17th August 2026
When the oil price rises, who really wins?
There is something rather uncomfortable happening in Britain whenever the price of oil surges.
For motorists, fishermen, farmers, hauliers and households heating their homes with oil, a higher oil price is bad news. It pushes up the cost of petrol and diesel, raises transport costs and can feed through into the price of almost everything we buy.
But for companies producing oil and gas, the same price increase can mean substantially higher revenues.
That raises a straightforward question:
When an international oil-price shock creates exceptional profits for energy companies, should the British taxpayer take a larger share of the gain?
I think there is a strong argument for saying yes — but not necessarily by simply increasing the existing windfall tax.
The better solution would be a permanent, automatic system which takes a larger share when prices move into genuinely exceptional territory, while leaving the normal tax system alone when prices are relatively low.
And interestingly, the Government has already started moving in that direction.
Britain is already taxing North Sea oil heavily
It is important to put things into perspective.
The UK oil and gas industry is not lightly taxed.
North Sea production is subject to a 30% Ring Fence Corporation Tax, a 10% Supplementary Charge and, currently, the 38% Energy Profits Levy.
That means the headline rate on qualifying profits can reach 78%.
The Energy Profits Levy was introduced in 2022 when oil and gas companies were benefiting from the extraordinary price increases following Russia's invasion of Ukraine.
The levy started at 25%, rose to 35% and then to 38% from November 2024. It is currently due to continue until March 2030, although its operation can be affected by the Government's Energy Security Investment Mechanism.
So anyone arguing that oil companies should simply be subjected to an enormous new tax increase needs to acknowledge that they are already paying a very substantial rate on qualifying North Sea profits.
But that does not necessarily end the argument and the surprising thing is how little the Treasury actually receives
The headline 78% rate can make the North Sea oil industry sound like an enormous cash machine for the Treasury but it isn't.
The Office for Budget Responsibility estimates that offshore corporation tax, Petroleum Revenue Tax and the Energy Profits Levy together raised about £4.1 billion in 2025-26.
The OBR expects this to fall sharply as North Sea production declines and the existing levy eventually disappears.
That is a relatively small contribution to a UK tax system raising well over £1 trillion a year.
And it illustrates an important point that a very high tax rate does not necessarily produce enormous tax receipts.
The amount collected depends on the level of profits, production, investment allowances, tax losses and the price of oil and gas.
The North Sea is also a mature basin in which production has been declining for years. The UK therefore faces a strange situation in that it has a highly taxed industry which nevertheless produces a relatively modest and declining amount of tax revenue.
So why not simply increase the tax again? There is a danger in thinking that a higher percentage automatically means more money but it doesn't.
Oil companies make investment decisions based partly on the tax regime. If the Government continually increases taxation whenever prices rise, companies may respond by delaying investment or bringing forward decisions to reduce production and eventually leave mature fields.
That could leave Britain collecting more tax from a smaller industry.
There is another issue. A North Sea producer does not determine the global oil price.
If Brent crude rises dramatically because of conflict in the Middle East or disruption to global supplies, a British producer can suddenly receive much more for its oil without having done anything differently.
That is the crucial distinction between an ordinary return and a genuine windfall.
What if the tax switched on automatically? I think the debate becomes much more interesting.
Instead of politicians repeatedly deciding whether to impose another windfall tax whenever oil prices jump, Britain could have a permanent high-price mechanism.
Below a predetermined oil price, the normal tax regime would apply and above that price, an additional levy would automatically apply to the amount above the threshold.
When the price falls back, the additional levy disappears giving companies much greater certainty.
And Britain is now proposing precisely such a mechanism. The Government's new Oil and Gas Revenue Levy is designed to operate during periods of high prices. It would impose a 35% levy on the portion of oil and gas revenues above specified thresholds.
For 2026-27, the proposed thresholds are $90 a barrel for oil and 90p per therm for gas. The thresholds would then be adjusted for inflation.
The important difference is that this is intended to become a permanent feature of the tax system, replacing the temporary Energy Profits Levy when that levy ends. In other words, the Government has effectively accepted the principle that extraordinary energy prices may justify extraordinary taxation.
Is $90 really a windfall? This is where I would question the Government's approach. An oil price of $90 a barrel might once have seemed extraordinarily high. But the world has changed.
Inflation, geopolitical instability, declining production from some mature fields and enormous investment requirements across the energy industry mean that $90 today is not necessarily the same thing as $90 ten or twenty years ago.
The Government's proposed thresholds will also rise with inflation. That makes sense in one respect but it raises another question:
At what point does the taxpayer actually begin sharing in a genuine windfall?
If oil rises to $100, only the amount above the threshold is subject to the additional mechanism and if it rises to $120, the additional revenue becomes much more significant.
And if another major international crisis pushes oil to $150 or $200, the argument for allowing producers to retain all of the additional gain becomes considerably harder to make. Let's hope that does not happen.
There is a particularly strong argument when the consumer is paying the price and this is perhaps the strongest case for a windfall mechanism. Suppose an international crisis pushes up the price of crude oil and the consequences are felt throughout the economy.
Petrol and diesel become more expensive and all that means such as higher haulage costs and fishing becomes more expensive because boats consume large quantities of fuel.
Farmers face higher machinery and transport costs, airlines face higher fuel costs, and businesses pay more to move goods.
And households using heating oil can face an immediate increase in their winter heating bills.
Yet the oil producer receives a higher price for its product. The same event therefore creates both winners and losers.
That is exactly the situation in which a windfall mechanism can make economic sense. The Government doesn't need to confiscate normal profits. It simply says that when prices move far beyond normal conditions, some of the extraordinary gain should return to society.
We should not forget the investment problem and the Government should not design a system which effectively tells companies:, "Invest billions developing a new North Sea field, and if oil prices subsequently rise, we will take most of the upside." That might discourage investment.
And the North Sea is already declining.
Britain has to decide how much domestic oil and gas production it actually wants during the transition to other energy sources.
There is therefore a legitimate argument for allowing companies to earn attractive returns on new investment. The tax system should encourage investment in projects that Britain actually needs.
But that is different from allowing companies to retain an unlimited share of an unexpected price explosion caused by events thousands of miles away.
Perhaps the answer is a sliding scale and I would favour something more sophisticated than another flat-rate increase.
For example:
Normal oil price:
Existing taxation applies.
High oil price:
An additional levy begins once the price passes a defined threshold.
Very high oil price:
The Government takes a progressively larger share of the exceptional revenue.
A temporary additional rate could apply, with the money specifically directed towards reducing the impact on households and businesses.
That would create a system which rises and falls with the circumstances rather than requiring a new political argument every time oil prices jump.
It would also make the tax system more predictable for investors.
And where should the money go?
This is just as important as how much is collected.
If the Government takes another £1 billion or £2 billion from extraordinary oil revenues, simply putting it into general taxation makes the policy much harder to justify to the public.
I would argue for using at least part of the additional revenue to offset the consequences of the oil-price shock.
That could include:
helping households facing exceptionally high heating costs;
reducing fuel costs for essential rural and island transport;
supporting energy-intensive businesses;
assisting fishermen and farmers during extreme fuel-price periods;
or investing in domestic energy infrastructure which reduces Britain's exposure to future oil and gas shocks.
That creates a direct link between the source of the windfall and the people suffering from the price shock.
The OBR's figures show something that is often missing from the political debate.
North Sea oil and gas taxation is declining over the long term as production falls. The OBR forecasts oil and gas revenues falling dramatically over the next few years.
Britain therefore cannot build its future public finances around permanently extracting more money from the North Sea.
The opportunity is temporary. That makes it even more important that when an exceptional oil-price boom occurs, Britain has a mechanism capable of capturing a reasonable share of it.
Otherwise the country could end up with the worst of both worlds: declining domestic production, declining tax receipts and consumers still exposed to international energy prices.
Britain needs to capture the windfall without killing the industry and there is a perfectly reasonable argument against endlessly increasing windfall taxes.
But there is also a perfectly reasonable argument against allowing extraordinary price increases to generate extraordinary profits while households and businesses absorb the corresponding costs.
The answer lies somewhere between the two.
Britain should tax normal profits normally, reward investment and risk-taking, but take a larger share when prices move into genuinely exceptional territory.
The Government's proposed Oil and Gas Revenue Levy is a step in that direction. The question is whether its thresholds and rate will prove sufficiently ambitious when the next major oil-price shock arrives.
And that brings us back to the question that matters to ordinary households.
When oil rises dramatically because of a crisis, why should the British consumer bear all of the pain while the producer keeps all of the additional gain?
A sensible windfall tax does not have to be about punishing oil companies.
It can be about making sure that when Britain gets caught in an international energy storm, some of the financial benefit created by that storm comes back to the people who are paying for it.