The UK Government’s economic case for its draconian windfall tax on North Sea producers is weakening even further as oil and gas prices continue to fall.

Brent futures were today down to just over $75 a barrel – a long way from recent highs of more than $120 last June. UK natural gas futures were just above 85p a therm – only a fraction of the 700p seen last August.

The justification for Chancellor Jeremy Hunt targeting the North Sea with a total tax rate of 75% is crumbling week-by-week.

The Chamber's Energy Transition Survey will reveal the devastating impact the tax has had on North Sea confidence when it is published later this month.

Oil and gas firms have been calling for months for him to bring in a price floor, so the levy can be phased out when hydrocarbon prices dip to that threshold.

Evidence of the detrimental impact of the chancellor's move against the offshore sector has been emerging on an almost-daily basis.

Price floor being sought

There had been hopes that Westminster’s recent energy-security plan would contain details on a price floor, but no such announcement was made.

The prospect of the tax applying, even when hydrocarbon prices drop and there are no windfall profits being earned, has proven a massive deterrent to investment in the North Sea, with 90% of operators revealing that they are cutting back on investments.

Just last month, the UK’s biggest oil and gas producer confirmed plans to axe one fifth of its workforce, blaming the levy for deterring investment.

Harbour Energy said it planned to cut 350 onshore jobs following a review of its business, the majority of which are understood to be in Aberdeen. The firm pointed to the chancellor’s money grab having squeezed cash flows and put off financial backers.

In January, Harbour said it was preparing to shift attention outside of the UK in response to the windfall tax.

Then, in March, the company revealed that the levy had virtually wiped out its profits for the last year. Profits after tax at were less than £7million on turnover of more than £4.5billion.

Taking a hit

Oil prices and stock markets around the world both took a significant hit yesterday on news that the American government could default on its debt obligations by next month unless Congress increases how much it can borrow.

Fears are also growing that the US is heading for a recession – and the massive impact of this would be felt all around the planet.

Janet Yellen, the Treasury Secretary, has said that President Joe Biden’s administration would run out of cash to pay all of its debts as early as June 1 unless the borrowing limit was lifted or suspended.

The president is facing pressure to reach an agreement with Republicans on the debt ceiling - the legal limit for how much the US can borrow to pay its bills.

Analysts at Barclays say the US economy continues to evolve in a manner consistent with a recession later this year.

They add: "The manufacturing sector is contracting, the consumer is struggling. There are broadening signs of cracks emerging within the labour market.”

Interest-rate hikes

Investors are looking for market direction this week from expected interest-rate hikes in America and Europe by central banks still fighting inflation.

More hikes could slow economic growth and dent energy demand.

The US Federal Reserve is expected to increase interest rates by another 0.25% later today.

The European Central Bank is also expected to raise rates at its regular policy meeting tomorrow.

Oil broker PVM's Tamas Varga said: “The action of central banks in their mission to tame elevated consumer and producer prices all cast a rather-long shadow of doubt on prospects going forward.”

Edward Moya, senior market analyst at data and analytics firm OANDA, told Reuters: “Oil basically has weakening prospects from the world’s two largest economies, China and the US.”

China manufacturing

Over the weekend, data from China, the biggest crude importer, showed manufacturing activity fell unexpectedly in April. That was the first contraction in the manufacturing purchasing managers' index since December.

On the supply side, Iran's oil production surpassed 3million barrels per day, its oil minister said.

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