The major oil firms, ranging from BP and Shell in the United Kingdom to ExxonMobil and Equinor in Norway, have reported astounding profit figures.
As a result of the invasion of Ukraine, the price of oil and gas has risen significantly.
People around the world are struggling to pay their energy bills and fill up their vehicles. Which has led to requests for additional taxes on these corporations.
How do they make so much money, and should the government intervene?
Why has the price of oil soared?
Oil and gas are sold globally, and if supply are low and demand high, sellers can raise prices.
Before the Ukraine conflict, Russia was the greatest exporter of oil and natural gas in the world.
In 2021, 45% of the Russian government’s budget was derived from these exports. Which were purchased with a significant portion of the money paid for oil and gas.
After the invasion, Western nations, particularly the United Kingdom and the European Union, attempted to cease (or at least drastically cut) their energy imports from Russia to prevent funding the Russian military and bolstering an adversarial regime.
Countries that refused to purchase oil from Russia were forced to pay significantly higher costs for oil produced elsewhere.
As economies reopened following Covid-19 lockdowns, oil prices had already risen, and people required more oil.
After the Russian invasion, the price of a barrel of crude oil over $100, peaked at over $127 in March. And has since dropped to around $85 per barrel. After the invasion, gas costs also increased.
Petroleum and natural gas are indispensable to nearly every element of modern life. Natural gas is utilized for heating and cooking, whereas petroleum is used to create gasoline and diesel.
In addition, they are utilized in agriculture, electricity generation, and many industrial operations that produce everything from fertilizer to polymers.
Consequently, a continuous increase in oil and gas prices drives up the price of many other goods we purchase, contributing to the cost of living crisis that has gripped the United Kingdom and other nations in recent months.
Why do rising prices result in more profits?
Oil firms generate revenue by discovering oil and gas reserves hidden in rocks beneath the earth’s surface and then drilling to extract them.
The expenditures do not alter significantly if the price increases or decreases, but the revenue does.
Thus, as oil prices skyrocketed during the invasion of Ukraine, businesses’ oil and gas earnings increased tremendously.
What was Shell and BP’s profit last year?
BP declared record annual profits of $27.7 billion (£23 billion) for 2022 on Tuesday. As it pulled down plans to limit its oil and gas production by 2030. These profits were quadruple those of the prior year.
Shell recorded its biggest profits in 115 years in February. In 2022, profits will reach $39.9bn (£32.2bn), doubling the previous year’s amount.
Many common people own shares in BP, Shell, and other global oil companies, so their profits do not evaporate entirely. This may be through their pension savings, and they may be unaware.
Some of the additional income is distributed to shareholders through dividend hikes and share repurchases (which increase the share price).
As long as customers struggle to pay their bills and billions keep coming in, calls for higher taxes will continue.
How much tax do producers of oil and gas pay?
Even after paying billions to governments around the world, major oil firms achieved unprecedented profits.
BP and Shell are in a precarious situation since their headquarters are in the United Kingdom. But they produce a negligible quantity of oil and gas in British waters. They generate the majority of their income from international operations.
In 2022, Shell paid $134 million (£110 million) in taxes on its UK businesses, out of a total tax bill of $13 billion.
BP paid $2.2 billion (£1.8 billion) in UK taxes out of a $15 billion global tax total.
How are UK oil companies taxed?
In the United Kingdom, oil corporations currently pay a 40% tax on their income from oil and gas production. Which is greater than the taxes paid by other companies.
However, they might minimize their tax liability by deducting the cost of decommissioning aging oil rigs or by offsetting future investments and losses from past years.
BP and Shell have received government payouts instead of UK taxes in some years.
Following the invasion of Ukraine, there were proposals for the government to impose an additional “windfall tax” on energy sector earnings to help pay for skyrocketing energy costs.
This was implemented in May 2022 and increased to 35% in November, from 25%. It is currently anticipated that between 2022 and 2028, all enterprises operating in UK waters will contribute an additional £40 billion.
However, the windfall tax only applies to the earnings from oil and gas extraction in the United Kingdom. Which make for a minor portion of the revenues of some businesses.
In addition, corporations can deduct more than 90 percent of the cost of new exploration and production from their windfall tax bills, dramatically reducing the amount they are required to pay.
The windfall tax accounted for the entirety of Shell’s UK tax bill and all of BP’s.
They’re being asked to pay considerably more tax
Politicians, environmentalists, labor unions, and anti-poverty activists have criticized the record profits of oil companies and advocated for increased windfall taxes.
They claim that high prices are the result of a factor outside the control of oil companies, namely war and that it is unfair that oil companies profit from people’s misery.
Some argue that governments should increase windfall taxes since they are easy to collect and difficult to avoid.
Ben van Beurden, the former CEO of Shell, questioned if it was unavoidable that governments would need to tax energy producers more to safeguard the lowest members of society.
However, oil companies believe that a greater windfall tax would discourage them from investing in UK production and that they would instead look for oil in countries with lower rates.
Due to the windfall tax, Harbour Energy, which produces the most oil and gas in the United Kingdom, is reducing employment and reevaluating its UK investments.
If the UK government opted to impose a heavier tax on BP and Shell’s global profits, they could theoretically move their headquarters out of the nation, therefore avoiding the new tax and depriving the UK of a significant portion of the cash they currently provide.
Oil firms must operate in a world where the price of oil can fluctuate rapidly in both directions. The income generated during prosperous years helps to compensate for years when oil prices are low.
Russian oil major Rosneft
Last year, many oil corporations lost billions on Russian assets. BP, for example, wiped off $24 billion in interest in the Russian oil major Rosneft.
They must also invest billions to locate new oil reservoirs to maintain supplies until the globe transitions to alternative energy sources.
Energy corporations also play a significant role in this transition. BP and Shell invest billions in solar and wind farms and electric vehicle charging stations.
The CEO of BP, Bernard Looney, stated that the business was “helping to give the world the energy it needs. While also investing in the transition to green energy.
Wael Sawan, the chief executive officer of Shell, stated that these are “very challenging times, with inflation raging around the globe,” but that Shell was doing its part by investing in renewable technologies. Sinead Gorman, its chief financial officer, added that Shell paid $13 billion in taxes worldwide in 2022.
However, BP has scaled back its efforts to reduce carbon emissions this year due to the high demand for oil and gas.
