Refineries: we need investment, not taxes on windfall profits

It is impossible to resist the temptation to blame the high fuel prices on the greed of the oil companies. In Europe, buoyed by the positive experience of 2022, some countries, including Italy, have asked the Commission – which reacted coolly – for support in introducing a European tax on windfall profits. It is an attempt to lend more substance to a very weak idea. Taxation on windfall profits was first introduced in the UK in the early 1980s to recoup part of the exceptional gains caused by high oil prices following the 1979 crisis, which was also linked to Iran at the time. It was introduced as part of an oil taxation system that provided substantial rebates in the event of exploration losses. In these more recent initiatives, there is no reduction in tax rates for years of low profits, such as 2020 or 2016. It is difficult to define ‘extra profit’, although historical average levels do provide some guidance. However, such excess suggests a form of misconduct which the regulatory authorities should investigate, if warranted.

Italia is the country that has made the greatest effort to implement this measure in the past. The Robin Hood tax was introduced in 2008, when Brent crude reached $140 – equivalent to $180 in today’s money – a far cry from the current price of $90. Following an appeal by a number of courageous small oil companies, the Constitutional Court declared it unconstitutional in 2015, creating a legal mess because the ruling was not applied retrospectively. Since last February, there has been a 2 percentage point increase in IRAP for energy companies, bringing the total tax rate on profits to 30 per cent, compared with 28 per cent for other companies. That this is being implemented in a country that is inspired by free-market principles, enshrined in the constitution, is in itself an anomaly. The taxation of profits – which are, in fact, enormous – will, in any case, generate huge revenue for the tax authorities.

Raising tax rates is a policy typical of a planned economy rather than a free-market one. Taxing windfall profits is dangerous because it diverts attention from the real cause of high prices, namely the shortage of refining capacity in Europe – capacity that was shut down partly because it was opposed by the very people who are now calling for windfall profits to be taxed. Further upstream, there is also a lack of crude oil production capacity outside the Persian Gulf, including in Europe, where for years talking about oil rigs and refineries has been tantamount to declaring oneself against the climate policies that will save the planet. The high profits made by European oil companies – not energy companies – are in the region of €20 billion, and a 50 per cent tax on them would generate additional revenue of €10 billion; however, this must be set against taxes that will in any case amount to around €40 billion from standard taxation.

High profits are a sign that investment is needed in the oil sector, which European energy policy – which also influences Italia’s – persists in denigrating in the hope that this will accelerate the transition to renewables. Building a new refinery in Europe is impossible today; it would cost €10 billion. Similarly, it is impossible to drill for new gas and oil fields. We need to keep the refineries we have up and running; they require major investment because they are outdated. European oil companies must strengthen their position, have certainty, and invest globally to supply us with gas and oil in the future. The Italian refining sector is largely owned by foreign companies, which will not invest in the face of such punitive taxation. We need more supply and more investment to bring prices down and ensure energy security – not more taxes.