If you want to convince me this is a good idea, you’re going to have to convince me that Tim Worstall is wrong.

“Increasing [fuel] supply would require more money to be spent on the problems of discovering and extracting more of those energy sources: reducing demand could be done by reducing the amount that people either do or have available to spend on purchasing such.” - Tim Worstall

Utter madness.

The only way to bring down the price of energy is to bring new oil and gas supplies on-stream and increase the supply available for trade in the market.

How, pray tell, are energy companies to increase exploration and drilling of new sources when would take away the very money that would be used, profit?

Centrica, for example, has a 58% tax rate already - they pay 75% on gas extraction from the North Sea. How much more are we expecting them to pay?

Presumably if we take this money from the companies the shareholders will see lower dividends - I wonder if the Granny Jones with a few hundred shares in British Gas, who qualifies for no state help will be able to pay her gas bill when you reduce her income>

We have just seen a $25 fall in the price of a barrel of crude; why? Because the futures traders in London have been informed of new supplies about to hit the market.

You’re aiming at entirely the wrong target here.

I think it’s awfully helpful of Daniel to label his comment ‘Utter madness’.

The article gives no advice for what to do if you disagree. Go suck a lolly, would be the presumed retort, or something similarly hilarious. Hmmm, lollies. Such icy loveliness. Heaven on a stick really.

S, mm Nl, y r ttl fckwt thn, h?

< hrf="http://dmsmth.rg/blg/tx-nd-cnmy/thr%27s-stpdty-nd-thn-thr%27s-dcy-200808021809/" rl="nfllw">http://dmsmth.rg/blg/tx-nd-cnmy/thr%27s-stpdty-nd-thn-thr%27s-dcy-200808021809/

If the belief is that the energy companies have lots of extra money and the concern is fuel poverty, then maybe the first step would be for the government/regulators to invite Centrica etc to bring forward proposals of their own to address the issue of fuel poverty and home energy efficiency. The threat of a windfall tax may spur them into action.

whatsmore does anyone really believe the Treasury could resist dipping into the windfall revenues for other spending/tax cuts?

RickB

…..but it is. It flies in the face of competent economic theory. We should be giving them a reduction in corporation tax to stimulate growth (and hence supply) in the sector - not taking the very money that could be spent expanding production from them. What’s your big idea then?

I’ve posted almost the opposite on this site before, you can read it here. What we need is to simply make getting energy fairer, who cares if the companies are generating record profits if those that need simply to heat and light their home and eat can do so without worrying about losing something else? I know I don’t, i’d applaud a company making £10billion profit a year as long as at the same time they were not fleecing the poorest disproportionately.

A windfall tax is a short term populist measure, and no doubt that is why Labour will seriously consider employing it, but ultimately it has been proven already that the amount of money that goes in to social tariffs is eaten up by bureaucracy, and affects a pitiful amount of people that need the handout.

Centrica and that are not the ultimate evil, they’re pretty shitty in that they have (up until the last year) overall, by and large, passed the cost of gas increases on to the customer, but they are a business doing what they need to do. I think that right now is the perfect time for them to consider a change in the model for tariffs, personally. They have the capital to back it up, it technically should help their profits as people adjust to the new way of charging, and ultimately will lead to people using less energy needlessly…thus driving down demand, and aiding the government’s environment credentials.

The only people that would lose out, if calculated correctly, would be those that excessively use too much gas and electricity. The government would win, both with the poor (it’s core vote) and business (in that no punitive measures are exactly taking place), energy companies simply wouldn’t lose out financially if the numbers are crunched correctly, and the majority of people would be paying no more than they were. At least that’s my thought.

But essentially, if you want to help people, then help people by sorting out unequal tariffs and trading practices. If you want to stop companies from feeling so ready to be trading in the UK and to give the Tories a chance to label you with derogatory terms then slap a windfall tax on, but it certainly won’t be an efficient way of aiding anyone that needs to be.

Also, I find this interesting… “But every 10% increase in energy prices mean an extra 400,000 people go into fuel poverty.” 10%… that’d currently be about, what, £100? £140? a year of course. I’d say that the 10p situation (should the supposedly temporary measures be rescinded) combined with a retrospective car taxation must be putting at least 400,000 people into fuel poverty, effectively. Perhaps the government could undo 400,000 people’s fuel poverty by also undoing stupid tax changes?

Daniel, it depends which economic analysis you choose to use. Sure, for a normal good, lowering corporation tax may well be a good thing, depending on elasticity of supply and market conditions. But is oil a normal good? It has vast unpriced (and mostly unmeasured) externalities which are mostly negative, and have to be taken into account. If these are factored in, it may well turn out that oil is a socially undesirable product, at least in the long term. If it can be argued that the socially positive thing to do would be to move to a post-petroleum economy, then economics would applaud the move. (I’m using “social” in the economic understanding, i.e. private value + externalities = social value; it has nothing to do with “socialist”.)

I personally believe that we do need to move beyond a petroleum-based economy, but disagree that the proposal will further my aim at all, if that was ever the intention.

“If these are factored in, it may well turn out that oil is a socially undesirable product, at least in the long term.”

Jebus. So, if this is true then the last damn thing we want to do is subsidise people so that they can consume it, isn’t it?

Look, it’s pretty damn simple: if you want oil (etc) to get cheaper then you don’t tax the companies that provide it.

If you don’t want oil to get cheaper then please stop whining about how expensive it is.

One or the other, eh?

Tim, try debating without throwing around cusses once in a while, yeah?

These people are insisting that we should take the money away from those who would go and find more fuel and give it to the people who want to buy fuel.

First, it assumes most of the money given in windfall taxes would be spent on fuel. It won’t. A small proportion will, especially since poorer families are less likely to drive around in gas guzzlers.

Secondly, Tim is assuming the money taken away from gas companies will be spent on extracting oil. Good luck with convincing OPEC that eh? That money could be better spent on trying to improve renewable energy viability… but it certainly won’t help reduce gas prices. OPEC has much more control, as does events in the Middle East, than BP alone.

Tim probably knows this, but he’s pretending that he’ll show up the socialists on his supposedly superior economics knowledge.

Lee: it has been proven already that the amount of money that goes in to social tariffs is eaten up by bureaucracy, and affects a pitiful amount of people that need the handout.

Shown where?

Daniel: Centrica, for example, has a 58% tax rate already - they pay 75% on gas extraction from the North Sea. How much more are we expecting them to pay?

Sorry, what was their latest profit announcement again?

I wonder if the Granny Jones with a few hundred shares in British Gas, who qualifies for no state help will be able to pay her gas bill when you reduce her income

haha! I love this. Rather than handing her money, we should pretend she has shares in British Gas and would benefit through dividends. What convoluted thinking.

Synergy6

I agree. We should be doing everything possible to move to a post-petroleum situation - and we will as it becomes economically viable; but in the short-term, until such alternative supplies are available in order to do this, penalising the extraction/production companies - and then transferring that wealth to the very people causing the problem in the first place, seems, well, crazy to me.

If the government effectively subsidises my gas bill, I’m not likely to turn the thermostat down (lowering demand and conserving supply) - quite the opposite, I’ll turn it up - hey, I can afford it, GB just gave me £200 off my bill. This stokes demand and pushes prices even higher, surely?

If the green lobby hadn’t been so intent on turning us all into Luddites, we could have had the sensible debate about nuclear in 1997/8 - and ten new power stations could have been coming on stream - right about the time we so desperately need them.

@Tim, “If you don’t want oil to get cheaper then please stop whining about how expensive it is.”

Err, when I have whined about it? I happen to quite like it :) I’d like energy prices to fall in the long term, but I happen to think of the current high oil prices as a good thing. To my mind, if the oil price actually reflected its externalities (think carbon tax), it would be far higher than it is now.

@ Daniel, it’s crazy to me too. I in no way support the original post.

Sorry, what was their latest profit announcement again?

You’re talking about absolute amounts of money - profit, from a quick and dirty calculation was about 6% of total turnover - hardly excessive.

As for the point about Granny Jones, my own Gran is in this situation - modest savings and a few shares here and there - doesn’t qualify for help (wouldn’t want it, pride and all that) - reduce her income and she starts spending her capital - then eventually she would qualify and become another person for the state to aid. I don’t see how that is “convoluted” thinking at all. She wants her financial independence as do thousands of people in her situation. In a previous life I used to deal with their finances, I’ve seen them, hundreds of them, and that was in just one small city - I have not doubt the situation is replicated all across the country.

Gordon has already fucked their pensions, now he wants their portfolio monies too - because that’s what will eventually happen under plans like these.

This is naked political expediency and it stinks.

This is naked political expediency and it stinks.

Its wealth re-distribution, and in this case its legitimate.

I wonder how many people on the right will be calling for all the huge pay-offs that CEOs have been getting, prior to the credit crunch, to be severely cut back and those people penalised for creating the credit crunch.

But of course that won’t happen, because those on the economic right keep talking about being nice to poor people, but when it comes to putting forward policies, the only ones they put forward help the rich.

You want to complain about falling share prices? Why not call for the heads of the CEOs who have been walking away with golden parachutes once their share price tanked?
Your granny is more likely to be robbed by them than New Labour:
http://plattitude.blogspot.com/2008/07/how-to-lose-11000-without-even-noticing.html

synergy6:
I’m not likely to turn the thermostat down (lowering demand and conserving supply) - quite the opposite, I’ll turn it up - hey, I can afford it, GB just gave me £200 off my bill. This stokes demand and pushes prices even higher, surely?

Oh right, yeah! Because those poor people aren’t going to be thankful they have some new money to cover the mortgage, they’re immediately likely to turn up the thermostat just so they can pilfer away the money for the hell of it. Let us know when you’re back on planet earth.

@ Sunny “You want to complain about falling share prices? Why not call for the heads of the CEOs who have been walking away with golden parachutes once their share price tanked?”

The main losers from giving “golden parachutes” to under-performing CEOs are the shareholders of the company involved. The point is a call for increased shareholder activism, not misguided and populist government “interventions”. Furthermore, to act like the “credit crunch”, as it has been popularly termed, has entirely been the wilful creation of a scheming, conspiratorial bunch of CEOs, is quite frankly beneath you. One hopes you can see the world is far from being that simple.

Oh, and your quote, I believe, was from Daniel, not myself.

Its wealth re-distribution, and in this case its legitimate

Yes, but you’re redistributing funds to the very people causing the problem in the first place and enabling a potential greater increase in demand - thus fuelling price rises.

I’m not against redistribution - Christ, I’m a three-time Labour voter (’97 was the first time I could vote) - but this is not the way to remedy this problem. We should, as I said, have been building nuclear power stations along time ago; but when people like J McK get to spread anti-science, anti-nuclear propaganda on sites like this (the lefty version of keeping people scared, I guess) - it ain’t gonna happen.

Wind, wave, hydro, geothermal nor solar will not remedy this for us in the immediate future, so what do we do? One thing we don’t do is fuel demand for gas/oil and that’s what a subsidy will do - even if that extra demand is modest, in the current situation it is a very bad thing.

As for people paying their mortgages with this money, then they shouldn’t be given it in the first place under these terms - this is supposed to be about alleviating fuel poverty, not subsidising (which is the last thing it needs) - the housing market. There is an entirely different debate to be had about incomes (scrap wasteful tax credits and massively raise personal allowances, in my view, why are people earning £10k even paying tax?)

As for CEO wages, yep, golden parachutes for people that have made a balls of things (wither, Adam Applegarth?) - I agree, the current situation is a disgrace. What we do about it, I’m less sure.

What the ???? have you done to Tim’s post (#5)?

Blanking the obscenity and personal attack seems to follow the comment rules, but changing the link is childish. For reference, http://www.adamsmith.org/blog/tax-and-economy/there%27s-stupidity-and-then-there%27s-idiocy-200808021809/

Dearime, I thought we were at Drinks soaked trots for a moment.

Tim Worstall’s link

Delete this and the “debate” will effectively be over - dissenters need never post here again.

“Lee: it has been proven already that the amount of money that goes in to social tariffs is eaten up by bureaucracy, and affects a pitiful amount of people that need the handout.

Shown where?”

I take back the proven about bureaucracy, I was obviously thinking of something else, however the Government’s plans to make the energy companies spend £225m over 3 years will lift all of 2.5% of people out of fuel poverty. To supposedly do enough to lift all those people out of fuel poverty you’d have to spend £9 billion. This isn’t going to happen, why are you striving to achieve the impossible? A windfall tax will help for a while, but how do we know it won’t go the same way as the winter fuel payments that only manage to ensure that pensioners are proportionately equal in fuel poverty as to *before* winter fuel payments were even conceived? This government is not one for long term substantive measures that actually tackle poverty, hence them considering (with your help) a windfall tax.

Let’s face it, it’s a short term measure and no-one is going to make any friends over it, unless they tax the energy companies in the region of 150% of their gross profits there is no way that the fuel poverty situation will be solved, and all of this in the face of the government *cutting* the tax income they make from the majority of people at the expense of the poorest! You need to think a lot bigger than this I’m afraid.

Heh. Clever. You removed all the vowels. I wondered why it still (almost) looked familiar..

Taking the points in turn…

Tim’s post was disemvoweled, and subsequent posts that rely on hurling insults rather than adding to the debate will continue to be so.

Synergy6 The main losers from giving “golden parachutes” to under-performing CEOs are the shareholders of the company involved. The point is a call for increased shareholder activism, not misguided and populist government “interventions”.

Not just the shareholders, but the economy, the workers and related industries too, unless you think financial companies work completely in isolation. There is a strong case to be made for further regulation and I believe a windfall tax is a good re-distribution that is unlikely to make much difference to the financial health of those companies. Besides, abnormally high profits are a sign of market failure anyway - so the market is already quite imperfect. Once those companies change rules to allow shareholders greater say in their affairs, I’ll be more sympathetic to their cause.

I didn’t say there was a conspiracy to bring down the financial system. More like a lack of oversight, self-regulation and market failure.
I’ll look forward to articles criticing these companies on that basis.

Daniel:
Yes, but you’re redistributing funds to the very people causing the problem in the first place and enabling a potential greater increase in demand - thus fuelling price rises.

Erm, not really. The cause of high prices could variously be attributed to: the growth of China, instabillity in the Middle East and not diversifying our energy supplies quickly enough.

Wind, wave, hydro, geothermal nor solar will not remedy this for us in the immediate future, so what do we do?

We invest money in making them more financially viable and improving the technology. Its not going to happen through wishful thinking.

One thing we don’t do is fuel demand for gas/oil and that’s what a subsidy will do - even if that extra demand is modest, in the current situation it is a very bad thing.

As I said above, increased demand has probably played a negligible effect on the higher prices. Prices don’t jump from ten dollars a barrel to 150 just because of demand.

There is an entirely different debate to be had about incomes (scrap wasteful tax credits and massively raise personal allowances, in my view, why are people earning £10k even paying tax?)

Agreed.

As for CEO wages, yep, golden parachutes for people that have made a balls of things (wither, Adam Applegarth?) - I agree, the current situation is a disgrace. What we do about it, I’m less sure.

Well, for a start I’m not going to take lame economics lessons from right-wingers who have been curiously silent about what caused the credit crunch and about these balooning salaries while they bleat about helping the poor as soon as someone mentions re-distribution.

When Bear Stearns collapsed, they lost the argument. Now its time for the left to develop an alternative vision.

Lee - no one has said this windfall tax is a long term measure. It is entirely a short term measure. In the long term you could pray that Obama gets into power (or more likely, get involved in his campaign) so the United States pours more investment into energy diversification.

God knows there’s far too many myopic people who forever keep making excuses for the oil companies and fatcats, that when we had the chance to become global leaders in renewable energy science, the govt failed to put any money into it.

Yet a windfall tax won’t affect the way that the poor are charged disproportionately more of their energy use, renewable or otherwise. I also seem to remember someone making the very pertinent point that it’s all well and good saying that you want every home to be energy efficient yet there are homes out there, usually occupied by the poor, that simply cannot have a significant level of energy efficiency bestowed upon them.

If you make energy cheaper, it will ultimately be cheaper for all, and all that will do is make the worst offenders of frivolous use of resources less wary about doing so. You cannot, as far as I’m concerned, solve the problem of energy dependence and all that it will bring to constantly struggling capacities of sustainable energy sources without first solving the issue of energy being traded as if it were a bag of nails, with “bulk buying” being cheaper. All you’ll do is keep shifting the goal posts, and at a time when energy companies are starting to really feel the pinch of not being able to pass on all the rising gas costs to us. It’s not a good recipe for success.

“Not just the shareholders, but the economy, the workers and related industries too, unless you think financial companies work completely in isolation.”

Not quite. You made the specific point about golden parachutes. Golden parachutes have not hurt the “economy” in any meaningful way. Perhaps you’d care to compare the golden parachutes given out in 2007, to the revenues of the companies involved, nevermind GDPs.

“There is a strong case to be made for further regulation”

Generally, I don’t believe so. Certainly, a tweak here and there wouldn’t hurt, but the current regulations seem sufficient. The efficiency and effectiveness of regulators, however, is quite another matter.

“abnormally high profits are a sign of market failure anyway”

True, but how are you measuring “abnormal”? If you’re appealing to economic theory, I believe the response to such profits, if they indeed exist, is to encourage competition and new entrants to the market, not windfall taxation.

“Once those companies change rules to allow shareholders greater say in their affairs, I’ll be more sympathetic to their cause.”

We are agreed.

“I didn’t say there was a conspiracy to bring down the financial system.”

Err, what? “huge pay-offs that CEOs …. those people penalised for creating the credit crunch.” The credit crunch wasn’t entirely, or even mainly, created by CEOs. To treat them as sole defendants must surely assume some sort of conspiracy, unless you grant that CEOs have far greater powers than their regular positions could possibly afford them.

“More like a lack of oversight, self-regulation and market failure.”

Very true. And the market will fix itself.

Lee - I agreed with your earlier analysis. The point here is that a windfall tax doesn’t negate the need for a broader look at how energy is priced anyway. But the two can be separate arguments.

Daniel, here’s more on the benefits of the Nuclear industry saving our problems:

Anyone caught up in the excitement of the Government’s decision to back a new generation of nuclear power plants last week might benefit from a trip to Sellafield, where the grisly realities of Britain’s past nuclear mistakes are plain to see.

Up there, despite an industry charm offensive, the local seagulls are still radioactive. Like most birds, they are partial to a dip in the local pond. Unfortunately, Sellafield’s ponds contain a highly radioactive sludge full of weapons-grade plutonium, glowing skips of cobalt 60 and even — bizarrely — rotting barley, which I’m told was formerly used to “clarify” the murky green waters. Sellafield has tried everything — from scaring the birds off with klaxons to shooting at them, but it doesn’t work.

Some do manage to fly off, dispersing gunk into the Cumbrian skies. Don’t worry, though, when the gulls are finally caught, they are frozen and stored as nuclear waste.

http://business.timesonline.co.uk/tol/business/columnists/article3200340.ece

(via Justin). Good luck with that line of argument.

And you still want to invest in nuclear over investing in renewables?

Synergy:
Not quite. You made the specific point about golden parachutes. Golden parachutes have not hurt the “economy” in any meaningful way

My point, the golder parachutes indicate a market failure that the market is unwilling to correct or is unable to. It hasn’t at all corrected itself as you keep on hoping. In fact it has gone the other way.

So at what point do you accept that there is something wrong with how companies are renumerating their CEOs, and right-wingers keep making excuses for them, while the incentive for them to be more careful in running operations (the stuff that loses people their life savings, you know - the important stuff?) is negiligible?

The efficiency and effectiveness of regulators, however, is quite another matter.

I agree, so the regulators shoudl be given more teeth.

The credit crunch wasn’t entirely, or even mainly, created by CEOs.

No? What do you blame the credit crunch on then? No blame for reckless lending?

Very true. And the market will fix itself.

Yeah sure. You may as well become a Hindu, invite over a pundit and start the bhajans because right now your hands-off approach is likely to be just as effective.

Sellafield’s ponds contain a highly radioactive sludge full of weapons-grade plutonium, glowing skips of cobalt 60 and even — bizarrely — rotting barley, which I’m told was formerly used to “clarify” the murky green waters

And “highly, glowing, rotting” mean what precisely? See, you’re at it again. My faeces is radioactive. as is yours - whether its dangerous or not is an entirely different matter - scaremongering - and you are unapologetic. Yes, Chernobyl was horrendous - but why? Because of a secretive regime that wouldn’t share best practice. Apart from that, point to another major event with substantial casualties? Or a proven substantive effect on the local population?

I don’t want to “invest in nuclear over renewables”, I wanted to invest in what is viable now (renewables certainly have their problems, particularly wind) -now we should balance what is economic against what is able to fulfil demand, surely?

“My point, the golder parachutes indicate a market failure that the market is unwilling to correct or is unable to. It hasn’t at all corrected itself as you keep on hoping. In fact it has gone the other way. ”

Golden parachutes are not a market anything. They are a private company decision. You and I might well sit here and call them silly, (which I do), but if a company and its shareholders choose to waste their money on inept management and misguided incentives, that’s their issue.

“So at what point do you accept that there is something wrong with how companies are renumerating their CEOs,”

If what you’re getting at is “do you think CEOs get too much”, then I fear we have a deep divide. You get what shareholders think you’re worth. If they’ve overpaid, that’s (once again) their issue. The credit crunch was not caused because a few CEOs got £40m instead of £40k.

“the incentive for them to be more careful in running operations”

The forward-thinking companies (which, in the long-term, will likely be the most enduringly successful) are always improving the link between remuneration and company performance. You are welcome to buy a single ‘A’ share of a company who’s management remuneration you disagree with, and bring it up at the AGM.

“What do you blame the credit crunch on then?”

Well, the answer to this question could be huge, but it’s late and I’d like to summarise. I don’t really think “blame” is the right word to use here. It conjures up images of a criminal trial, with readily identifiable defendants. The problem is, no individual or group of individuals “caused” the credit crunch. It’s a market retraction, it happens. Much as no person or company can be “blamed” for market falls from the Wall St. Crash to the dot-com bubble, neither can this one. I’m sure, if you wanted, you could invent bogeymen. Alan Greenspan, for keeping federal inter-bank rates too low for too long, fuelling the housing bubble. Ben Bernanke, for seeing his mistake but not instantly correcting it. You could blame the global housebuilding industry, firing up homes that could only be sold for as long as the bubble continued. You could blame investment banks for basing investment models too heavily on the unusually low interest rates. You could blame American lenders for encouraging, or at least not discouraging, people to lie about their incomes. You could blame American borrowers, for lying about their income. You could blame governments, for not anticipating the bursting of the bubble. You could blame regulators, for not doing enough. You could blame George Soros and Warren Buffett, for figuring out in 2003 that this was almost inevitable, but not doing enough to warn people. You could blame our society’s obsession with credit. You could blame.. I’m getting bored. In short, you could blame just about everybody. Swinging tax hikes will not help the readjustment.

“Yeah sure. You may as well become a Hindu, invite over a pundit and start the bhajans because right now your hands-off approach is likely to be just as effective.”

And now you’re being childish again. What have you got against the Hindu faith? The approach has not been hands-off, even if it hasn’t been as hands-on as you might like. Yes, it didn’t stop the bubble bursting, but if you think enough regulation can stop boom and bust, you’re fundamentally misunderstanding the market. I’m simply calling for tweaks here and there to take into account what we’ve learned over the past few years, and moving on. Hasty, populist moves in the wake of financial crises are rarely successful.

I do find it interesting that I’m debating the credit crunch with someone who only brought it up to infer that because I don’t hate Chief Executive Officers, my views on the actual topic here (windfall energy taxes, if anyone had forgotten), are somehow irrelevant. Que sera, sera.

Daniel: See, you’re at it again. My faeces is radioactive. as is yours - whether its dangerous or not is an entirely different matter - scaremongering - and you are unapologetic.

I am unapologetic about the fact that there are significant dangers in moving to Nuclear energy that need to be confronted. Its likely we’ll have to put some eggs in that basket, but I’d rather we move faster towards renewable energy too.

Hi Synergy:
Golden parachutes are not a market anything. They are a private company decision. You and I might well sit here and call them silly, (which I do), but if a company and its shareholders choose to waste their money on inept management and misguided incentives, that’s their issue.

They’re a product of market failure because they indicate not only that managers are being awarded for failure, but that shareholders are (very frequently) unable to do anything about it.

My point here is two-fold: that right-wingers say very little about this kind of market failure, and that markets don’ always self-correct.

The credit crunch was not caused because a few CEOs got £40m instead of £40k.

No, it was caused because CEOs had little to worry about in terms of renumeration when they failed or were chucked out, so they had an incentive to take abnormal risks.

That, combined with not enough regulation and oversight.

It’s a market retraction, it happens. Much as no person or company can be “blamed” for market falls from the Wall St. Crash to the dot-com bubble, neither can this one.

This sounds a bit like when left-wingers try to blame crime entirely on social conditions. There are identifiable companies that created opaque derivative instruments that were not regulated properly. There are companies that lent recklessly and borrowed even more recklessly.

Swinging tax hikes will not help the readjustment.

I never said a windfall tax would solve the problem. More regulation would do that. The point about a windfall tax is merely a redistributive one.

And all the arguments against it (my grannies shares will fall! People will throw that money away on fuel bills!) are pretty lame.

What have you got against the Hindu faith?

I’m not a fan of praying. Thankfully Hinduism isn’t all about that.

Yes, it didn’t stop the bubble bursting, but if you think enough regulation can stop boom and bust, you’re fundamentally misunderstanding the market.

No, but it can prevent markets tipping over, as clearly would have happened if Freddie Mac and Fannie Mae were allowed to go bust. I suppose you’re also opposing the Feds supporting them?

I do find it interesting that I’m debating the credit crunch with someone who only brought it up to infer that because I don’t hate Chief Executive Officers, my views on the actual topic here (windfall energy taxes, if anyone had forgotten), are somehow irrelevant.

No, my point was that right-wing thinking is pretty much exhausted right now on global economic developments, other than some lame shreiks from the likes of Tim Worstall, who seems to believe, like you, rather naively, that markets will self-correct painlessly and that everyone will come out happier.

In this case a windfall tax won’t solve long term problems, but it is in no way as dangerous as various people are making it out to be,

To take a number of points.

“My point here is two-fold: that right-wingers say very little about this kind of market failure, and that markets don’ always self-correct.”

Us “right wingers” have said a great deal about this for many years. It’s called the principal agent problem. It’s well known, there’s reams and reams of work on it. You’re obviously correct that the market hasn’t “self-corrected” this but if you knew a little more economics you’d know that this isn’t something that right wingers ignore.

It’s also not unique to private business: an MP or a Minister gets a pay off when they lose office, that’s a reward for failure, isn’t it?

“As I said above, increased demand has probably played a negligible effect on the higher prices. Prices don’t jump from ten dollars a barrel to 150 just because of demand.”

Erm, oil production is no lower this year than it was last. Or the year before. There has been no reduction in supply. Thus the entire increase in the price has indeed been as a result of an increase in demand. But then that’s economics….

“Secondly, Tim is assuming the money taken away from gas companies will be spent on extracting oil.”

No, Tim is assuming that the money taken from gas companies would be spent on finding gas: and that oil on oil but….there is also the point that by reducing the profits of those already in the industry you deter new entrants. Want to go and look up how much new money has flowed into oil and gas companies via the LSE and AIM over the past few years as people chase those high profits?

Further, we’ve actually done this before. A couple of years back Brown increased the profits tax on extraction from North Sea oil fields. Yes, production did fall the next year. The Guardian reported that it was because of the higher taxes. That’s economics you see….when you tax something you get less of it.

“But is oil a normal good? It has vast unpriced (and mostly unmeasured) externalities which are mostly negative, and have to be taken into account.”

Whether oil is a normal good or not has nothing to do with whether there are externalities.(which of course there are). A normal good is any one that the demand for it increases with rising income: ie, a positive income elasticity of demand. Yes, oil is a normal good…..I do love it when you socialists try to discuss economics.

“Besides, abnormally high profits are a sign of market failure anyway”

Err, no. Firstly the phrase is excees profits (defined as above the natural risk adjusted rate) and no, they’re not an example of a market failure. They’re a signal to hte market that extra profits are available in a certain sector. So get your cash into this business guys! Not a new idea, Adam Smith laid it all out in 1776…..

“When Bear Stearns collapsed, they lost the argument.”

No, when the Bear Stearns shareholders, as the Northern Rock ones, were wiped out, that’s when us free marketeers (who you bizarrely seem to think are right wingers) began to win the argument. If you as a shareholder invest in a well run business that makes profits then you get the profits, if you invest in a dud then you lose your money. All as it should be. If you invested in a company that found a huge oilfield (say, in recent years, Cairns Energy) then, because people want and need oil then your gamble pays good dividends. If you invest in something that people don’t want, say, mortgages that aren’t going to be paid back, then you lose it.

But then that would be economics.

Honestly, what complete rubbish from Mr Lawson.

At a time where the government and the green lobby is constantly moaning about energy companies not investing enough money in renewables and cleaner energy sources (which is going to cost them billions), how can a windfall tax be justified?

By all means tax these companies to death, but don’t blame them when they turn to cheap coal and increase our dependence on foreign oil.

http://lettersfromatory.wordpress.com

Sunny, perhaps you or Justin could tell us what risk the radioactive gulls pose to the public. Again, without that context you just look like you’re trying to scare people. But I’m sure you are more interested in persuading people with reason than panicking them.

Windfall Taxes are like Poll Tax. In pure economic theory, they are OK. If you read the theory and don’t bother to think through the practical consequences, you impose such taxes in haste and regret them, with greater or lesser bitterness, at leisure. Gordon Brown’s windfall tax which turned out to wreck so many pension schemes is a case in point.

The primary practical consequence of a windfall tax on energy companies now would be that investors would expect it to happen again when they made good profits in energy. They will therefore invest less in finding new, profitable energy sources; renewable or non-renewable. Energy prices will therefore stay higher than necessary.

I am infavour of substantial taxes on energy, but for heavens sake do it in a considered way taking the long view. Lashing about with a windfall tax will only do harm.

“Gordon Brown’s windfall tax which turned out to wreck so many pension schemes is a case in point”

It’s an interesting example of a completely untrue meme becoming received fact, certainly.

Oh, on the main issue - I don’t have any real problems with sticking a windfall tax on oil and gas producers in the UK. Tim’s point doesn’t work here - we could put a tax of (total value of oil minus cost of extraction for oil company minus 5%) and it’d still be economically rational for them to keep on pumping the stuff.

Sticking a windfall tax on utilities is less sensible, given that they’re paying more for the gas they buy - the problem is that oil and gas are more expensive, not that E.ON and RWE are fatcats. If we are going to do it, we should certainly spend it on energy efficiency - and not on allowing people to use more energy that they shouldn’t be using.

What’s wrong with wearing a jumper in the winter, anyway?

Hi Tim, glad to see you could join us without hurling around insults.

I’m perfectly aware of basic economic theory, thanks, I did spend four years studying it at University. My point here is that you should occasionally try economic reality instead of just theory.

So for example:

You’re obviously correct that the market hasn’t “self-corrected” this but if you knew a little more economics you’d know that this isn’t something that right wingers ignore.

Great! If you could point me to the reams of outrage about the massive pay-offs and fatcat salaries I’d be grateful.

It’s also not unique to private business: an MP or a Minister gets a pay off when they lose office, that’s a reward for failure, isn’t it?

And I’m opposed to that too, but ministers usually get the equivalent of redundancy payments which don’t amount to tens of millions of dollars/pounds. So the scale is completely different. Besides, isn’t this an admission then that the private sector is worse than the public sector?

Thus the entire increase in the price has indeed been as a result of an increase in demand. But then that’s economics….

This is what I mean by wishful thinking. No doubt strong demand from China has played a part, but you don’t think uncertainty in the Middle East and the Iraq war has played a part? This simple demand / supply equation is fantasy.

No, Tim is assuming that the money taken from gas companies would be spent on finding gas: and that oil on oil but….there is also the point that by reducing the profits of those already in the industry you deter new entrants.

The oil companies make most of their profits from oil exploration anyway - so there’s very low possibility they’ll stop this anytime soon.

Secondly, the abnormally high profits in fact make it harder for new entrants to come in and compete on equal terms. This is also basic economic theory.

They’re a signal to hte market that extra profits are available in a certain sector.

Yes…. because it signals to the market that there isn’;t enough competition in that sector. Get with the programme Tim.

No, when the Bear Stearns shareholders, as the Northern Rock ones, were wiped out, that’s when us free marketeers (who you bizarrely seem to think are right wingers) began to win the argument

NOt sure what your point is here. The Bear Sterns collapse caused enough ripples that had the potential to bring down the financial system to ruin, otherwise the Fed wouldn’t have to step in. Meanwhile, there was barely a squeak from free-marketers, or nothing substantial that reflected the real world.

Similarly, the bailing out of Freddie Mac and Fannie Mae says that the pure free marketers lost the argument: clearly the market doesn’t correct early enough, and that the whole system itself was in danger of going under given market conditions.
If it had been allowed to go under, as many free marketers would have advocated (is that what you’d advocate?) then free marketism would be as popular as the bubonic plague over the coming decades.

“They’re a product of market failure because they indicate not only that managers are being awarded for failure, but that shareholders are (very frequently) unable to do anything about it.”

For the (I’m not sure, is it the 4th or) 3rd time now, golden parachutes are not a “market” anything. They can be seen by you and me as a company failing, but they are not a market policy. Shareholders rights could well be increased, but this is already happening, without extra regulation.

“My point here is two-fold: that right-wingers say very little about this kind of market failure”

When you’re mis-characterising a corporate policy as “market failure”, they probably get tired of repeating themselves.

“This sounds a bit like when left-wingers try to blame crime entirely on social conditions.”

I’m not blaming it entirely on anything, as you might have noticed. I gave a list of people who could be considered to blame. There are specific cases where it hasn’t happened for reasons of national macroeconomic stability, but in general the biggest losers have been shareholders in the financial companies. Not the “grannies” I keep hearing about.

“More regulation would do that.”

More regulation would not stop boom and bust. That’s getting rather silly.

“And all the arguments against it (my grannies shares will fall! People will throw that money away on fuel bills!) are pretty lame.”

Or.. it’s just a bad policy that won’t actually achieve its aim. But then, never let logic get in the way of a rant.

“but it can prevent markets tipping over, as clearly would have happened”

No, regulation would not have prevented this current bust.

“if Freddie Mac and Fannie Mae were allowed to go bust. I suppose you’re also opposing the Feds supporting them?”

I believe we’ve been over this. I didn’t support the creation of F/F, and their leeway to leave their original brief (low-end mortgages) was dangerous and myopic. While you see their fall as “death to free-market theory”, a free-marketer wouldn’t have created them in the first place, and most certainly wouldn’t have let them become general-mortgage-sucking behemoths.

“No, my point was that right-wing thinking is pretty much exhausted right now”

To be fair, the only person calling me right-wing is.. you. If we were talking about changes to personal income tax, or sales tax, or most other issues, I’d probably fall slightly left of centre. But, I understand that drawing me as some hard-right type makes it easier to dismiss my arguments.

“markets will self-correct painlessly and that everyone will come out happier.”

Wrong, and wrong. Where did I mention “painlessly” or “happier”? Readjustments are always painful, and rarely create happiness. However, they are necessary. And, yes, the market will correct itself, as it is already in the process of doing. All I’m saying is that emotionally-driven, hasty legislation in the aftermath of downturns very rarely turn out to be sensible. If you want to clip the tails of business, it makes more sense to do it on the way up.

“no way as dangerous as various people are making it out to be”

Not dangerous, just stupid.

This discussion is getting hilarious, so keep it up - I don’t like getting bored.

The point I’d raise is that the politics of Neal Lawson and Co producing a petition for a winfall tax are far more interesting than the economics.

Whether or not the petition succeeds in getting what it calls for is less important than satisfying the demand for Labour to be seen to be helping the poor (ie those in fuel poverty), whether the facts bear out the theory or not.

The supporters of a windfall tax are those on the left of Labour and they know they have to play to their constituency in order to win their votes come the election. So this is effectively holding the leadership of the party to ransom while threatening to coalesce potential rebels who might form a breakaway group or mount a coup to overthrow Brown.

Ultimately which side wins control of the leadership comes down to pure political calculation whether there are more votes on the left than in the centre, but one thing is certain it shows how weak Brown is.

“Lee - I agreed with your earlier analysis. The point here is that a windfall tax doesn’t negate the need for a broader look at how energy is priced anyway. But the two can be separate arguments.”

Like Thomas I’m less interested in the economics of this situation, given that I understand now you’re talking not about long term solutions it’s clear how political this is. I’d be able to support the idea of a windfall tax if it wasn’t for the government taking with the other hand from the poor at the same time.

Giving the government the authority of public pressure to introduce more taxes (this time on corporations) while they’re happy to siphon off an increasing amount of money from the social housing market (£200mil this year), and raise taxes that disproportionately affect the poor, you’re not solving the problem of funding a strategic future and security for energy. But then I guess in line with Thomas’ point it is hard to simply hold Brown to ransom if you’re actively going out there and making a big deal about how Labour are no longer about being “fair” to the poor and have no wish to be?

There is an additional point about a ‘Windfall’ tax in that it is supposed to be a one-off.

It is a fallacy to suggest that it is redistributive in any meaningful sense because the underlying conditions remain the same, unless the one-off tax becomes part of the regular practise of budget measures punishing acceptable behaviour for having unacceptable consequences - in which case it isn’t either a ‘windfall’ or a one-off.

Historically speaking Income Tax was considered acceptable only on a one-off basis - that is until the political elites discovered that it was politically expedient to bow to the pressure of growing proletarian power for the state to provide social services. Exactly how many wars have been stopped by widespread tax rebellions?

The fact is that taxation does nothing to effectively redistribute direct power because power is based on the ability to create wealth not wealth itself and taxation limits economic choice, so supporters of this petition are wrong if they do so on a redistributive basis.

[...] Liberal Conspiracy call for a windfall tax on energy companies. [...]

I wish someone would tell us the truth. If oil and gas companies were making a profit at $20 a barrel, and are making not much more at $120, then who is siphoning off about $90? That is where you all (including Compass) should be looking. The answer may include a component about a majority of the energy being sold on long term contracts (not through the headline markets), but, since we are paying a lot more as we burn it, once again, where is the profit going?
The petition is signed by quite a few people who I respect, which saddens me.

“who is siphoning off about $90?”

That would be the governments in taxation. Either through the State owned companies that actually do a lot of the pumping (Aramco etc) or through royalties and profit taxes on those private sector companies. British Gas, for example, pays 75% profit tax on it gas from the North Sea. North Sea oil pays royalties plus (I think) 50% profit tax.

I think Dreamingspire is misunderstanding what we’re saying here.

Royal Dutch Shell, BP, Gazprom, Aramco are indeed all making stupendously large amounts of money out of $120 oil, because their job is to get oil and gas out of the ground and sell it to other people. EDF, RWE and EON are not, because their job is to pay the first lot the market price for oil and gas, convert it to electricity, and sell it to us.

Oil and gas companies in the North Sea are indeed taxed at an enormous rate, and North Sea tax revenues does indeed increase dramatically when oil prices are high. But we can’t tax the foreign oil and gas companies who get oil out of the ground in foreign countries - and they’re the ones who’re doing most of the syphoning.

“I’ll make oil companies like Exxon pay a tax on their windfall profits, and we’ll use the money to help families pay for their skyrocketing energy costs and other bills.” These aren’t Compass’ words, so who’s can they be? I’ll let you guess.

It amazes how many of you criticising the tax that oil companies have to pay when a company like BP makes £6.75 billion a year, a 23% increase on last year. Wait a minute, what BP makes in an hour, someone on the minimum wage would need to work over two years to make the same amount.

The windfall tax will fall mostly on the petrol companies because demand for oil is more elastic than supply. The proceeds for the tax will make energy cheaper (i.e. investment in better insulation) and more sustainable (i.e. investment in renewables) for people. The cost of insulation and renewable energy is much more elastic than the cost of petrol (unless you think the UK can buy off OPEP and at the same time prevent any externalities affecting the cost?), so with greater investment to make sustainable energy solutions cheaper, people will see which energies are the most cost-effective for them. Unless the cost of oil goes down, private investors will be more likely to put their money in these solutions too, especially if they aren’t as affected by externalities that petrol is impacted by. I forgot, this also creates jobs in that sector…

Obviously, windfall tax isn’t the only answer, we could also introduce smart tariffs for energy where people would get access to cheaper energy up to a reasonable level and then charge higher rates if you consume more than that.

“Wait a minute, what BP makes in an hour, someone on the minimum wage would need to work over two years to make the same amount”

That’s a moronic point - BP isn’t a chap in a top hat smoking cigars, it’s several million people’s pension funds.

We know that BP has investments in our pensions, but show me the evidence that the several million people you’re talking about have indeed seen an increase in their pensions as a result of this amazing profit margin? If so, how come pensioners so hard hit by fuel poverty?

Again, is this really an amazing profit margin? I get 6% in my ISA, so it doesn’t look too hot to me.

a) no, it isn’t an amazing profit margin (although remember that margin on revenue is not the same as interest on capital - the correct figure for that is return on equity)

b) the pensioners who’re hit by fuel poverty are the few really poor ones reliant on benefits (by ‘few’ I mean that pensioners are less likely to be in extreme poverty than non-pensioners, partly because they get more generous benefits than everyone else); the ones who benefit from rising BP share prices are the others.

Ok, so does anyone have the numbers to hand to figure out what RoCE (if that’s even the right acronym - A-level business studies was a long time ago now!) the utility companies are making? Is *that* excessive?

[...] on home turf, debate abounds about Compass’ Neal Lawson’s latest attempt to get his mug on the telly. Conor Foley isn’t persuaded that this is the way forward, nor is [...]