Should BP Pay a Windfall Tax?

There have been calls for BP (BP.) to pay a “windfall” tax out of their record profits which were announced yesterday. For example Richard Tice, leader of the Reform Party, had this to say on Twitter: “BP highest profit for 8 years. Even bigger profits likely in 2022, not thanks to own efforts but to Putin’s warmongering. Shareholders likely above average wealth. So higher energy prices transfer wealth from poorer to richer. Windfall tax right in moment of crisis”. [I corrected a couple of grammatical errors]

The Labour Party has also put the Government under pressure to tackle the cost-of-living crisis by calling on MPs to support its bid for a windfall tax on gas and oil companies.

But is BP actually that profitable a company? Not being a shareholder in it I thought I would have a quick look at its numbers over the last few years. They are in fact quite abysmal. The company lost $20 billion in 2020 and in the previous 5 years never achieved a better return on capital employed of more than 7% in any one year and averaged only 1.4% over those 5 years.

Prior to that they tripped over the Deepwater Horizon Gulf oil disaster which meant not just profits disappeared but also dividends.

BP said “Generally, a windfall tax on UK oil and gas producers would not encourage investment in producing the UK’s gas resources”; and “”Very importantly, we also believe the UK should continue its [low carbon] energy transition as fast as possible. BP is committed to playing our part here.”

I think this is a “we need the money” kind of argument. But the simple fact is that BP’s profits, like those of oil companies, are very sensitive to the market prices of oil and gas. They have to invest billions of pounds on likely future profits in researching and developing new resources with no certainty that market prices will reward them. The level of profitability of BP over the last few years is not an encouragement to anyone to invest in this business. Taxing them with a windfall tax would discourage folks even more.

It’s unfair and unreasonable to penalise them when profits rise in a good year. They have to ride the peaks and troughs of market prices because nobody is going to protect them against market forces, unlike the Government’s unwise attempt to protect the public from them.

Roger Lawson (Twitter:  )

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