The Idea Of A Windfall Tax On Oil And Gas Is Gaining Popularity

By Felicity Bradstock - Sep 29, 2022,

• The EU plans to launch a deep and comprehensive reform of its electricity market, a reform that will likely be funded by a windfall tax on oil and gas companies.
• The UK has already introduced a windfall tax on oil and gas companies, although Lizz Truss has since said that she is against it and has ruled out using further windfall taxes.
• Pressure on President Biden will be mounting to implement something similar, although he has resisted so far and there is plenty of resistance to such a move in the U.S.

As the European Union introduces an extensive windfall tax, the region is putting pressure on other parts of the world to do the same. The U.K. may have already taxed oil and gas companies to subsidize rising consumer energy bills, but the E.U. is going one step further by planning a total overhaul of the energy market. Yet, other world powers, such as the U.S., have avoided taxing energy companies, instead turning to the oil and gas industry to increase production as it faces major shortages and price hikes. It remains to be seen if the Biden Administration will be influenced by European policies.

European Commission President Ursula von der Leyen announced in a statement on September 14th that the E.U. had plans to launch a “deep and comprehensive reform” of the electricity market. She explained that the current market was organized around merit order and was not fit for purpose. Von der Leyen stated: “Consumers should reap the benefits of low-cost renewables,” adding, “So we have to decouple the dominance of the price of gas on the price of electricity.”

In her speech, von der Leyen made her position on the oil and gas industry clear, suggesting that their profits had been far too high during a period of energy scarcity, high oil and gas prices, and rising consumer costs. She highlighted the outdated market measures. For example, the benchmark in the gas market still centers around pipeline gas, rather than the more prevalent liquefied natural gas. These archaic mechanisms, she suggested, must be addressed to reflect the realities of the market. 

The world has faced increasing energy volatility in recent months, following the Russian invasion of Ukraine and subsequent sanctions imposed on Russian oil and gas. This has led energy prices to soar as governments scramble to find other energy sources to establish new trade partnerships. Yet, the one industry that continues to profit from energy scarcity and rising consumer costs is the oil and gas industry.

Earlier this year, the U.K. government announced it would be introducing a windfall tax on oil and gas companies operating in the U.K. to alleviate the pressure on consumers. The Labour party proposed such a tax early on, suggesting the government could raise $1.3 billion to provide consumers with subsidies on their home energy bills. The Chancellor of the Exchequer Rishi Sunak agreed to introduce an energy profits levy (EPL) in May, to tax oil and gas companies on their earnings – which have significantly increased in recent months. The EPL could be in place until the end of 2025 and aims to raise $5.43 billion as part of a broader $16.3 billion consumer support package.

At the time, the British windfall tax seemed ground-breaking in a world that had continually supported the super-rich oil and gas industry. But now, the E.U. plans to supersede the U.K.’s EPL by curbing the power and wealth of oil and gas majors even further. E.U. ministers met this month to discuss a five-point plan that will curb Russian gas prices, introduce a windfall tax on fossil fuel companies, limit renewable and nuclear energy revenues, reduce peak hour energy use by 5 percent, and provide emergency credit lines for power companies. The plan was quickly met with hostility by Russian President Putin, who threatened to shut off the country’s remaining energy supplies to Europe. 

Von der Leyen emphasized that “it is wrong to receive extraordinary record revenues and profits benefiting from war and on the back of our consumers,” adding, “in these times, profits must be shared and channelled to those who need it most.” The aim now is to raise $139.8 billion in taxes from fossil fuel companies to split across member states in support of rising consumer energy bills.

Despite acting as a leader in the introduction of windfall taxes, it seems unlikely that the U.K. will extend its legislation on oil and gas companies further. The U.K.’s new Prime Minister, Liz Truss, stated that she opposes an extension of the windfall tax, saying “I am against a windfall tax,” and “I believe it is the wrong thing to be putting companies off investing in the United Kingdom just when we need to be growing the economy.”

But some world powers have avoided punishing the oil and gas industry for profiting off of high energy costs completely. U.S. President Biden has repeatedly called on American oil and gas companies to boost production to help improve the region’s energy security and reduce costs. Yet, he has not pushed for a windfall tax on oil and gas companies and there is plenty of resistance in the U.S. to such a move. With the E.U. taking such a dramatic step to redistribute wealth to consumers, in the face of dramatically higher energy bills, however, pressure on Biden and other world leaders to do something similar will increase. 

By Felicity Bradstock for Oilprice.com