Exeter, Devon UK • May 22, 2024 • VOL XII

Exeter, Devon UK • [date-today] • VOL XII
Home Features The profiteering of oil giants

The profiteering of oil giants

Charlie Gershinson investigates BP and Shell's record profits, and its potential consequences.
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The profiteering of oil giants

Image: Zbynek Burival via Unsplash

Charlie Gershinson investigates BP and Shell’s record profits, and its potential consequences.

As inflation continues to rage across the country and the world, most acutely within the war-impacted oil industry, many are certainly surprised, to say the least, once they hear of record profits being made by oil giants like BP and Shell. Considering these companies seem at least superficially impervious to the market forces affecting individual consumer and even other companies, why has this happened and what, anything, should be done about it.

While the average trip to the pump is 10 per cent more expensive at the time of writing compared to January 2021, a bargain compared to the 50 per cent hike at its peak in Summer 2022, BP and Shell have each made the highest profits in their century-long history. As BP reported $27.7 billion and Shell reported $39.9 billion (their highest in their 115-year history), it is worth investigating why this is the case.

BP and Shell have each made the highest profits in their century-long history

The price of petrol sold at the pump is decided by two factors: the costs of extracting oil by the oil companies themselves and the costs which rely largely on geopolitical events. The former costs are largely fixed in nature. The physical extraction of oil, including the labour and capital costs, remain largely the same as they are independent of any other factors outside the oil company. However, current geopolitical factors (most significantly the Russian invasion of Ukraine) have led to a shortage of supply and a corresponding increase in price, irrespective of the costs paid by the oil companies. This has led to the profits of oil companies’ profits increasing drastically with little input from those companies.

Regardless of the reasons why oil companies have come across these profits, this has sparked a debate on how they should be dealt with. Some may suggest that as oil companies’ increased profits are not a direct cause of their business practices and are not a sign of price gouging, they should not be discriminated against through taxation more than any other type of company.

Indeed, energy companies already have a higher tax burden than other corporations at 40 per cent with BP being taxed $2.2 billion to the UK Government compared to their worldwide tax bill of $15 billion while Shell paid $134 million out of $13 billion. However, oil companies are still able to use loopholes allowing them to pay less tax. By deducting the cost of shutting down old oil rigs or offsetting previous losses or future investments, they have previously been able to receive a tax bill of £0. 

As it became clear that oil companies were making record profits and had been able to use these funds to pay increased dividends to their shareholders, the UK Government instituted a new 25 per cent tax on all oil company profits, which has since increased to 35 per cent. This is expected to provide the Treasury with £40 billion in tax revenue between 2022 and 2028.

There are still calls for higher taxation on oil companies by politicians, environmentalists, trade unions and anti-poverty campaigners, saying it is not fair for oil companies to be profiting from the suffering of others. Even former Shell CEO Ben van Beurden has supported his company having to pay higher taxes to ensure that energy companies cannot “damage a significant part of society”. Speaking to the Energy Intelligence Forum in October 2022, he said: “You cannot have a market that behaves in such a way – logically and effectively and everything else – that it’s going to damage a significant part of society. […] That probably means governments need to tax people in this room to pay for it – I think we just have to accept [that] as a societal reality.”

It is not fair for oil companies to be profiting from the suffering of others

However, energy giants have instead said that increasing increments of taxation put on them will only make it less likely for them to continue to invest in UK production and may look for oil elsewhere. For example, Harbour Energy, who produce more of their oil and gas in the UK than anywhere else, have already cut jobs and are considering relocating. If any future windfall tax with target oil giants’ global profits then they may choose to move their headquarters out of the UK to avoid the tax altogether, meaning they would mean the Government would lose on all tax revenue from these companies as well as revenue from the new windfall tax.

Similar windfall taxes are being imposed elsewhere around the world. In the EU, the “solidarity contribution”has seen Shell pay $520 million thus far with a final theoretical total of $140 billion to be paid. This has prompted US oil giant ExxonMobil, which reported a quarterly profit of $20 billion in October 2022, to sue the EU to stop the 33 per cent tax on the grounds that the levy would undermine investor confidence. Exxon spokesperson Casey Norton said: “Whether we invest here primarily depends on how attractive and globally competitive Europe will be.”

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