Reducing the North Sea windfall tax would do nothing for struggling consumers and would simply increase the profits of oil and gas companies, economists and experts told The Guardian.
Rachel Reeves, the UK chancellor, is understood to be considering reductions to the energy profits tax, or potentially scrapping it and replacing it with a lower tax. Oil prices rose to $100 a barrel on Monday as the US-Israeli offensive against Iran showed little sign of stopping.
The tax was introduced during the last oil crisis, in 2022, after the Russian invasion of Ukraine sent oil and gas prices soaring. Producers made a windfall because the cost of production remained unchanged but the price they could get for their oil and gas rose more than 50% within weeks.
Companies are primed for a new boom as oil production in the Middle East has faltered and tankers have become trapped in the Strait of Hormuz.
The Conservative Party has called for the windfall tax to be scrapped, claiming this would help the North Sea oil and gas industry. But experts told The Guardian that was not the case.
Simon Cran-McGreehin, head of analysis at the Energy and Climate Intelligence Unit think tank, said the tax operated on producers’ profits, not their output. The price producers get per barrel is determined by international markets, so UK producers subject to the tax cannot pass it on to their customers.
“It is an ascending tax, so it does not affect the final consumer,” he stated.
Some have argued that removing the windfall tax would allow greater investment in the North Sea to increase production. But Alex Chapman, senior economist at the New Economics Foundation, said if North Sea producers wanted to invest in their industry, they could do so with the huge profits they were making from rising prices, rather than needing tax breaks. “Treasury should be looking at real growth opportunities, not this,” he said.
Advocates of easing the tax have argued that it puts the UK at an international disadvantage. But Bob Ward, policy director at the Grantham Research Institute at the London School of Economics, pointed out that the 78% tax that British North Sea companies paid on their profits was roughly equivalent to the tax paid by Norwegian producers.
The windfall tax has raised around £12bn, but that figure is dwarfed by the £56bn spent by the government to help consumers with high energy prices during the 2022-23 price rise.
He said: “It seems a little premature for the government to consider scrapping the energy profits tax now, with energy companies again set for a windfall and the possibility that the government will have to spend taxpayers’ money again to protect consumers.”
New drilling in the North Sea, which some have also called for, would take more than a decade to get underway, so would have no impact on the current crisis, while the development of renewable energy and the switch to electric vehicles will have a much greater impact, much sooner.
In the long term, further drilling doesn’t make much sense either, as the UK’s share of the basin is hugely depleted, leaving only pockets of oil and gas that are harder and more expensive to extract. According to estimates, new licenses in the North Sea would extend the life of the basin by only three to five years.
Robert Palmer, deputy director of campaign group Uplift, said the idea that the North Sea could generate economic growth for the UK was “a fantasy, a chimera of a declining industry, because it is about geology, not politics”, and the government should invest in clean energy.
He added: “All of us are about to become poorer, except the oil and gas companies and their shareholders. It’s pretty incredible that these companies are now lobbying for even less taxes.”
The best advice for consumers, experts say, would be for those who can to move away from the large petrol and diesel SUVs that have become normalized in the UK in recent years, in favor of public transport or electric vehicles, and for homes to install heat pumps, insulation and solar panels.
