Oil consumption and taxation

The truth is out there, but it’s not quite as simple as those who call for tax increases to reduce demand claim.

Take for example, the table of world oil consumption figures published by BP, and cited by Labour Party-supporting blogger snowflake5. The figures extracted by snowflake5 show the consumption of various countries in 1997 and 2007, the change over this 10-year period, and the percentage share of total oil consumed.

The argument goes that demand in Europe and Eurasia has been fairly flat over the past decade, save for that of a few EU states. In Germany, France and the UK oil consumption has fallen, while in the Middle East and India it has soared. So does this mean that Europe and Eurasia are not to blame for the current world oil spike? If we are looking at this from an environmental perspective, then I really don’t think we can let ourselves off that easily.

The UK is consuming less oil than it did 10 years ago, but why? To those with the resources and inclination to crunch numbers and carry out a full analysis rather than a back-of-envelope calculation, I would ask: how much of the decrease is due to the increase in natural gas usage over the same period? I know there are only half a dozen oil-fired power stations in operation today in the UK, but there used to be more. Gas is now the main fuel used for electricity generation.

Germany’s oil consumption has dropped significantly over the past decade. To what factors is this due, and how does Germany compare with the UK and France: countries with similar population levels and industrial infrastructure? Raw data without context are pretty meaningless.

Snowflake5 mentions Norway’s extremely high oil tax. It’s worth pointing out that this is a tax on producers, not domestic consumers. At 78% the tax is, as snowflake5 says, eye-watering, but it does not serve as a disincentive to extract oil and gas. Norway’s retail tax on petrol and diesel is not particularly high.

As I pointed out in an article last year for the online industry journal Offshore Technology, oil and gas companies are willing to pay high taxes (and Norway is not the only country imposing them) as long as they can make a healthy profit. They are also looking for stability in the marketplace, and minimal political interference from host states. With Norway that is exactly what they enjoy.

As for Russia, low oil and gas prices have limited industry’s ability to finance capital spending, and raising domestic prices toward parity with European market rates is now official policy. Price caps on domestic oil and gas are due to be abolished by 2013. Previous low taxes on producers were a sweetener to entice foreign firms and technical expertise into the country. In fact, Russia originally agreed not to impose any taxes on foreign energy companies until they had recouped their costs. But then came resource nationalism, and the increasing influence of organised crime in the Russian economy and polity.

The tax system can be used to reduce demand, but only to a degree. Let’s not fool ourselves that this has been the motivation for tax increases in recent times, or that there exists a simple relationship between oil consumption and tax levels.

Hat tip: Paulie