Leading article: High prices, huge profits and a logical response

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Night follows day and, when the price of oil rises, so do the profits of the oil companies. That is the context we should bear in mind when we read about Shell and BP's record profits this year. Shell made £3.9bn in the first three months of 2008 and BP posted a profit of £3.31bn over the same period. But, with a single barrel of oil fetching almost $120, it is little wonder. If your business is selling something that everyone seems to want, your profits will go up.

Prices are so high partly because of the low value of the dollar, which has inflated assets denominated in the US currency. But a bigger factor is that reserves are under pressure. Demand is spiralling because of the rapid economic growth of China and India. And supply is not rising to match it. Opec, the cartel of Middle Eastern oil producers, claims it cannot increase capacity. Its president, Chakib Khelil, warned the world this week to expect oil prices of $200 a barrel.

The immediate question is what, if anything, governments should be doing about these stellar profits. One answer is a "windfall" tax. Whenever the oil majors report vast earnings, they are met with demands for such a levy. This is understandable. It is not as if these companies have increased their productivity or become vastly more efficient in the past year. Indeed, 2007 was a veritable annus horribilis for BP. The company was fined for safety lapses, fraud and environmental crimes and its chief executive resigned after lying to a court in an attempt to block stories about his private life. But all those troubles have been conveniently washed away by a sea of expensive oil.

Many of those suffering from higher commodity prices, in the form of more expensive food and fuel, would see some justice in the beneficiaries of those price movements being forced to pay some back into the communal pot. There was a horrible political dissonance between yesterday's profit results from BP and Shell and npower's announcement that one of its domestic energy tariffs will go up by 20 per cent.

Yet a windfall tax would do more harm than good in the long term. Taxation should be transparent and predictable. If governments run around slapping taxes on industries that benefit from rising commodity prices, investment will eventually suffer. We should remember, too, that it is in the interests of the planet that the price of heavily-polluting fossil fuels remains high so as to encourage conservation and investment in cleaner forms of energy. A windfall levy on the oil companies in the name of helping consumers would open up the Government to charges of hypocrisy. Ministers would look as if they were punishing the oil companies at the same time as benefiting themselves from higher oil prices in the form of greater VAT revenue on fuel.

So, instead of a windfall tax, our political leaders would do better to concentrate on putting a proper price on carbon globally, by co-operating to increase taxation on fuel and speeding up the implementation of mandatory carbon trading schemes to cover industry and transport. That is not to argue that the energy conglomerates should feel no government pressure. They should be prevented from investing in environmentally-damaging projects such as the extraction of fossil fuels from tar sands or searching for oil beneath the Arctic. Instead, they should be cajoled and incentivised to invest these profits in clean energy production.

After all, it is in their interests too. They know oil is running out or, at least, becoming prohibitively difficult to extract. The only rational long-term strategy for the sector is post-petroleum technologies and investment in renewable energy. Their present bumper profits notwithstanding, the future is anything but bright for fossil-fuel extractors.

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