In Defence of the Profits of Oil and Gas Companies

Few companies today are less popular than those in the oil and gas industry. Shell, ExxonMobil and British Petroleum are all resented for the great profits they are now making. 79% of the public back yet another windfall tax to get these profiteering companies to subsidise their bills. This is despite the fact the existing levy, with pre-existing taxation, is already an extortionate 65%, following Rishi Sunak’s increase to it in May. No doubt, with the forthcoming £130bn plus price cap,  further increases to the windfall tax will be touted as the means to pay for it. 

Increasing the windfall tax on oil and gas companies’ profits would be wrong: any windfall tax on these companies’ profits is wrong. Individuals, and the companies they constitute, have a right to the windfall gains of their labour or property, even if they haven’t done anything to earn them. To seize these gains is to violate their rights, to use them unjustifiably. Any such levy must therefore be abolished, and any increase in them opposed.

Let us proceed to bolster the truth of this liberal position by refuting the principal argument for the existing windfall tax, and by deduction all increases too.  We start with the contention that the profits of energy companies are ‘undeserved’. When Sunak increased the levy in May he argued it was fair because the companies’ increased profits have not come through “changes to risk-taking or innovation or efficiency”, but rather, have come as a “result of surging global commodity prices”. The essence of this argument is that individuals are not entitled to the income they have not had to do anything for. Although not Marx’s, Sunak’s reasoning shares with his the idea entitlements to incomes cannot be legitimised simply because they have arisen through free exchange. Some work needs to be done to confer deservedness.

It is then argued that the poor need support to get through the cost of living crisis, more than the companies’ shareholders need dividends, and this is a reason for the government to seize their profits via windfall taxation. Indeed it is predicted two-thirds of households could be in fuel poverty by January of 2023 (without further intervention). Together, the undeserved profits of oil and gas companies, and the needs of the poor, allow for a windfall tax for increased benefits to help the impoverished with their energy bills. 

The problem with this argument for the windfall tax is it proves far too much. Consider this example: across the country the average salary of a plumber is £35,862, putting such tradesmen’s earnings 14% above the median. Now imagine for some reason half of all plumbers quit the trade and decide to become waiters instead. The remaining plumbers would see their wages increase significantly, even though they’re doing the same hours and work as before. Let us assume our plumber ends up being paid a wage, such that his household expenditure is £45,437.60, putting him in the ninth decile of spenders. This allows his household to spend about £11,117.60 on restaurants, hotels, recreation and culture, as of 2019.

According to Sunak’s argument, the plumber should be subject to a windfall tax. Both criteria are satisfied. First, the plumber has done nothing to see his salary increase. Second, the poorest households, who really struggle to pay for their food and increasingly large fuel bills, clearly could do with the money more. Indeed, the poorest decile spends only about £1,705.60 a year on food and non-alcoholic drinks, less than a fifth of the plumbers’ spending on leisure, and that was in 2019! 

This is an unacceptable conclusion. Individuals have a right to the windfalls they derive from the voluntary exchange with customers and employers. To deny such a proposition is to accept whenever there is a shortage of labour in your trade or profession you are not entitled to bargain for a higher salary, or rather that the government is entitled to tax away all the additional income you may receive. Or at least it may tax it away insofar as others’ needs are greater than your own. I doubt my reader will want to embrace this. I believe this is because most of us implicitly reject the idea that individuals are only entitled to money they have worked for, or rather are only entitled to money insofar as it was proportionately worked for.

Consider the man who stumbles across truffles in his garden, he hasn’t worked for the money he receives on their sale; it’s sheer luck. Nonetheless, we accept he is entitled to their windfalls and should pay no more tax than anyone else with the same income. Equally, we accept people are entitled to the windfall on their car if it has become very popular, despite it being sheer luck such conditions have arisen. Indeed, it is sheer luck that beauty models are born beautiful. Yet no one is proposing taxing away their genetic-based windfall, with the bar being the income the average person would get going down the catwalk.  I contend that the root of these beliefs is a commitment to defending the freedom of the individual to make as much money as he so can, in whatever activity he so chooses – even if sheer luck is the cause.

By analogy then, if individuals, e.g. our plumber, are entitled to their incomes from sheer luck, then so too must the oil and gas companies be entitled to their profits from sheer luck too (from globally higher commodity prices). The alternative would be to live in a dystopian world where each job, trade, profession and commodity market has a differential tax rate to eliminate all windfalls (for why allow a part to be kept). To a few this may appear but a minor inconvenience. However, as F. A. Hayek has explained, this would lead to the impoverishment of society, as prices would be unable to direct resources to their most efficient uses. 

Consider, due to potato blight, the price of wheat increases dramatically as consumers switch to pasta. Today farmers of wheat would receive far larger profits as a result, due to the high price, despite having done no more work. This incentivises other farmers to shift to wheat production, from less urgently demanded crops, eventually pushing supply out, bringing the price of pasta back down. Resources are shifted from less valued to more valued uses and thus consumers are better off. If the state insisted, since wheat farmers are conducting no more work, efficiency-savings, investing or risk-taking, they should receive no higher price for their crop, the market would take far, far longer to adjust, and in the meantime, people would be worse off. Given these adjustments are always occurring across the economy, consumers would be permanently worse off if all windfall gains were taxed away.

Indeed it is even worse than this concerning the labour market. If half of the existing bin men decided to leave their jobs today the remaining bin men would see their wages go up, which would encourage new individuals into the role. If this wage weren’t allowed to go up though there would be shortages of bin men. To stop rubbish from going uncollected the state would have to conscript people into the position: These bin men would be slaves. Such is the conclusion one is forced to, as Hayek maintained, if rewards correspond not to the value which their services have for their fellows, but to the moral merit or desert the persons are deemed to have earned.

Clearly, if applied consistently, the principle no one should receive windfalls would impoverish the people, and require the conscription of individuals into many jobs. No man committed to living in a free society can thus permit the state to operate on such reasoning. Individuals have a right to their windfall gains, whether they be plumbers, or indeed the owners of oil and gas companies. The windfall tax must therefore be abolished, and failing that any attempts to increase it must be resisted every step of the way. Only then will the extraordinary profits of oil and gas companies remain where they should have always rightfully belonged: In the bank accounts of the shareholders.

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