Do high oil prices justify an increase in taxation in a mature oil province? The case of the UK continental shelf

Abstract

In response to the structural shift in oil price coupled with greater import dependency, concerns about security of supply have once again emerged as a major policy issue. The UK, the largest producer of oil and natural gas in the European Union, became a net importer of natural gas in 2004, and according to Government estimates will become a net importer of oil by the end of the decade. A weakened North Sea performance means extra reliance, both for the UK and Europe as a whole, on global oil and gas network and imports. In 2002, the UK Government introduced a 10% supplementary charge and in 2005, doubled the charge to 20% in an attempt to capture more revenues from the oil industry as a result of the increase in the price of crude oil. However, higher tax rates do not necessarily generate higher fiscal revenue and in the long term may result in materially lower revenues if investment is discouraged as indeed occurred when the 2007 UK Annual Budget statement showed a shortfall in North Sea oil revenues below forecasts of £4 billion. It is therefore argued that the increase in the fiscal take came at the wrong time for the UK Continental Shelf and that the UK Government's concern should have been to encourage more oil production from its declining province, especially in the light of the rising concern surrounding the security of supply.