Time to tax Russian oil

If a government wants to discourage people from buying a product, it can mount a campaign explaining why we should go without, or it can take steps to make it harder to find the stuff, or it can tax it. Over decades, all three methods have been employed against smoking. It’s not illegal, but we are urged to go without for our health, promotion or display of cigarettes is banned, and it is so highly taxed that it pays for lots of other things deemed more valuable. Over the years, tobacco consumption has fallen dramatically as a result.

The world now has an unmissable opportunity to apply the same principles on a massive scale. Instead of trying to do without Russian oil and gas, the western nations have this well-tested method of reducing our usage – by taxation. Applying a tax on all imports of Russian oil and gas would be far more effective than any of the hair-shirt proposals exhorting us to put on another jumper, drive more slowly or skip the shower. In terms of the impact on Russia, it would be far more effective than the hopeless ideal of trying to avoid buying any fuel.

The major western economies, already with one eye on the cost of rebuilding Ukraine once the war is over, are already turning to the need for a new version of the Marshall Plan that rebuilt Europe after the Second World War. The cost will run into hundreds of billions, but an oil tax would provide a capital sum big enough to cover at least some of this without direct payments from the taxpayers, whose sympathy for Ukraine may be waning when the money is needed.

In Project Syndicate, Ricardo Hausmann proposes a punitive tax on Russian oil. Since it costs less than $6 a barrel to produce, his argument is that provided the proceeds (after tax) are higher than this, it is in Russia’s interest to keep pumping, and it needs the dollars to run its war machine. He suggests a figure of $90 a barrel in tax, which with the world oil price at $100, would generate $300bn a year, which the rich nations would use to rebuild Ukraine.

He concludes: “Given very high demand elasticity and very low short-term supply elasticity, a tax on Russian oil would be paid essentially by Russia.” He is an economist, after all. This is really too good to be true in the real world, and might finally infuriate the czar in the Kremlin beyond endurance. However, we already have some indication of where a tax could be set. Watching the differential between the Brent price marker and the oil we in the West are trying to avoid buying produces a figure around $20 a barrel.

If instead of boycotting the oil, the US and European Union taxed it when imported, a post-war chest overseen by the International Monetary Fund would soon contain tens of billions of dollars. The rate of tax could be changed to maximise income.

Extending the principle to gas, the Germans could even offer to open to Nordstream 2 pipeline, which would immediately bring down gas prices across the continent. Since there are only a limited number of entry points for oil and gas imports into Europe and the US, and that every oilfield carries its own unique marker, policing and collecting the tax would be relatively straightforward.

It would be too much to hope for universal agreement to such a tax, but it is not really necessary. As Hausmann points out, “in 2019, 55% of Russia’s exports of mineral fuels (including oil, natural gas, and coal) went to the EU, while a further 13% went to Japan, South Korea, Singapore, and Turkey.” Were China to become the only major non-taxing buyer, it would reinforce Russia’s position as a client state, hardly something Putin will want to happen.

The tax would not be painless in the West. The impact on the price of crude would depend on where the tax was set, and whether others could be persuaded to join the scheme. Either way, such a tax works with market forces, rather than against them like any attempt at an embargo or rationing. In the longer term, high prices bring their own solution, as producers find more of them and consumers learn to use less. Until that day arrives in the oil and gas markets, an international import tax would de a down payment for rebuilding the country that Russia is trying to destroy.

Negative thinking

When we look back at the current age, surely one of its most bizarre features will be the bonds with negative yields. At the peak, $18tn of government debt stood at prices which guaranteed holders getting back less than they invested. In other words, were it practicable, those holders would have been better off just leaving the money in cash.

The only reason why a sensible investor would buy bonds under these circumstances would be if she thought a greater fool would pay for an even bigger negative return. Of course the buyers were not sensible, value-seeking investors, but central banks eating their own cooking, or long-term funds like life companies and pension funds, where financial repression forced them to buy loss-making stock to pass the sacred rules on matching liabilities with assets.

The slow return towards something like normality has shrunk that pile to below $10tn, and authorities in the UK and EU have seen how absurdly restrictive the rules have been. As Sonal Desai, chief investment officer for fixed income at Franklin Templeton, put it: “The thing to remember is that when you’re buying fixed income, you’re not supposed to be getting negative yields.” Ah, the wisdom of the expert.

Don’t go nuclear

Here’s another investment from the UK government: the “nuclear opportunity” at the proposed new power station, Sizewell C. The hapless taxpayers and the experts at EDF are each taking a fifth share, and now the Chinese have been thrown off the project, advisers are being sought to help fund the rest of the estimated £20bn cost.

This is a wonderful opportunity for the advisers, with the prospect of glistening fees in front of them. It also ticks what is becoming today’s orthodoxy, that nuclear power stations are as green as anything, so your favourite ESG fund might be tempted to join the fun. Real investors, using their own money, should steer well clear.

Don’t miss this week’s edition of A Long Time In Finance with Neil Collins and Jonathan Ford. On Spotify or Apple apps.