Tuesday, 3 March 2015

North Sea oil: tax and subsidies

A few ill-thought out ideas from opposite ends of the political spectrum.

From the BBC:

[Gordon Brown] suggested a number of measures that he claimed could help the industry, including;

* A North Sea reserve to maintain and upgrade essential infrastructure and to provide "last-resort" debt finance for companies who want to keep fields open.
* UK government co-investment through public-private partnerships.
* Government loans.
* Advance purchase agreements.

Yup, nationalise it and subsidise it; he doesn't appear to have mentioned tax cuts.

And from City AM:

Deep tax cuts are the way to go. Nothing less than a double digit cut or the elimination of the supplementary charge will achieve the necessary level of impact. The Basin needs help now, or much of it could disappear if the oil price stays at these levels for a number of years...

Rather reassuringly, the article also tells us that extraction costs are £18.50 ($28.50) per barrel, only half the current oil price, so there's still plenty to play for. Most of his special pleading is hokum, but here's the interesting bit:

And if policymakers want to be really radical, there is always the option of introducing production sharing contracts for North Sea exploration.

The UK is out of step with many other oil producing countries, where these arrangements are a standard alternative to our tax and royalty system. In essence, these contracts between governments and extraction companies guarantee a minimum and maximum return on capital, giving companies more financial certainty and governments more tax revenues.

In outline, the original 1970s system for North Sea oil taxation was quite Georgist. Capital expenditure was allowed as incurred on a cash basis (none of this capital allowance nonsense), which minimised downside risk - but the corporation tax rate was very high. Norway and The Netherlands have stuck with this, quite successfully.

So oil companies ended up with a fair return on capital and the government kept most of the 'rent' or the 'free gift of nature' i.e. the excess of market price over extraction costs.

Interestingly, both Brown and the vested interest guy are stumbling in the right i.e. Georgist, direction, which is to abandon all current taxes on North Sea oil producers and for the government to enter into fixed-price agreements with them to purchase oil for cost-plus, say £30 a barrel.

This gives the oil companies incentives (the price would be set by however much they bid at a reverse auction) and certainty; and the government gets the freebie. It also gets the upside and the downside of oil price fluctuations, but as oil revenues are only a very small part of UK tax revenues, that scarcely matters.

Remember also that even if the world oil price fell below £30/barrel, the UK government would still not be making a commercial loss, because the 'pump price' of a barrel of oil (159 litres), minus refining and transport costs is £1/litre. It would just be making a smaller profit than it otherwise would have been.

Whether the government would get more or less revenue under such a system is neither here nor there, it would be getting the right amount of revenue and that is what matters.


Random said...

Norway - not as Georgists as you'd think ;)

Kj said...

Random: well, in a way it's very Georgist; a government entity collecting urban land rents - just not the UK government...

Steven_L said...

A few governments collect UK rents through their SWF. We can't pay for gas from Norway and Qatar with products and services they want, so they buy up our assets with the surplus and we pay them rent.

Mark Wadsworth said...

R, I didn't say that "Norway" the country was Georgist, I said the the 1970s system operated by the UK, Norway and The Netherlands was broadly speaking Georgist. How the Norwegians choose to invest or spend the revenues is an entirely separate topic.

Kj, ta for back up.

SL, that's the sickening thing, but easily fixed. Claw back the rents in tax - problem solved.

Random said...

OK. Just seemed a bit hypocritical of the Norwegians.
With LVT, wouldn't the economy be more competitive. I can imagine a country with 100% LVT having a sovereign wealth fund that invests exclusively in land and real estate. Then you can buy (slowly) all the land in the world.

Bayard said...

To have a sovereign wealth fund, the government first needs to run a surplus, then needs to pay off the national debt, the latter being something which no UK government has ever achieved and the former being something that isn't going to happen anytime soon.

Mark Wadsworth said...

R, Kj is our Norway spokesman, they are possibly even more Home-Owner-Ist than us.

As to the LVT-funded SWF idea, that's theoretically possible. So non-LVT country A sees all its land acquired by LVT-funded SWF from country B.

What is Country A's best option..?

B, indeed. But running constant surpluses causes equal and opposite problems to running constant deficits and is not necessarily desirable.

Random said...

MW, I think their best option is to implement - Land Value Taxation.
If you running constant surpluses I meant trade surpluses. You have to tax away to stop inflation, and the best tax is LVT.
Interestingly, if another country owned all the land in another country and said rents had to paid in their currency, what currency would they use? I think this is an excellent example to show LVT is a privately collected tax.
If the IMF etc were smart (and more evil) they would require fire sales of land as conditional on their loans as collateral. But let's not give them any ideas!

Mark Wadsworth said...

R: "I think [Country A's] best option is to implement - Land Value Taxation."

Correct, thus at a stroke shifting the assets/income from a foreign SWF to a domestic SWF.

As to trade surpluses, they just as pointless as constant trade deficits.

The ideal is to have a plus-minus break even on government deficit/surplus and on trade deficit/surplus.

"If the IMF etc were smart (and more evil) they would require fire sales of land as conditional on their loans as collateral."#

They are more evil and they already do, that's their standard policy prescription.

Random said...

B, no you don't. Just don't issue bonds when you spend.
There is no need for countries to issue debt.
But you will need trade surpluses.

Mark Wadsworth said...

R, this is where most people have a complete mental block and miss the obvious.

If the government just spends, it must pay with something. Let's assume it just prints bank notes.

What is a bank note?

It is a non-interesting bearing government bond. It is not fundamentally different to officially borrowing money via government bonds (apart from the interest bit).

When a government borrows money by issuing bonds - or by collecting taxes - the point is not primarily to raise money for spending. It is to prevent hyper-inflation.

Issuing bonds or collecting tax is just 'unprinting' money, in the same way as government spending is 'printing' money.

Bayard said...

R, well, I suppose there is nothing to stop the government borrowing money and then using it to invest in things like other countries' businesses, land or debt, but given the track record of the UK government for this sort of thing, we'd probably end up worse off than if the government had done nothing.

Random said...

True, but I believe the UK had a current account surplus with a trade deficit for a few years. That's the sweet spot.