‘The Government should put a one-off windfall tax on the greedy oil companies who have made £10billion extra profits in the last year while the rest of us struggled to fill our cars.’
So says Tony Woodley, the leader of the UK’s biggest Trades Union Unite - and you are probably expecting me to dismiss such socialist interference with the free market out of hand.
And yet it does not seem so long ago that similar demands for a windfall tax were being directed at the banking sector. Look what happened next. The banks, flush with money and urged by the City to expand and to grow, lent more and more money with less and less care until the borrowers finally began to struggle to make repayments. Like an earthquake the financial sector shuddered, the economy ran for the hills and not only did the banking sector move very rapidly from supernormal profits to massive losses, the rest of us are all suffering the consequences.
I don’t think this would have happened, or at least not to anything like the same extent, if some agency had relieved the banking sector of some of the profits that it was reaping two or three years ago.
There is only so much finance that an economy needs, or is good for it.
It is a bit like drinking red wine. A little is good for you but too much certainly is not. Had the banks not been allowed to retain the fat profits they were making at the peak of the cycle they would not have lent with such reckless abandon at the time, or caused the problems that now beset us.
What happened was that the banks reinvested their increasing profits in decreasingly profitable ways. This has reduced their return on capital, to the detriment of shareholders.
Proponents of the free market argue that this is not supposed to happen. The institutional shareholders of banking shares are supposed to be able to foresee diminishing returns and demand that a part of the banks’ capital is returned into their hands, so that they can then redirect it into areas of more promise.
This clearly has not happened to any degree. The banks were left with their pile of money, and did what banks do – they bought each other, the benefits of which are dubious, or simply increased their lending. It is easy to argue that we would not be in today’s mess if the Government had imposed a windfall tax on the banks about three years ago. So does the same argument now apply to the oil industry?
Oil companies have to invest
There is one very big and very important difference between banking and oil. Essentially all banks do is to recycle money. They take deposits and lend them out. Although they might decide that they need a physical branch network – although this is not essential – they operate essentially with people and with their raw material, money.
Banks have no need to invest in the future.
No doubt they would dispute this. They would say that they have to build a presence in new markets, like Africa, and they have to get into new business areas like trade finance or investment banking.
But, unlike the pharmaceutical industry, the banks do not employ thousands of highly paid researchers to come up with the new products that they need to grow their business. And the banks do not need to spend billions of pounds finding new sources of raw material. The banks’ raw material, money, does not come out of the ground. It walks into a bank tucked into somebody’s purse or wallet and is handed over the counter.
Oil companies need oil!
They need to find a supply of it that they can then refine and deliver to the customer. They are running down their inventories each and every day and are involved in a constant struggle to replace them.
Oil exploration is extremely expensive, not only because hire rates for rigs and other equipment have soared in the last couple of years, but because oil is increasingly remote and hard to extract. It is one thing to pump oil from the fields of Texas; it is quite another to drill in the deep waters of the South Atlantic or to squeeze oil from Canadian tar sands.
As I said earlier, the City is not nearly as good at allocating investment capital as it would like to think. Remember how it poured billions into dot-com companies, most of which never made a penny of profit?
If Mr Woodley has his way and money is taken from the oil industry and given to the hard-pressed UK citizen that will represent a transfer from a pool of money that will be invested into future production, and into the hands of those who will spend it on current consumption. That is not a good idea.
So Mr Woodley and the Government should lay off the oil industry.
To a far greater extent than the UK banking industry, it is involved in global competition, and it needs every penny it can get if it is to find the oil that we all want in the future. While hoping that the oil companies are successful in their efforts, and do not drill too many barren wells, we should be pleased that they have the financial wherewithal to pursue their various exploration projects.
Regards,
Tom Bulford
for The Penny Sleuth
