If only he knew about anything at all

Oil prices are low. You may have noticed. And now the markets are. They are reacting in two ways.

First, they have realised that low oil prices should boost the economy. Is that why markets are rising again?

Second, they are pricing in low cost per barrel for some time to come. I don’t thgink anyone thinks the days of $100 a barrel, or more, are returning soon.

So what’s the implication? Three, I think.

First, without harming the economy we could increase the tax on oil at present. We do not need the risk of defaltion current low prices brings.

Second, we should increase the tax on oil: we have made cliamte commitments and burning more oil cannot help fiulfil them.

Third, when banks do really look to be in some trouble we need new revenue streams. That is oil.

The case for increasing oil taxation is very clear. But will anyone have the courage to do it?

I’ll be watching in March.

We do actually have oil taxation in Britain at the moment. We have taxation of indigenous production, as we should do, and that’s at around and about the rate the pips squeak, as the taxation of such resource rents should be. We also have swinging taxes on oil use. It might be that rail or agricultural use of diesel isn’t fully taxed but the main use of oil is of course in private transport (we use almost nothing for electricity generation). And that’s really rather fully taxed. Indeed, the fuel duty escalator has increased petrol taxation by more than double the amount of the Stern Review’s carbon tax.

It would be interesting if our 0.2 of a professor realised all of this of course. You know, considered the amount of tax already being charged rather than just looking at the falling untaxed price and deciding for MOAR TAX.

50 thoughts on “If only he knew about anything at all”

  1. as ever he looks at a problem and pronounces that in his humble opinion now is the time for MOAR TAXES

    The oil industry in the UK is pretty much buggered right now – no matter what Unite say about big scary evil oil corporations still making money, the N Sea bit of it is losing money for pretty much everyone. So the LHTD’s “solution” to this problem is to take those few bits of it that are economic right now and take more money out. And as for the bits that are *losing* money, he’d be increasing their tax rebates on decommissioning costs.

    I suspect if one could cast off the lassitude caused by his deathly prose and summon the energy to examine the archives of his pronouncements, one would probably find saying “the oil price is high therefore we should increase taxes”

  2. Politically it’s an easy time to raise fuel duty. The next election is four years away, the price of oil is low, the economy is strong. You can pluck a lot of feathers with very little hissing.

    Hypothecathing that revenue for rescuing banks is stupid; and he’s weakening his arguments by conflating them.

  3. @AndrewM – one wrinkle that seems to have passed him by is that the banks are about to start taking huge writedowns on bad loans in the energy industry. They’ve fire-hosed money around oil and gas for the last eight or ten years like a drunken sailor on shoreleave and never had to take a writedown or put a loan into workout. Suddenly they’re having to put *everything* into their distressed debt teams. So how does Ritchie propose to bail them out? By exacerbating the problem by sucking more cash out of the industry and this driving more companies into trouble,


  4. First, without harming the economy we could increase the tax on oil at present. We do not need the risk of defaltion current low prices brings.
    Second, we should increase the tax on oil: we have made cliamte commitments and burning more oil cannot help fiulfil them.

    Is this that double taxation we are always hearing about?

  5. Presumably he would apply the same logic to gas (and note to our US friends here I mean gas, not gasoline) where the price is also falling. The VAT on supplies of gas to domestic consumers should be increased from the low current rate to the standard rate.

  6. Firstly, we could also tax the banking industry to rescue the oil industry.

    Secondly, we can tax the oil industry to rescue the banking industry.

    And secondly, we could then tax them both.

    Fourthly, I shall be watching re-runs of “Only Fools and Horses” in March.

  7. I don’t thgink anyone thinks the days of $100 a barrel, or more, are returning soon.

    Genius. I see a consultancy role in the industry for him in the near future.

    If only he could be more specific than ‘soon’. What is ‘soon’? Next week? Next month? July? August 2017?

  8. The sale price of oil is low due to oversupply. In Britain, the sale price of oil is below the production cost. Therefore, we should increase the production cost of oil.

    Sounds sensible. Then again, these idiots did much the same thing with the minimum wage.

  9. @Tim (Newman) – how much is the oversupply due to the producers realising the game is up? That it seriously looks like, in 30 years, we will be using oil only for things for which there is no alternative? And so they are pumping and selling as much as they can while they still can?

  10. The other day he wanted to nationalise banks if they got into trouble again now he wants to stuff tax money into them which would not be necessary since the BoE could simply buoy them up with a handful of pixels.

    You have to wonder if the 0.8 of a quondam accountant and the 0.2 of a putative professor always see eye to eye.

  11. “First, they have realised that low oil prices should boost the economy.”

    “First, without harming the economy we could increase the tax on oil at present.”

    So low oil prices boost the economy, but increasing oil prices won’t harm the economy?

    Can we keep a record of the shortest gap between Murphy’s self-contradictory statements? Only 4 lines in between these, although I should think he’ll have beaten that already.

  12. @Bloke In Germany – the oil industry won’t die, even once renewables become cost competitive and demand for transportation and heat/light become less dependant on hydrocarbons. Two reasons – 1) the car fleet takes a long time to turn over (15 years on average) so there’ll be gasoline and diesel vehicles around for a long while yet and 2) petrochemicals, which are so fantastically useful that our grandkids will turn to us as say “Sorry? What you mean ‘you burnt it all’?”

    The reason people have been ramping up production is that prices have been very high, largely because the industry has been running desperately to try to keep up with Chinese economic growth. Now that’s slowing down a bit the industry has caught up and we’re in oversupply, and will be for at least another 6-12 months, even on optimistic projections.

    For years senior managers have walked out of major oil companies, set up their own independent, raised millions from investors and then banks and then gone out to buy stuff. Most of those guys have seen the equity that they thought was their pensions destroyed, and now economic reality is coming to screw the over-lent banks too

  13. Bloke in Germany said:
    “how much is the oversupply due to the producers realising the game is up?”

    I heard it was the Saudis trying to kill off shale oil for another generation, by driving the price down below the level where shale is economic. A tactic which then over-shot because of the Chinese slow-down.

    Anyone know if that’s right? It seems to make sense.

  14. @BiG – it’s not clear whether you’re arguing that we’re close to peak oil (what, again?) or that in 30 years we’ll be able to produce energy from renewables/cold fusion/pixie dust so will no longer have any need for it except to produce plastics and other petrochemicals.

  15. “I heard it was the Saudis trying to kill off shale oil for another generation, by driving the price down below the level where shale is economic. A tactic which then over-shot because of the Chinese slow-down.”

    I think more chunky issues are at stake – knocking the floor out on the oil price drives Iran and Russia to the wall.

    Its a game of chicken in the oil market.

    Re the shale providers – isn’t is simpler for them to mothball/reopen production dependent on the market price?

  16. @Johnnydub – the low prices might kill the debt, and it may kill the companies but it doesn’t kill the technology. Now it’s out of the box, as soon as the price picks up again it’s relatively easy to go into the ready-drilled but uncompleted wells (of which there are several thousand in the shale patch) complete them, hook them up and BOOM. Much easier and quicker to send Bubba and Billy-Bob out in a pickup than it is to whistle up a rig in the North Sea. So there’s a natural damper on oil prices rises in the short/medium term.

  17. @BiG,

    how much is the oversupply due to the producers realising the game is up? That it seriously looks like, in 30 years, we will be using oil only for things for which there is no alternative? And so they are pumping and selling as much as they can while they still can?

    Not at all. The oversupply has come from a decrease in demand, and the oil companies and producing nations have spent the past 10 years or so desperately trying to maximise production in the face of what seemed to be inexhaustible and ever-increasing demand. So the demand has dropped, mainly due to the US being more self-sufficient and the downturn in the Chinese economy which has knocked on to the rest of Asia, but production continues as before.

    There are two reasons why production hasn’t slackened off: firstly, each producing country is desperate for revenue and nobody is willing to cut back short-term revenues in the hope of an increase in medium-term prices (bear in mind that these countries are largely governed by hopelessly corrupt incompetents). Also, it’s not so easy to shut in production at a reservoir or slow it down: the surface facilities are designed for a certain production profile, meaning the equipment operates optimally at certain pressures and flowrates. If you reduce the flow, stuff like separators stop working properly and you get off-spec crude. Given how much CAPEX has been sunk into these facilities, nobody is too keen to start modifying them with the owners already facing dire cashflow situations.

  18. For years senior managers have walked out of major oil companies, set up their own independent, raised millions from investors and then banks and then gone out to buy stuff.

    And a lot of them didn’t know their arse from their elbow. It’s usually worse when an exploration company which excels at exploration decides it is “mature” enough to go into production and operations and makes a complete hash of it. Tullow, I’m looking at you.

  19. I heard it was the Saudis trying to kill off shale oil for another generation, by driving the price down below the level where shale is economic.

    Anyone know if that’s right?

    It’s wrong. A popular theory, but wrong.

  20. @Tim – you couldn’t be more right – pretty much everyone smaller than the majors seems to be up to their eyes in crap right now; there will be a*lot* of restructurings and insolvencies soon

  21. The Saudis have nothing but oil to sell. It makes up 75% of their budget revenues and about 45%of GDP. They literally cannot afford not to pump oil in large quantities.

  22. Flatcap Army,

    Some banks have made loans to oil companies which may well go sour; but the sums involved are nowhere near as bad as the housing bust (espcially in America).

    I’m curious as to how much of their loan books are secured against physical assets such as drilling rigs, whose value also falls when the oil price falls. Do the banks think of these connections when they make the loans?

  23. I’m curious as to how much of their loan books are secured against physical assets such as drilling rigs, whose value also falls when the oil price falls.

    Against drilling rigs? Probably not much. Drilling rigs quickly become worthless when the oil price crashes, even recent generation deepwater rigs are currently being scrapped because the storage and inspection costs are too high. Which does seem a bit silly.

    They might secure the loans against physical fixed assets such as onshore/offshore facilities, but I doubt it. I suspect they’re secured against production: don’t pay the loan, have your cargo seized.

  24. @AndrewM – I’m going to have to be quite careful answering this. A mate of mine who worked on the oil and gas team of a large bank said “What you need to remember is that a year is a long time in banking. Eight years is a lifetime. And for eight years people have lent money hand over fist and always got it back. No one’s ever taken a write down, no-one’s ever had to go back to their credit committee, no-one’s ever had to repay their bonuses. Until now”

    The sums of money lent are massive, as are most numbers in the oil patch – companies in Nigeria alone have borrowed hundreds of billions of dollars. And banks are finding that all of that tedious paperwork they never bothered to read about who owns what and what they are entitled to if they enforce are kind of important, as they’re finding out that they have little to no security over anything, And even if they have, they can’t enforce it. The whole sector’s banking support is very badly rattled and it’s not going to end well. Afren, Endeavour, Iona – just the start. There are many more to come at this rate.

  25. Correct me if I’m wrong but aren’t British taxes on gasoline fairly high? If the tax rate is as high as I’ve seen claimed raising it would actually reduce revenue coming.

    Contrast this to the US where the federal gasoline tax on a liter is around £0.03. Adding state and local taxes gives a national average of around £0.09. On our side of the pond raising the tax rate would still lead to higher overall revenue.

    I admit this is a simplistic argument but it is all that is needed to disprove Ritchie’s point.

  26. Liberal Yank-

    Taxes on petrol here are very high. Some nutters want to tax the carbon in it as well, and make them even higher.

  27. Liberal Yank said:
    “it is all that is needed to disprove Ritchie’s point”

    Yes, except that Murphy doesn’t accept that raising taxes can lower the tax take. Ever.

  28. Ian deflation has been seen before. It currently isn’t seen because we have left hard currencies for fiat currencies. This was the main argument for moving off of the gold standard as the US has done twice. Now when the economy grows faster than the money supply governments can simply print more money.

    A better point to raise is whether the long term effects of deflation are really as bad as claimed.

  29. Ian B,

    Deflation means debts go bad, banks collapse, and savers lose their shirts. That’s why it must be avoided at all costs. Better to have mild inflation slowly chipping away at everyone’s hard-earned wealth, rather than defaults in which some people lose thousands while others suffer nothing.

  30. “Deflation” is a natural response of the debt supply to a value adjustment that causes debt default. The error is thinking that there is something wrong with it.

    Which is why the only way out of a crash situation is liquidation of the insolvent wrongly valued assets that accumulated during the boom.

    The problem we have at the moment is an economic belief system based on the strange idea that the solution to everything is inflating the money supply. Economic growth? Inflate. Economic shrinkage? Inflate! Business doing well? Inflate! Business doing badly? Inflate!

  31. “and savers lose their shirts. ”

    By “savers” there you actually mean “lenders”, who are loaning their savings out in the expectation of earning interest. Which quite naturally means risk.

  32. It’s 30 years since I went anywhere near ‘O’ level Economics, so could somebody explain how elastic (if that’s the right term) oil pricing is. It seems to me that oil producers are stuck on a sliding scale between eg selling 2 barrels at $50 or 1 barrel at $100. That means there is no benefit to the producers to change their supply, but also no cost, so the side effects come free (eg crippling somebody else’s industry). How close is this model to reality?

  33. For the furriners here. UK petrol tax is 58p per litre fuel duty, then an additional 20% VAT (sales tax). The fuel duty is an absolute value. Even if petrol was free it would still cost 58p per litre on the forecourt. Doing the sums show that wholesale petrol costs something like 25p a litre.

    (25p + 58p) + 20% = 99.6p

  34. As a “furriner” does 58p=£0.58?

    I currently know more about knuts, sickles, and galleons(Harry Potter money) than I do about pence, shillings and pounds.

  35. jgh-

    Same as any cartel. Holding up the price depends on how well you can hold the cartel together; the problem being that any cartel is actually benefitting the lame ducks who would be wiped out by competition, which is why cartels tend to break down.

  36. jgh said:
    “Even if petrol was free it would still cost 58p per litre on the forecourt.”

    Worse, if petrol were free it would still cost 70p on the forecourt (58p duty plus 20% VAT).

  37. ty Ian. Google gave me links to outdated information. Knowing that a shilling used to be 1/6 of a pound isn’t useful to me today.

  38. I’m no economist, but the argument “deflation is bad even when it’s due to the oil price falling” has always struck me as odd.

    To me, inflation is something of a broad thing, which conflates two aspects: one is how much the stuff I buy increases in price, and the other is how much the stuff I sell does the same. I want deflation of one and inflation of the other.

    If you look at a closed system of course, then everything I buy has been sold by someone else, and vice versa, so a single measure of inflation makes sense: I can’t get my preferred downs/ups without someone else’s ups/downs cancelling it out.

    However, if I am buying a load of stuff in from abroad, then the decrease in the price I pay is not matched by a decrease in the price my neighbour receives. So with the oil price, if the price I pay for goods in the UK goes down because the oil price falls,but the decrease in oil revenue is felt by someone outside the UK, then surely that is overall rather good for the UK?

    I can understand deflation being bad for the UK if my neighbour’s income goes down, but I can’t see why it should be if Saudi Arabia’s does.

    The problem is that inflation is measured by looking at purchase prices, not sale prices, so it’s not immediately obvious what sort of deflation we have.

    But overall I just think a) UK prices decreasing is good; and b) if we end up with inflation once we adjust the oil price fall out of the deflation figure, then we have UK incomes increasing – which is also good.

    In other words: inflation is too crude a measure to be relying on here. We need to look at income inflation separately from price inflation.

    Apologies if this is well-trodden ground, but no-one seems to be mentioning it if so 🙂

  39. Bloke in North Dorset

    Apologies if someone’s made this point, TL;DR all comments.

    “Second, we should increase the tax on oil: we have made cliamte (sic) commitments and burning more oil cannot help fiulfil (sic) them.”

    So here he wants to reduce burning oil to save Gaia and he’s using the micro economic model that says if the price of something increases demand falls.

    But we also know that this isn’t true in all cases, but to be fair its a reasonable assumption in this case.

    But then we learn:

    “Markets as defined by micro economists have never worked

    And can’t

    It is not humanly possible to deliver their model”

    I know Richard’s picked up an inconsistency being 4 lines apart as some sort of record but this fundamental, he can’t say models don’t work and then start using them to justify his own theories, no matter how many times he says he hasn’t had time to think them through.

    If I was one of his students I’d be demanding my money back, with menaces.

  40. Adding VAT on top of a tax is just taking the piss. What value is added by a government fuel or beer duty? Fuck all.

  41. What is really scary about inflation is the core rate which is most widely quoted doesn’t include food, energy, and housing.

    To me personally these 3 items affect my life far more than the cost of a TV made in China. For my main expenditures inflation is actually around 7% once cyclical fluctuations are averaged out. This means one needs to make $12.36/hr to have a similar lifestyle to someone who made the minimum wage of $5.15/hr 20 years ago. The current minimum wage nationally is only $7.25.

  42. Liberal Yank said:
    “What is really scary about inflation is the core rate which is most widely quoted doesn’t include food, energy, and housing.”

    Fairly sure the main UK measures include food and energy. Although isn’t the main difference between RPI and CPI, as used in the UK, that RPI includes some sort of housing cost but CPI doesn’t?

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