Weekly News Review - 9th June 2023
Windfall tax to be suspended if energy prices drop
The government has announced that the windfall tax on oil and gas companies will be suspended if energy prices drop below a set level for six months. The Treasury said that the windfall tax would remain until March 2028 but the rate would fall if oil prices fall below $71.40 per barrel and gas prices drop to 54p per therm.
Brent crude oil is currently trading around $75 per barrel and the price of gas is around 62p/th. Current government forecasts suggest that oil and gas prices are unlikely to fall below the new threshold, however if this does occur for two consecutive three month periods then the tax rate would fall from 75% to 40%.
The Energy Profits Levy (EPL) was introduced last May in response to the rise in energy prices caused by the Russian invasion of Ukraine. The government said it has so far raised £2.8bn which has helped it to provide energy bill support to households and businesses. They expect the levy to raise around £26bn by March 2028.
However, the EPL has been criticised by industry experts for discouraging investment in UK oil and gas. Several North Sea oil and gas businesses claimed it could put the brakes on new investment in oil and gas projects at a time when the government hopes to increase domestic fossil fuel production. Critics also said the levy had a disproportionate impact on smaller, UK-based oil and gas producers, which pay most of their tax in the UK.
Gareth Davies MP, the exchequer secretary to the Treasury, said: “It is right that we recover excess profits resulting from Putin’s war and use the money to help people with their energy bills. Thanks to the revenue raised from windfall taxes on energy profits, we have helped save the typical household over £1,300 on their energy bill last winter.”
Davies added it would be “beyond irresponsible to turn off the North Sea taps overnight”, and it was important to “secure investment in our own domestic supply, protecting the tens of thousands of British jobs that come with it”. He said: “Without oil and gas from British waters, we would be forced to import even more from overseas, putting our security of supply at risk.”
Oil prices rise as Saudi Arabia pledges output cuts
Oil prices rose on Monday following the news that Saudi Arabia will be cutting production by 1 million barrels per day (bpd) from July. The nations that make up the Organisation of Petroleum Exporting Countries and its allies (OPEC+) met in Vienna on Sunday to discuss their response to the falling energy prices. This resulting in Saudi Arabia and other OPEC+ members agreeing to continued cuts in production.
The price of Brent crude rose by 2% on Monday in response to the announcement, reaching $78.73 a barrel before dropping slightly. This brought prices back to where they began the year, although Brent crude has reached as high as $82 a barrel as recently as April. This is still significantly lower than last June when prices peaked at $130 a barrel following the Russian invasion of Ukraine.
Saudi Arabia’s energy minister Prince Abdulaziz bin Salman, OPEC’s de facto leader, said the 1 million bpd cut would initially be for July but could be extended. He described it as a “Saudi lollipop” or sweetener for the group, whose other members were spared from making additional cuts this year. Prince Abdulaziz said: “We want to just ice the cake with what we have done. We will do whatever is necessary to bring stability to this market.”
As part of the OPEC+ agreement, several African members will have their quotas reduced from next year, bringing them closer to their actual production capacities. Additionally, the United Arab Emirates increased its output target by 200,000 barrels a day from January. OPEC+, which represents about 40% of the world’s oil production, also agreed to extend the voluntary output cuts announced two months ago into 2024.
Naeem Aslam, the chief investment officer at Zaye Capital Markets, said an expected pickup in oil demand post-Covid had not materialised. He said: “Oil bulls have been banking big time on Chinese demand, but in reality, we have not seen a serious strength in oil demand, and this indicates that the global economy is still suffering from a number of Covid shocks such as higher inflation and the threat of a serious slowdown in economic activity.”
Labour scales back commitment to £28bn green plan
Shadow chancellor Rachel Reeves has scaled down Labour’s £28bn a year green plan and said that Labour would now “ramp up” to that figure over the first half of the parliamentary term. The main reason behind the change in policy is the significant rise in inflation over the past year which has increased the cost of borrowing.
Labour first announced their ‘Green Prosperity Plan” in 2021 when interest rates were close to zero. However, following the Russian invasion of Ukraine and former PM Liz Truss’s disastrous mini-budget last year interest rates have risen to 4.5%.
Labour initially planned to spend £28bn a year on projects like offshore wind farms and developing batteries for electric vehicles. Ms Reeves said the money would come from borrowing, however following the rise in inflation there have been doubts over whether this was affordable in the current context. As a result, Labour will now aim to reach the £28bn a year target by 2027.
Speaking to BBC Radio 4’s Today programme, Ms Reeves said: “The Tories have crashed our economy, and as a result interest rates have gone up 12 times, inflation is now at 8.7% and I’ve always said our fiscal rules are non-negotiable. Economic stability, financial stability, always has to come first and it will do with Labour.”
“The truth is I didn’t foresee what the Conservatives would do to our economy. We will get to the investment that is needed. But we’ve got to do that in a responsible way.” She added: “No plan can be built that’s not on a rock of economic and fiscal responsibility. I will never play fast and loose with the public finances and put people’s mortgages or their pensions in jeopardy.”
Chancellor Jeremy Hunt said the change was “superficial” and “still adds around £100billion to our national debt – meaning higher mortgages for families and higher debt interest bills for taxpayers”. He added: “A responsible approach should tackle inflation, not fuel it.”
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