The Effect of Higher Taxes on Energy Prices and Production

Mark Green
Posted May 3, 2011

Do higher energy taxes affect access to energy? It sure looks like that could be the case in Great Britain.

The owner of British Gas said this week it might shut down production at one of its major natural gas fields because of a 12 percent increase in the country's supplementary tax on oil and gas, announced in March.

Centrica says three fields in Morecambe Bay will be closed for a month of maintenance, but one of the largest might not reopen because of the March tax hike. Centrica said it stands to pay a total tax of 81 percent on profits from the field, which would make its profitability "marginal." The company said buying imported natural gas on the open market would be cheaper than running its UK facility.

"Gas produced in Britain is one of the cheapest supply sources for the UK by virtue of its proximity," Mike Tholen, economics director of UK Oil & Gas, told The Independent. "If those sources are going to be less productive and there is less investment to renew those supplies then it makes this cheaper gas less available. Consumers will then pay more."

The British government's energy tax increase reminds one of changes to this country's tax policy proposed by the White House - including elimination of business deductions that historically have helped encourage domestic development. Regarding the changes proposed here at home the Congressional Research Service writes:

"...the tax changes proposed in [the FY2012 federal budget request] would increase tax collections from the oil and natural gas industries and may have the effect of decreasing exploration, development, and production, while increasing prices and increasing the nation's foreign oil dependence."

While the U.S. debate heats up, keep an eye on the UK to see what can happen when government hikes energy taxes.

For a video discussion of the effects higher energy taxes, click here.