Windfall tax could cripple biofuel industry

While Sasol has been investigating the possibility of converting 400 000 tons of soya a year into 80 000 tons of diesel, as well as the feasibility of producing ethanol from maize, these investments – which are not believed to be especially profitable – could be rendered non-viable by a windfall tax on fuel profits.

While Sasol has been investigating the possibility of converting 400 000 tons of soya a year into 80 000 tons of diesel, as well as the feasibility of producing ethanol from maize, these investments – which are not believed to be especially profitable – could be rendered non-viable by a windfall tax on fuel profits.

This is according to an article in Absa’s economic perspective report for the fourth quarter of 2006. The article, which focuses on resource nationalisation, windfall taxes and the security of SA’s fuel supplies, says that commodity resource nationalisation is rearing its head around the world against the background of soaring international commodity prices. This trend is particularly prevalent in Latin America but is also showing signs of emerging in Africa and even SA.

South American governments, driven by pressures from poorer ­voters who feel they are missing out on the ­commodity-led prosperity, are ­claiming a bigger share of the commodity action. Argentina has already imposed export taxes and other restrictions on exporters of soya, wheat and meat.

But, says the article, in SA where the government is reported to be ­willing to consider subsidising bioethanol ­operations, it is difficult to understand why the synthetic fuel industry should be threatened with windfall taxes. The high profits enjoyed by oil industries worldwide are the by-product of the increased demand for oil and have little to do with the concept of “ill-gotten gains”.

The Absa article notes that if the synthetic fuel industry is to be a target then the sugar industry should also be taxed, since it is also benefiting substantially from the boom in oil prices, which has induced a switch to ethanol products.

The article warns that despite the recent pullback in oil prices, the geopolitical conditions prevailing in various oil-­producing nations could yet disrupt supply so much that prices could soar to well above 0 a barrel. In addition, the world could run out of recoverable oil within the next 50 years. SA cannot ignore the danger that oil is simply not going to be available in sufficient quantities. Currently we have a refining capacity of 700 000 barrels a day, but this could prove to be too ­little given the rate of economic growth.

According to the article, the concerns about the global security of oil supplies partly explains why some governments are offering lucrative incentives to entice companies like Sasol to invest in alternative sources of energy. In the US, Sasol can obtain fiscal support of roughly per barrel for any oil-from-coal ventures. China offers generous subsidies for similar investments.

Locally, the Western Cape intends to impose a special tax on fuel products to help finance the upkeep of roads. This controversial plan would hit the poor and raise the cost of doing business, particularly in agriculture and tourism.

If the ceiling price for oil was set at a barrel for windfall tax purposes and Sasol was obliged to refund 25% of its before-tax synfuels profits, the petrol price would fall by only 5c per litre, says the article.

There are suspicions that the expected cut in company tax rate in the February 2006 budget did not materialise partly because company profits are so buoyant, but mainly because of the ­commodity price boom. – Roelof Bezuidenhout