LONDON () -- Seriatim, various oil & gas companies have reported spectacularly burgeoning profits to the market. While this is hardly surprising given the current level of the headline oil price and is probably a matter of exultation for most shareholders, an unscrupulous UK government may be unable to resist making a fast buck at someone else's expense.
This is a particular risk in Britain, where two of the world's foremost oil & gas majors, British Petroleum [LSE:BP; NYSE:BP] and Royal Dutch Shell [LSE:RDSA, RDSB; NYSE:RDS.A, RDS.B], happen to be based, and where a plethora of oil & gas companies are actively producing and exploring in the North Sea. Not only is the man most able to institute an extra tax on the oil & gas industry, Chancellor of the Exchequer Gordon Brown, ordinarily inclined towards such left of centre measures, but he has a higher political ambition that may be served by going after the oil & gas sector for extra revenues. The political ambition in question of course, is to succeed incumbent Labour Party Prime Minister Tony Blair in the top spot when and if he chooses to relinquish it, something that has been hinted at by both men.
Brown's ends would be furthered in two ways by raising significantly the level of taxation on the UK oil & gas sector. Firstly, it could help avert a fiscal crunch when the government's excessive profligacy becomes more apparent, and perhaps lessen the resultant likelihood for Brown of having to burden consumers with yet another tax rise. The latter might otherwise have negative electoral implications for the Labour Party just as Brown wishes to assume the reins, particularly as consumers are already feeling slightly the squeeze of high oil prices. Secondly, a move against the oil industry would appeal to the fundamentally socialist instincts of the bulk of the Labour Party, thus building support in reserve for Brown's leadership bid.
A raid on the corporate profits of the oil & gas sector would though be highly inadvisable. Not only does it clash with basic notions of fairness and respect for enterprise, but it sets a worrying precedent which may negatively impact the UK economy's free market credentials and erode its overall attractiveness as a business environment.
The temptation for the government could be lessened if the major oil firms were seen to be investing their profits in a manner that might relieve widespread consternation arising from the high oil price. Specifically, this could mean investing in new refining capacity, particularly that suitable for heavier grades of crude so as to alleviate upward price pressure on the lighter, currently more desirable grades, or upping the rate of reserve replacement in order to guard against future shortfalls.
Although the rectitude of any attempt by the government to tell industry what to do with its profits is highly debatable, such a state of affairs would surely be better than one of encroaching taxation. That said, greater investment alone might in any case be insufficient; oil may just be getting harder to find as global resources, particularly those easily accessible or of desirable grade, are depleted.
The key issue though for Gordon Brown and his ilk regarding any opportunity to raise the tax burden on the oil & gas sector is probably whether or not they can get away it. If oil prices remain high and begin to significantly inflame public sentiment, the answer could well be yes. However, certain government advisers must surely know that such a move would likely prove imprudent in the long run, and hopefully, these voices will be the ones that carry the day.
