
2 minute read
Why are oil giants making such big supernormal profits?
Bruno
BP has recently followed Shell in reporting record annual profits and the businesses are now providing billions in the form of dividends to their shareholders. In the mean time millions of British homes are preparing for a cost-of-living crisis prompted by the fall in supply for gas. These high prices generate huge revenues for the world’s leading fossil fuel giants. So how are they making so much money, and should the government intervene to reduce these supernormal profits?
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The record profits of £23 billion and £33 billion, were recently announced for last year. In simple terms, their profits are high because they were able to massively put-up prices on the oil and gas they sell. As the data shows this has affected other oil and gas companies in much of the world, as well. Additionally, the costs don’t vary that much as the price goes up or down, but the money they make from selling it does.
For consumers and producers, the price of gas in the UK hit an all-time high of around £8.50 per therm last August, compared to around 50p in the early part of 2021. Meanwhile, oil prices also soared, to around 107 dollars per barrel in early June last year, from around 64 dollars a year earlier. Much of this was down to Russia’s invasion of Ukraine, launched over a year ago. On the other hand, both oil and gas prices have eased back from their recent highs. Oil now costs around 82 dollars per barrel, this is not an unusual figure, historically. While gas prices have also significantly fallen from last year’s optimum but at around £1.50 per therm they are still much higher than they have previously been. So despite this, how are oil firms taxed in the UK? Well, oil companies already pay a tax on their profits from oil and gas production in the UK of 40% - which is higher than taxes on other companies. However there are strategies to reduce this bill, by deducting the cost of shutting down old oil rigs, or offsetting future investments from earlier years. After the invasion of Ukraine, the government faced calls to introduce an extra ‘windfall tax’ on energy company profits to help pay for soaring energy bills. This was introduced in May 2022 and increased from 25% to 35% in November. It is now expected to raise around £40bn extra from all the companies operating in UK waters between 2022 and 2028. Although, recently politicians, environmentalists, trade unions and poverty campaigners have attacked oil companies’ record profits and argued for higher windfall taxes. Even the former Shell CEO, Ben van Beurden, wondered if it was inevitable that governments would need to tax energy producers more to protect the poorest in society. If the UK government decided to tax BP and Shell on their global profits more heavily, they could potentially move their headquarters out of the country - escaping the new tax and depriving the UK of much of the revenues they currently pay.