Last year’s ones broke all records, to the point of creating political embarrassments: and there could still be strong gains
Since the beginning of the war in Ukraine, oil prices have soared and energy companies have gained a lot, while households and businesses have had considerable difficulties. Oil prices are now far from the peaks reached at the start of the war and last summer, but the European embargo on refined Russian oil started on sunday could drive prices up again.
The contrast between the enormous success of the oil companies and the difficulties of consumers has been arousing ambivalent feelings for months: on the one hand there are private companies that legitimately sell a raw material whose price increases for reasons beyond their control, making a profit; on the other hand, there are consumers who suffer these price increases on various fronts, when they go to refuel but also when they buy products at higher prices because transport costs have increased, which are reflected in the price of the goods.
For this reason, many Western governments have imposed extraordinary taxes on the extra profits of energy companies, so that part of their additional income could be redistributed in the form of aid and subsidies to those who were paying a lot for energy.
The price of oil has increased a lot compared to three years ago. Due to the pandemic, the producing countries had reduced the supply of crude oil to adapt to very low consumption, given that travel and movement were prohibited. When the restrictions were then removed, the supply of the producing countries did not increase as much as the demand, effectively making oil a scarcer and more expensive commodity. Furthermore, the producing countries want to continue to keep prices high to make a profit, and do not intend to increase supply. In addition to this structural reason, the war in Ukraine has aggravated the situation: Russia was one of the most important oil producers in the world and the West has imposed sanctions precisely on its exports to hit it economically. Last year, prices rose above 100 dollars a barrel, a value not seen for years. Since the end of the summer, however, prices have settled around 80 dollars: for comparison, in the spring of 2020 the price was around 20 dollars a barrel.
Thus, oil companies have earned much more than in the past, because their costs (for extraction, refining, sale) have remained virtually the same. Throughout the supply chain, from extraction to sale at the gas pump, companies have achieved exceptionally high returns.
According to the calculations of Reuters, the profits of the largest Western energy companies (Shell, BP, TotalEnergies, Chevron, ExxonMobil) reached $200 billion in 2022. We are talking about profits, ie what is sold net of production costs, therefore potentially ready to be distributed to investors. The Shell company’s profits totaled $39.9 billion, double that of 2021 and the highest in its 115-year history. The American group ExxonMobil recorded profits of 55.7 billion in 2022, more than twice the result of 2021. BP has more than doubled its earnings compared to 2021, reaching nearly $28 billion.
In 2023 profits are expected to drop to 158 billion, a figure that is in any case much higher than those of 2021. The estimate is based on current prices, around 80 dollars a barrel, but the beginning of the embargo on refined Russian oil could cause the quotations and therefore the profits of the companies.
Profits of the five largest Western energy companies, in billions of dollars (Reuters)
Italian companies also gained from the war. Eni closed the third quarter of 2022 with a net profit of 3.73 billion euros, an increase of 161 percent compared to the same period of 2021. In the first 9 months of 2022 it recorded profits of 10.8 billion, the 311 percent more than in the same months of the previous year.
Many Western governments have therefore imposed a so-called windfall tax, an extraordinary tax that is levied at the discretion of governments on certain businesses that are benefiting from unforeseen and exceptional circumstances. Taxes have therefore been introduced almost everywhere on the extra profits of oil companies, but in general of all energy companies, which have become very rich due to the effects of the war in Ukraine. The objective of this tax is to raise funds to finance measures in favor of those who have been disadvantaged by the situation, such as citizens and businesses who find themselves paying a lot for fuel and energy in general.
Italy was one of the first countries to apply it. The measure was decided in March 2022 by the government of Mario Draghi and provided for a one-off tax on the extra profits of companies in the energy, gas and oil sector, equal to 25 percent. The Ministry of the Economy counted on collecting 10.5 billion euros from the measure last year, but then, for a series of reasons also linked to the difficulty of calculating the amount due, the companies preferred not to pay, counting on the unconstitutionality of the law , and the state had collected just over a billion. The current government has decided to increase the tax this year from 25 to 50 percent.
The European Union in September announced the introduction of a similar tax, which it called though “Solidarity Contribution”, payable by producers of fossil fuels, in addition to national taxes. It requires a levy of at least 33 percent on any 2022 and 2023 taxable profits that exceed the average profits earned between 2018 and 2021 by at least 20 percent.
The United Kingdom has also imposed its own tax on extra profits: the current Prime Minister Rishi Sunak had introduced it at an amount equal to 25 per cent when he was still Chancellor of the Exchequer (the correspondent of our Economy Minister) during the government by Boris Johnson; it was then increased to 35 per cent by current Chancellor of the Exchequer Jeremy Hunt. However Sunak’s government has been much criticized for not being even tougher on energy companies: for months the UK-based company Shell said it had no no intention to pay the tax because its activities were almost all abroad. However, on Thursday he announced that he had finally paid 134 million pounds to the British government and over 500 million to the European Union.
From the point of view of fairness, all economists agree that an extraordinary withdrawal from the enormous profits made by these companies thanks to the war is very sensible, precisely with a view to raising funds to finance measures to support families and businesses, whose energy bill, between fuel and bills, has significantly increased.
However, there are risks. Taxed companies can adopt elusive and non-transparent behaviors in order not to pay what is owed: they can move their tax offices and can threaten not to invest anymore or even to withdraw investments in the countries where these taxes are required, with the consequent social cost deriving from the loss of income and jobs. The American company ExoonMobil, the largest European oil supplier, has sued the European Union against the requested solidarity contribution for this very reason: according to the company’s top management, a tax on extra profits would discourage investments. However, many have pointed out that these extra profits often served to pay hefty dividends to shareholders and not to finance business expansion.