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Oil prices plunge after OPEC fails to cap output

Will the LNG industry pay much tax? Photo:AAP

Will the LNG industry pay much tax? Photo:AAP

The price of crude oil tumbled as much as 5 per cent on Tuesday, after OPEC failed at the weekend to reach an agreement to cap production at current levels.

Iran is refusing to scale back its output, now that three decades of sanctions on its oil industry have ended, and failed to even participate in the meetings.

US investors ignored yesterday’s plunge in oil prices as company profit reports lifted stocks.

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The US market shrugged off the oil bearishness with the Dow Jones Industrial Average reached 18,000 points, its highest level since July with the blue chip index gained 0.6 per cent, or 107 points, to 18,004.

The Nasdaq rose 22 points to 4,961, and the S&P 500 increased 13 points to 2,094.

Australia’s market also shrugged off oil concerns with the benchmark All Ordinaries index opening up 1.1 per cent to 5264

Organisation of Petroleum Exporting Countries (OPEC) members will now consult among themselves and with non-OPEC oil producers ahead of the next meeting in June.

“I think we are more likely to see some form of deal reached,” said Spencer Welch, director of oil markets with the economic consultancy IHS Global Insight.

“In reality it doesn’t mean much, because the people involved are talking about freezing their production levels at already high rates into a market that is still oversupplied.”

Supply disruption may be more likely than cartel action: RBC

Not all analysts are convinced that a deal will be reached.

RBC’s Helima Croft was one of those predicting the weekend conference’s failure, and she cannot see Saudi Arabia caving on its opposition to a production cap that does not include Iran.

However, that does not mean she thinks oil will retest recent lows in the mid-$US20s per barrel range.

“Unless Saudi Arabia or Iran has a change of heart, we fail to see how the outcome will be any different, and it may ultimately be mounting supply disruptions in stressed states, rather than collective cartel action, that causes an accelerated market rebalancing,” she wrote in a note.

Potential disruptions include political unrest in Angola, Nigeria and Venezuela and an oil worker strike in Kuwait.

Political unrest is a risk in Nigeria. Photo:AAP

Political unrest is a risk in Nigeria. Photo:AAP

The breakdown in OPEC’s talks had an immediate impact on commodity and currency markets

Brent crude fell 5 per cent in early Monday trade, and was 4 per cent lower later in the day.

The Australian dollar shed more than 1 per cent, before recovering slightly, and other commodity-related currencies, like the New Zealand and Canadian dollars, were also weaker.

“Oil has really been at the centre of commodity market attention and it has had quite a high correlation with other industrial commodity prices like the metal prices for instance,” David de Garis, NAB senior economist, said.

Petroleum tax failing to bring in big revenue

Aside from the market impact, OPEC’s ongoing disagreement is also likely to have an impact on Australia’s tax revenue.

Australia is forecast to be the world’s largest liquefied natural gas exporter by 2018, thanks to a $200 billion investment program over the five years from 2012.

“These projects will be generating significant income for Australia,” Chevron Australia’s managing director Roy Krzywosinski told a parliamentary hearing in November.

“$350 billion in revenue will buy a lot of hospitals. It will purchase a lot of schools.”

But research released last year shows that despite the massive increase in Australia’s LNG industry, there will be little change in the federal government’s tax take.

The petroleum resource rent tax (PRRT) raised $1.2 billion in 2004.

But the Australian Taxation Office (ATO) is forecasting that by 2019, the PRRT will generate just $1.4 billion.

The ATO estimates the PRRT’s share of industry revenue plummeted from 24 per cent in 2004, to just 5 per cent a decade later.

In part it is because energy companies will generate large depreciation deductions from the investments they are undertaking now.

Will the LNG industry pay much tax? Photo:AAP

Will the LNG industry pay much tax? Photo:AAP

Chevron ‘Australia’s most successful tax minimiser’

However, Labor Senator Sam Dastyari told the ABC last year that tax planning is also to blame.

“Past behaviour by Chevron fills me with no confidence,” Senator Dastyari said.

“This is Australia’s most successful tax minimiser. This is a firm that has a business model based around paying as little international tax as possible.”

However, even without creative tax strategies from resource companies, weaker commodity prices are also expected to put a multi-billion-dollar dent in the Federal Government’s coffers.

Treasury estimates that a 10 per cent fall in the terms of trade, the ratio of export prices to import prices, would add $4 billion to the budget deficit this financial year.

With the oil price languishing near $40 again, other commodity prices are expected to stay lower for longer.

“Last year’s budget had a Tapis price in excess of $US60 and that has already been wound back in the mid-year review,” said NAB’s David de Garis.

“So the Treasury and Finance boffins are going to have to go back to their spreadsheets and work out what it means.”

 – with reporting by Rod Myer

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