A case for taxing Big Oil By Jayati Ghosh - Thursday, March 10, 2011

Source : http://www.dawn.com/2011/03/10/a-case-for-taxing-big-oil.html

THE crisis in the Middle East — and particularly in Libya — is generally believed to be the impetus behind the latest spurt in oil prices. But Libya produces less than three per cent of global petroleum output, and Saudi Arabia has already promised to make up any shortfall. In any case, global spare oil capacity is closer at present to historic highs than to historic lows.
The price spike is therefore driven by uncertainty, rumour and speculative activity in futures markets. Libya is only part of the problem — and in fact oil production still continues in many Libyan facilities, despite the civil war. The concern in financial markets is really about the possible endgame if the unrest spreads to Saudi Arabia.
We all know who loses from increasing oil prices: most of us. Oil prices directly and indirectly enter into all other prices through higher fuel costs in production and transport. Agriculture is directly affected, so food prices will rise further, worsening the resurgent food crisis. Developing countries which import oil tend to be much worse affected than developed importers. So the doubling of the oil price over the last year has destroyed any of the positive effects of foreign aid that developing oil importers receive.
But who gains from rising oil prices? The conventional view is to look at the leading exporters and assume they are the beneficiaries, and even that there is a redistribution of global income away from oil importers to oil exporters.
But this misses the point. The really big gainers — accounting for the largest portion of the gains by far — are the big oil companies. In fact, Big Oil, which suffered a setback during the height of the recession, is back with a bang, riding on the back of the recovery in petroleum prices in 2010. The large oil companies that announced their results in January 2011 have reported a doubling of profits in 2010, compared with the previous year. The three big US firms ExxonMobil, Chevron and ConocoPhillips together made nearly $60bn after costs and taxes. The profits of the Anglo-Dutch company Royal Dutch Shell also doubled, even though production was lower than expected.
In the current price surge, therefore, the real — and maybe only — real gainers are financial speculators in the futures markets and the big oil companies which can pass on much more than their own costs in the form of much higher prices due to a general sense of frenzy in oil markets.
The case for immediate and substantial taxes on those windfall profits, therefore, is very compelling. During his presidential campaign Barack Obama promised to impose such a tax in the US, but his administration has not yet done so. The point about the windfall profits is that they result from what are essentially anticompetitive practices of companies, in the form of rapid upward revisions and downward `stickiness` of prices.
So taxing them is only fair, because these surpluses do not reflect the investment outlays or current costs of companies but their ability to profit from price spikes created by other forces. — The Guardian, London
The writer is professor of economics at Jawaharlal Nehru University, New Delhi.

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