June 5, 2023

Big oil revenues reignite surprising tax debate | OilPrice.com

Despite the weakened oil price in the third quarter, the oil industry continues to record strong financial results. Some find this “awkward” because it occurs during a time of economic hardship. Besides being embarrassing, Big Oil’s profits are likely to attract more political pressure from desperate governments.

Bloomberg reported this week that based on the data it compiled, Exxon, Chevron, Shell, BP and TotalEnergies had a combined profit of $50.7 billion in the last quarter.

That’s considerably less than the record $62 billion reported by the five supermajors in the second quarter — drawing the ire of politicians — but it’s still a big number, and it’s likely to draw more ire and call for money to be handed out.

“It’s definitely embarrassing,” Abhi Rajendran, a research fellow at Columbia University’s Center for Global Energy Policy, told Bloomberg. “These companies don’t want to beat their chests about strong business results at the expense of consumers and a difficult economic environment.”

This is an interesting insight, considering that in 2020, when Big Tech was raking in the cash thanks to the restrictions — including at the expense of consumers who had to stay at home — nobody really blamed Amazon, Apple, or Microsoft.

Yet the oil industry holds a special place in the heart of almost every Western politician, as the energy transition remains high on the official agenda, despite the costs of renewables. rises and Europe turns to coal to survive the winter.

Related: Why Russian LNG exports to Europe exploded this summer

The oil industry was a major culprit in the energy crisis when it first started, and record profits helped bolster what were effectively flimsy arguments. Now that argument is likely to be raised again, and we may hear more talk about windfall taxes.

It’s not just the five Big Oil companies either. Based on the first reports of this earnings period, the industry had another excellent three months. For example, Halliburton saw its profits double in July-September to 544 million dollars. Valero reserved A profit of $2.8 billion for the period, which means that demand for fuels was stronger than in 2019.

In fact, the Biden administration has been quick to demand that oil companies “pass on lower energy costs to consumers immediately.” The White House claims that refiners’ production costs are falling while their margins are growing. Information page that industry must immediately share higher profits with consumers by lowering the final prices of their products.

Meanwhile, Energy Secretary Jennifer Granholm held talks with industry leaders this week to try to get them to step up fuel production. This sounds contradictory to the claims made in the announcement, but it reflects the reality where the demand for fuels is increasing, while the production capacity of fuels has decreased.

Unfortunately, the oil executives seem to have broken the administration’s wishes for the restoration of the closed refining capacity. Understandably, there are also no plans to build new refining capacity in the context of the federal energy policy, which aims to reduce the economy’s dependence on fossil fuels.

Meanwhile, attempts by governments on both sides of the Atlantic to force the oil industry to give up its “extra” profits may backfire. Since the EU and UK announced plans for windfall taxes on the oil sector, both industry and analysts have warned that this would dampen investment appetite. Instead, companies will continue to prioritize returning cash to shareholders, which would further weaken future supply security.

“If you’re planning your capital budget, you now have to think twice about whether you have a new risk,” Christyan Malek, Global Head of Energy Strategy at JP Morgan, told Bloomberg earlier this year. “It encourages large companies to return cash to shareholders while using free cash flow that could have been used for investment.”

In the UK, a windfall tax was approved in July, with the country’s industry lobby group warning that it would threaten investment plans. Group leader Deirdre Michie stated that “Exploring and bringing oil and gas ashore is inherently risky and expensive, so our members need UK tax and other regulations to be stable and predictable before they consider investing hundreds of millions of pounds in such projects needed.”

It could well be argued that if it were any other industry, governments would be celebrating its durability and the taxes that this resilient industry would pay into government coffers. Yet Big Oil and the oil industry as a whole have been cast as the villains of the era, and nothing they do seems right.

Oil companies are damned if they do—produce more oil and invest in new exploration, which lowers prices—and they’re equally damned if they don’t, shunning more exploration and focusing on returning cash to shareholders. demand exceeds oil supply. If they can’t win, why even try?

Irina Slav for Oilprice.com

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