Timmy Elsewhere

At the Register.

Lashing out at windfall taxes on oil companies again.

2 thoughts on “Timmy Elsewhere”

  1. On the article on oil profits in the Register.

    You start your argument with the observation that the current windfall profits are small compared to the massive amount of money involved in oil. I agree with you on this count. However, you then follow up with the comment that, all things being equal, markets will adjust for prices by drawing in more capital and more investors. However, I’ll point back to your initial statement – we’re talking huge amounts of money. There is a very high initial capitalization step that must be taken to get into the oil business, as well as myriad governmental control issues. From what I’ve seen, there have been few, if any, attempts to get into this market by new entities. It costs too much to start up a new enterprise.

    Oil is not an industry that can follow the simple rules of capitalization because it has been allowed to bend the rules for so many years.

    Each of the steps involved in oil: extraction, reduction and distribution, has been allowed to bend or break the rules (at least in the U.S.). From monopolies to syndicates to major illegal activites, oil has always dealt in so much money that government officials have been unwilling to monitor or investigate until too much damage has happened, leading to ill-conceived regulations. There is no self-management within the industry to keep this from occurring again and again.

    I don’t think that standard capital management concepts can be used to discuss the oil industry. It is too heavily regulated and in the hands of too few companies, and will remain so in the foreseeable future.

    On that basis, I’ll argue there is no harm in discussing taxing windfall profits, because there is no valid basis for not doing so.

    Dave Daurelle

    Tim adds: An excellent argument and one that I’d not thought of myself. However, it does fail for one reason. We do see new entrants into the oil and gas markets. AIM (the junior London stock market) is full of them. Thus new capital does flow into the industry, some striking it very rich indeed as Cairns Energy shows.

  2. We do see new entrants into the oil and gas markets.

    Indeed. Hundreds of small fields are too small or old for the supermajors to make money from, leaving the field open for a whole range of medium-sized and small outfits. Also, inviting a relatively small and obscure oil company into your country to exploit a reserve is often less risky than inviting in a huge supermajor and half of a government which comes with it.

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