Fuel retailers are making massive margins - should we have a windfall tax?

Monday, 25 July 2022

Accountant and author Terry Baucher: 'Windfall tax' could see fuel prices drop but could add uncertainty to market

When energy companies reported record profits off the back of disruption caused by the pandemic and war in Ukraine, Britain brought in a windfall tax.

Now the New Zealand Government has relaxed fuel excise tax and road user charges, which may have contributed to petrol companies making record margins here, some are asking whether we should follow suit.

Auckland-based tax consultant Terry Baucher said windfall taxes had never been used in New Zealand, but it might be beneficial to the Government to have them in its toolbox because politicians were largely relying on “soft power” to stop energy companies pocketing unfair profits.

This had to be balanced against corporates liking certainty, so the spectre of the tax could hinder investment, Baucher said.

* Much talk, little action in fuel price debate

* Will the Government's fuel probe find profiteering?

Terry Baucher says it’s up to regulators to put firms on notice.

The UK’s windfall tax, called the Energy Profits Levy, was introduced in May and added a 25% surcharge on the extraordinary profits oil and gas sector companies were making.

The new tax was expected to raise about £5 billion (NZ$9.6 billion) over the next year, which would go towards supporting people with the rising cost of living.

However, that amount might be substantially lower, due to a super-deduction the government wrote into the new tax allowing energy companies to get a 91p tax saving for every £1 they invested to support jobs, and the British energy sector.

The levy was imposed after BP and Shell reported big profits. Similar profits have been recorded in New Zealand.

In June, BP New Zealand reported a $230 million after-tax profit for 2021, and Mobil reported a $183m profit in June. Both had reported substantial losses the year before.

Fuel prices dropped after Energy Minister Megan Woods asked energy company chief executives to explain the high margins they were making during a cost of living crisis.

Baucher said the idea of a windfall tax would hit an immediate roadblock because the country did not have a history of using such taxes, and the concept would be “completely alien” to policymakers.

Prices of petrol and diesel dropped below $3 per litre in Wellington and Christchurch after Minister Woods questioned petrol companies over their margins.

The Government would have to put out an issues paper, conduct consultation, and then draft up new legislation.

The UK, by comparison, could respond more quickly, he said.

Baucher said the mega-profits were an under-discussed contributor to inflation, and a windfall tax would effectively remove money from the market, which would have a deflationary effect.

“We are not hearing a discussion about that because the politics of such a thing are really very awkward.”

The Treasury said it had not been asked to conduct any work on a windfall tax for energy companies, and Finance Minister Grant Robertson confirmed no work was under way.

Finance Minister Grant Robertson says there is no work underway to explore a windfall tax for energy companies.

“We are closely monitoring margins in the fuel market to make sure savings are being passed on to motorists,” Robertson said.

Basil Sharp specialises in energy economics at Auckland University, and said any windfall tax would require the Government to set a benchmark or threshold for when the tax kicked in.

“All this involves monitoring and measuring and, of course, there would be all sorts of games the targeted companies could play,” he said.

These included shifting profits overseas.

He said New Zealand was “small change” for large corporates, and energy companies could ask why they were being targeted.

“Why not banks, supermarket chains, and so on. There will be unintended consequences, maybe costs will be passed on to consumers, most likely hurting those that can least afford the increase.”

He said this was part of a bigger concern about the lack of competition in New Zealand.

The profits of the three big petrol companies have risen sharply despite the first recommendation from the Commerce Commission’s study into the fuel market taking effect in August.

Since then, companies have been required to advertise a price at which they will sell fuel in bulk to other retailers, a move intended to increase competition.

According to the Ministry of Business, Innovation and Employment (MBIE), in the week to July 8, petrol margins were up from 22 cents to 45c a litre and diesel margins were up from 30c to 64c a litre.

In response, Energy Minister Megan Woods last week asked fuel company chief executives to explain the cause of the spike, resulting in fuel prices dropping across the country.

Stats NZ’s Consumers Price Index in June found petrol prices had risen 32% over the year.

Baucher said companies would try and get away with what they could.

“It’s like rugby. You push the offside line until you’re told you can’t do that,” he said.

Any reduction in prices can take a long time due to the tendency for prices to leap in times of short supply, and only come down slowly over a prolonged period, Baucher said.

A BP spokesperson said the company continued to pass on the Government’s full, temporary excise reduction.

“There are a number of factors that influence prices. We continue to review BP Connect prices every day to ensure competitiveness in the market.”