then be passed onto consumers.

    Overall the budget looks fiscally neutral, with no big winners or losers.

  2. This is a second order issue, but what proportion of UK oil consumption comes from the north sea? Won’t non-north sea supply help keep some competitive pressure on prices?

    I agree that windfall taxes are daft

  3. This analysis is fine, and I agree with it in general, but would it not be true to say that domestic demand for fuel is highly inelastic to price changes – in the short to medium term, because of employment and commercial contracts? On the other hand, supply is highly flexible (the saudis can turn on the tap at will). Consequently, are not suppliers obtaining a producers surplus, over and above the market clearing price? If this is the case, then it does not seem politically, nor economically, stupid of Osborne to tax some of that surplus.

  4. I’m not defending the policy, but Holly Martins is right. Oil is globally traded. the UK consumes and produces about 2% of world oil, so there is no reason why UK petrol consumers should bear more than a tiny fraction of this windfall tax in higher pump prices.

    Featherplucker is right to think about elasticities here, but the key thing is this: British oil and foreign oil are perfect substitutes. Thus, while inelastic demand for oil mean that production taxes get passed onto the consumer, they get passed onto ALL consumers in the world, not just British.

    Osborne could shut down the whole UK oil production and it would have less effect on UK oil prices than the Saudi King having an attack of sneezing.

  5. and it bothers me, this continual anti-semitic gesture “George (Gideon) Osborne”

    what point are you trying to make here?

  6. Is this a windfall tax on production or on the profits of oil companies operating in the North Sea? If the former, then production will drop. If the latter, they might want to consider that in a year or so the largest producer in the British sector of the North Sea is Total, which pays its tax in France.

  7. Surely the correct way to tax the North Sea’s oil reserves is through a marine equivalent of LVT; you could call it “Sea Value Tax”. I don’t know the details of Osborne’s proposed tax; but with oil now over $100 per barrel and much of the North Sea still gushing freely, it would be foolish not to tax it. As with LVT though, the precise structure of the tax matters greatly.

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