The black hole in Jeremy Hunt’s energy windfall tax

Jeremy Hunt has supposedly just closed a black hole in the government’s finances. But is another black hole opening up before his eyes?  

One of the more popular announcements in the autumn statement on 17 November was a rise in the windfall tax applied to oil and gas companies from 25 per cent to 35 per cent. It was popular because it didn’t affect ordinary people directly and because it feeds into the narrative of greedy oil companies making fat profits while households struggle with their energy bill.     

The 35 per cent windfall tax comes on top of corporation tax, which oil and gas companies already pay at a higher rate than other businesses. Together, corporation tax and the windfall tax will mean oil and gas companies paying a rate of 75 per cent on their profits – the kind of tax burden more associated with Labour’s punitive regime of the 1970s (when 80 per cent was the top rate of income tax). The Chancellor also extended the period in which he expects the windfall tax to operate. It was due to end in 2025, but will now run to 2028.

But how much will the windfall tax actually raise? True, many oil companies have made good profits over the past year, with BP making profits of $8.15 billion (£6.77 billion) in the third quarter, up from $3.32 billion (£2.75 billion) in the same period a year earlier. Yet oil prices have always been highly volatile, and have been sliding in recent weeks to reach their lowest point in 11 months. Global recession could wipe out oil companies’ profits altogether. No-one should forget the vast windfall losses that oil companies made during Covid – BP lost $22 billion (£18.3 billion) in 2020. By 2028, how much, if any, profits are being made by oil companies is anyone’s guess.

Moreover, will anyone want to invest in North Sea production with a 75 per cent marginal tax rate on profits? Will existing investors pull out, leaving Britain with an even bigger energy security problem?

On Friday, Robin Allan, the Chairman of BRINDEX – a trade body for independent upstream oil companies – wrote to the Chancellor claiming that a 75 per cent marginal tax rate makes oil projects unviable. Oil companies, he argued, are required to insure their income, with the result that they never receive the full market price for their oil. He has suggested that the windfall tax only kick in at a certain oil price, to ensure that production remains profitable and investment viable.

The trouble is that Hunt has based his plan for the public finances on receiving 75 per cent of profits from inflated oil company profits for the next six years. He is making the same mistake many did when oil prices last peaked in 2011 – assuming the good times for oil companies would last indefinitely. By the time we reach next spring’s budget there may be another black hole in fill in the public finances.