Thursday, July 10, 2014

How UK Socialists Kill Their Golden Goose

The EIA, the US Energy Information Administration, has given the UK Socialists a blistering drubbing for imposing confiscatory taxes on oil and gas companies which will further ruin their already declining domestic energy production.  The UK Socialists try to ignore the Laffer curve as higher taxes will actually hurt government tax revenue and their balance of trade.  Oil and gas revenues used to be the UK's golden goose in the 70s and 80s when the UK was an oil exporter.

Socialists, who eventually run out of other people's money, are desperate for revenue and have ratcheted-up taxes on the (formerly) prosperous offshore oil and gas business with tax rates up to 81%.   Worse, this tax rate goes up and down too often creating policy uncertainty thereby hurting long-term business confidence.

To give you some reference, the US Federal government royalty rates (tax rate) on all offshore field production is 18.75% and has been steady for years.  Stability of policy, including tax policy, is a recipe for success.  Unsteady and shifting policies are not.

Back to the UK, here's some commentary from the Energy Information Agency,
Recent increases in tax rates for the oil and gas sector, coupled with technical issues, have contributed to sharp declines in UK oil production. Higher tax rates have made the UK fields less competitive, which were already strained by high operating and decommissioning costs.

Since 2011, there have been a number of tax changes that affected production (or investment) in the United Kingdom [...] The tax rate for fields that are subject to petroleum revenue tax (PRT) increased to 81% of their profits (from the previous 75-percent rate), and fields that are not subject to PRT now pay a 62-percent tax (compared with the 50-percent rate in the past).

As a result of the significant increases in taxes, the UKCS projects have become even less competitive. Increases in operating costs coupled with higher taxes have resulted in decreased investment in both brownfields and new exploration. Even without the increased taxes, operating costs in the UKCS were prohibitively high, exacerbated by the high decommissioning costs of old facilities, which also discourage investors.

Almost immediately after the new tax rates were implemented, development on several start-ups was suspended, including Statoil's Mariner and Chevron's Bressay fields. In addition, Centrica launched a review of all of its exploration activities, as many projects were deemed uneconomical under the new rates
The UK used to be a big petroleum exporter since the 1970s, but that has gone away as the big fields declined and more expensive marginal fields have come on line.  The UK has been a net oil importer now since 2005 and that is set to further worsen with the higher taxes.  Because of less attractive economics for the smaller fields, the UK should be LOWERING taxes, not RAISING them.

Indeed, former Wood Group chairman Sir Ian Wood said investment is likely to fall by half later this decade, and called for a complete overhaul of the tax and regulatory regime.

Big government, excessive regulation, welfare, welfare dependency and bloated government costs paid for by high taxes on the prosperous has ruined many a country.  The results are a stagnated economy, limited employment opportunities and limited upward mobility.  This is how Socialism ruins societies.  They soak the "rich"-- those who have the wherewithal to build businesses that create employment and growth.  This is also the story of the poor performing economies in Western Europe.

This, of course, is the direction that Obama and Democrats want to go.  When will people see that they need to be run out of town on a rail?

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