Big oil companies – from UK-based BP and Shell to international giants such as Exxon Mobil and Norway’s Equinor – have been posting staggering profit figures.
They all benefited from a surge in oil and gas prices following the Ukrainian invasion.
While they’re making profits, people around the world are struggling to pay their energy bills and fill up their cars – leading to calls for higher taxes on these companies.
So how do they make so much money, and should the government step in to stop them?
Why are oil prices soaring?
Oil and gas are traded around the world, and if supply is short and demand is high, sellers can charge higher prices, and prices rise.
Before the Ukraine war, Russia was the world’s largest oil and gas exporter.
Much of the money people pay for oil and gas goes to the Russian government — the exports make up 45% of the Russian government’s 2021 budget.
After the invasion, Western countries, including the UK and the EU, tried to stop (or at least drastically reduce) energy imports from Russia to avoid funding the Russian military and supporting hostile regimes.
Countries that don’t want to buy oil from Russia have to pay higher prices for oil produced elsewhere.
Oil prices have risen as economies reopen after Covid-19 lockdowns, and people want more oil.
Oil prices rose above $100 a barrel the day after the Russian invasion and peaked above $127 in March before falling back to around $85. Natural gas prices also spiked after the invasion.
Oil and gas are vital to nearly every aspect of modern life. Oil is used to make gasoline and diesel, and natural gas is used for heating and cooking.
They are also used in agriculture, power generation and other industrial processes that produce everything from fertilizers to plastics.
As a result, the continuing rise in oil and gas prices has pushed up the cost of many other things we buy, triggering the cost of living crisis that has gripped the UK and other countries in recent months.
Why Soaring Prices Mean More Profits?
Oil companies make money by locating oil and gas reserves buried in subsurface rock and drilling down to release them.
The cost doesn’t change that much as the price goes up or down, but the money they make selling it does.
So when oil prices spiked after the Ukrainian invasion, so did the money these companies made selling oil and gas.
How much profit did Shell and BP make last year?
The profits they make aren’t all gone – many ordinary people own shares in BP, Shell and other global oil companies. It might be through their pension fund, and they might not even know it.
Some of the extra profits are paid out to shareholders through higher dividends and share buybacks (which boost the stock price).
But calls for higher taxes will continue as long as billions of dollars are pouring in as customers struggle to pay their bills.
How much tax do oil and gas producers pay?
Even after paying billions of dollars to governments around the world, big oil companies are making record profits.
The situation for BP and Shell is complicated because they are based in the UK but produce relatively little oil and gas in British waters. Most of their profits come from events around the world.
Shell pays $134m (£110m) in tax for its UK operations in 2022, compared with $13bn globally.
BP paid $2.2bn (£1.8bn) in tax on its UK operations out of a $15bn global tax bill.
How are UK oil companies taxed?
Oil companies already pay 40% tax on their profits from oil and gas production in the UK – higher than other companies are taxed.
But they can reduce taxes by deducting the cost of shutting down old oil rigs or offsetting future investments and losses in previous years.
In some years, BP and Shell do not pay tax on their UK operations, but instead receive payments from the UK government.
After invading Ukraine, the government faced calls for an additional “windfall tax” on energy company profits to help pay soaring energy bills.
This was introduced in May 2022 and increased from 25% to 35% in November. All companies operating in UK waters are now expected to raise an additional £40bn between 2022 and 2028.
However, the windfall profits tax only applies to profits from UK oil and gas production, which make up only a small fraction of some companies’ profits.
Companies can deduct more than 90 percent of new exploration and production costs from their windfall tax bills, dramatically reducing what they have to pay.
The windfall tax accounts for Shell’s entire UK tax bill, and BP’s $700m (£538m).
They face calls to pay more taxes
Politicians, environmentalists, unions and anti-poverty activists have attacked oil companies’ record profits and advocated for higher windfall profits taxes.
They say high oil prices are the result of oil companies out of their control – war, and it’s not fair that oil companies profit off of people’s suffering.
Some say windfall tax increases are a good way for governments to raise money because they are easy to impose and hard to avoid.
But oil companies argue that a higher windfall tax will make them less willing to invest in production in the UK, and they will look for oil where taxes are lower.
Harbor Energy, which produces more oil and gas in Britain than any other company because of the windfall tax, is cutting jobs and rethinking its investments in Britain.
If the UK government decides to tax BP and Shell Global If profits are higher, they may move their headquarters out of the country – dodging the new tax and depriving them of much of the UK income they currently pay.
Oil companies must operate in a world where oil prices can go up and down with little warning. Money made in good years helps balance years of low oil prices.
Many oil companies lost billions of dollars from their Russian investments last year – BP, for example, wrote off its $24 billion investment in Russian oil company Rosneft.
They must also invest billions of dollars in finding new oil reserves to maintain supplies until the world shifts to renewable energy.
Energy companies also have an important role to play in this transition. BP and Shell invest some of the billions they make from oil and gas in renewable energy sources such as solar and wind farms, and electric car charging stations.
BP boss Bernard Rooney said the British company was “helping to provide the energy the world needs” while investing in the transition to green energy.
Shell chief executive Wael Sawan said these were “extremely difficult times – we’re seeing rampant global inflation”, but Shell was doing its part by investing in renewable technologies. Its chief financial officer, Sinead Gorman, added that Shell already paid $13 billion in taxes globally in 2022.
However, with demand for oil and gas so strong, BP scaled back plans to cut carbon emissions this year.
Will energy caps reduce oil company profits?
The energy price cap was introduced in 2019 to stop companies overcharging people who hadn’t shopped around for a cheaper deal. It targets energy suppliers and does not affect the profits of oil and gas producers.