For those who haven’t watched Parks and Recreation, the image above is of a secondary character on the show that is the epitome of the rich spoiled kid. Last week, Dutch politicians became serious contenders for the title.
Following the news of Royal Dutch Shell’s decision to first, drop the Royal Dutch from its name and two, relocate to the UK, the Financial Times reported that some Dutch politicians wanted to impose a so-called exit tax on the oil supermajor.
An MP from the Dutch green party, Tom van der Lee, the FT wrote, had plans to expedite a proposal first tabled in 2020 to punish companies leaving the Netherlands for comfier tax jurisdictions. The proposal has the votes of the greens and the Labour party but it needs votes from two other opposition parties to get anywhere.
From a certain perspective, it makes sense to punish big taxpayers for leaving, assuming the punisher has worked to create a reasonably comfortable environment for the taxpayer to operate in. That’s essentially the deal between tax collectors and taxpayers: the former make it easy for the latter to make money, so they can pay taxes. Yet this has not been the case with Shell and Dutch politicians.
The greens in particular, by definition, must have welcomed the historic decision by a Dutch court to order Shell to slash its emission footprint by 45% from 2019 levels until 2030. The lawsuit, brought against the supermajor by an environmentalist group, and the ruling on it were celebrated by environmentalists far and wide.
Slashing emissions by such a percentage would mean a major reduction in oil and gas production and while Shell has said that it was not relocating to escape the ruling — which the company is appealing — it must be quite unpleasant to operate in a political and judiciary environment that is on occasion outright hostile to you.
Of course, the reason for Shells’ relocation is not an emotional one. It is a pragmatic one and has to do with the repeatedly failed attempts of the company to convince Dutch politicians to drop a dividend tax. Under attack from activist shareholders and a growing shift in the mentality of regular shareholders, it makes perfect sense for Shell to look for more ways to make its stock attractive for investors. And the UK has no dividend tax.
The caretaker government of the Netherlands did try to drop the dividend tax immediately after Shell announced its plans to leave its home country but it failed to garner the necessary support. Now, apparently, it’s time for the opposition to punish the supermajor for leaving.
There are doubts about whether the attempt would be successful but there is a bigger issue that the whole exit-tax affair raises. The issue is this: Big Oil companies are equally big taxpayers. Clipping their oil-drenched wings might — just might — lead to them paying lower taxes or, under activist investor pressure, incurring losses, which also mean lower taxes for the governments where they operate.
Now, this is pure speculation, of course, but it does seem that a lot of organisations and even governments, judging from their rhetoric, would like nothing better than to see the supermajors cease to exist. While this would certainly be good for the planet — as opposed to humankind — it would also make some big sources of government revenue extinct. And finding a replacement for them would be a challenge.
It is one of the less discussed problems with the energy transition — finding alternative revenue sources to replace the fossil fuel industry and their consumers, who now pay some form of a fuel duty all over the world. There is also the question of revenue from those working for the oil and gas industry.
A lot is being promised by politicians in the way of well-paying jobs in the renewable energy industry but the fact of the matter is that just like a lot fewer people are needed to make an electric cars, a lot fewer people are needed to make, install, and maintain wind and solar installations than are needed to pump oil and gas out of the ground, refine them and transport them all over the world.
In separate but related news from the last few days, the U.S., China, Japan, and maybe India would be releasing crude from their strategic oil reserves in what looks like an attempt to show OPEC they’ve got oil, too. That crude oil prices have become uncomfortable high for large consumers such as the above countries is a fact. Yet these are the facts of the market and, unfortunately for large importers, it is a sellers’ market right now.
The reserve release move, conceived in the White House, is expected to push prices lower and indeed just reports about it have pushed prices lower. These reports, however, have coincided with others, including from OPEC, about the uncertainly around demand growth in the coming months as the coronavirus flares-up yet again in Europe, and have served to keep prices lower. This could end at OPEC+’s next meeting. The Biden administration’s idea of using a SPR release as a lever against OPEC might in fact end up pushing prices much higher.
At first glance, there is little in common between the Dutch green party and the Biden administration. In reality, both appear to be suffering from a severe case of wanting to have the cake and eat it, too. Biden came into office with a clearly anti-oil agenda, which he has stuck to since January 2020. However, as the president himself has noted, oil cannot be phased out overnight. So, after banning oil and gas drilling on federal lands and canceling the Keystone XL, Biden asked OPEC for more oil in order to keep prices at the pump lower.
It remains a mystery to me why the president did not begin by approaching the U.S. oil industry. It could be because, as industry executives admit, he has not won many friends there since he took office. Yet, Occidental’s chief executive directly advised him to approach U.S. oil producers for more oil rather than OPEC.
Instead, Biden wrote a letter to the head of the Federal Trade Commission asking her to investigate alleged “potentially illegal conduct” on the part of U.S. oil companies in fuel price-setting. Congress, meanwhile, has once again tabled the NOPEC idea that should allow the U.S. to sue OPEC members under local antitrust law.
Over the last few months the U.S. president has managed to antagonise both OPEC and the American oil industry. It is by all means a remarkable feat but one that the common driver — and all consumers — would have to pay for, ultimately. Because the reserve release move could backfire and it would backfire spectacularly.
OPEC has already hinted it might reconsider its strategy of adding 400,000 bpd at its next meeting next week. The official reason is concern about demand, which the cartel has already voiced before. The unofficial reason cannot be other than a response to the muscle-flexing of the U.S. and its partners.
Unfortunate for large oil buyers like Japan, China, and South Korea, not to mention the U.S. itself, OPEC still has the bigger muscles. Or, as John Kilduff from Again Capital put it to Bloomberg, “The battle lines are being drawn. Certainly, OPEC and the Saudis can win this in that they are holding all the cards. They can keep more oil off the market than a SPR release can put on the market. If you see WTI get under $70, then I would expect a response from OPEC+.”
Biden’s oil policy has been called hypocritical, including by me, despite his stated admission that oil cannot just suddenly disappear from the U.S. energy mix. Yet in keeping with his green agenda, he might have focused on alternatives to demanding more oil from OPEC and investigating U.S. oil companies for price-gauging. For example, he could have mended fences with local producers, securing at least the potential for more oil supply in a time of need, just like Oxy’s Vicki Hollub suggested.
This does not seem to be on the table. Instead, there is talk about the U.S, Japan, South Korea, China and possibly India releasing over 60 million barrels of crude over a month. This will certainly weigh on prices. It will also weigh on producers that could just decide to tighten production further, which might eventually push prices even higher than they were before the reserve release reports started pouring in. In the end, like the Dutch greens, the Biden administration may have to come to terms with the old saying “Take what you want and pay for it.”