Eye-popping prices for energy are just not right

A vehicle enters a BP petrol station in central London, Britain, on Aug. 2. Oil began to climb late last year, well before Russia’s invasion of Ukraine on Feb. 24.HENRY NICHOLLS/Reuters

United Nations Secretary-General António Guterres called them examples of “exceptional greed.” A Friends of the Earth campaigner said “it beggars belief that these companies are raking in such huge sums in the midst of a cost-of-living crisis.” U.S. President Joe Biden said one of the companies in question “made more money than God this year.”

Each of them was referring to Big Oil’s embarrassment of riches, as energy companies report record or near-record profits. The extraordinary earnings are not the result of a sudden collective bout of management genius; it’s just easy money, an outcome of the war in Ukraine, which has constrained supplies and jacked up prices.

Their luck is not shared by consumers in North America, Europe and elsewhere, where fill-ups have become exercises in self-inflicted pain. Maybe those purchases of gas-slurping SUVs were not such a great idea, but that’s not the point. The point is that we need windfall taxes on outsized oil company profits. Fairness dictates it, as an exceedingly small group of society – oil company investors – wallows in lucre while the rest of us suffer the consequences.

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Oil began to climb late last year, well before Russia’s invasion of Ukraine on Feb. 24. Prices then soared. Brent crude, the international benchmark, hit US$139 a barrel in early March and then ranged between US$100 and US$120 for months – a period that coincided with the oil companies’ fiscal second quarter.

The price on Friday was US$96, providing some relief to consumers. But that was still up by more than a third over the year, and with the war dragging on and the Kremlin using energy as a weapon against any country supporting Ukraine, it seems unlikely that oil prices will plunge any time soon.

Note that OPEC is making little effort to put downward pressure on prices, despite Mr. Biden’s cajoling. In a setback for the President after his visit to Saudi Arabia, the cartel’s dominant producer, OPEC this week agreed to increase output by a mere 100,000 barrels a day, equivalent to 0.1 per cent of global demand.

Big Oil’s earnings were better than most analysts’ expected, and you can bet the companies, recognizing the political risk of reporting exceedingly plump profits, used every legal accounting trick to make those profits as small as possible.

BP PLC this week revealed that its second-quarter profit tripled to almost £7-billion (about $10.93-billion), the second-highest in the British oil giant’s history. Italy’s Eni SpA saw its net profit increase fourfold to €3.8-billion (about $5-billion). Shell PLC reported record quarterly earnings of US$11.5-billion (about $14.86-billion), and the profit at France’s TotalEngeries SE almost tripled to US$9.8-billion (about $12.66-billion).

These “strong second-quarter results reflect a tight global market environment, where demand has recovered to near pre-pandemic levels,” said ExxonMobil Corp. boss Darren Woods. “This situation was made worse by events in Ukraine.”

By “events” he meant the war. By “situation was made worse,” it certainly wasn’t made worse for his company, precisely because of the war. In the past year, Exxon shares are up 55 per cent, with most of that rise coming since early this year, giving the company a market value of US$363-billion (about $469-billion). In Canada, shares of oil sands giant Suncor Energy Inc. are up by two-thirds in a year. During the height of the pandemic, when oil prices briefly turned negative, there were questions about the viability of high-cost producers such as Suncor; today, they are cash juggernauts.

Which brings us to the windfall tax.

The tax is already in place in Britain, where former chancellor of the exchequer Rishi Sunak, one of the two candidates to replace Prime Minister Boris Johnson, reluctantly slapped a 25-per-cent tax on “extraordinary profits” in July. The payments can be offset by tax breaks on new energy investments made in the U.K. Pressure is building on other governments to do the same. The arguments to do so are compelling.

Why do investors buy one energy company over another? Or why buy oil companies at all?

If they just want exposure to the raw material itself, they should buy oil futures (agreements to buy or sell certain amounts of oil at predetermined prices at a set date). Those who do not have the stomach to play that risky game can buy the oil producers themselves.

But which one? That all depends on an investor’s view of the various oil companies competing for their attention. Exxon might win out over, say, Chevron Corp. if the investor has a more positive view of Exxon management’s ability to maximize value, a process that involves everything from the production mix and geographic risk to hedging strategy and dividend policy, all of which is essentially code for capital allocation.

But the recent surge in Big Oil profits had almost nothing to do with management skill and almost everything to do with a war. Given that reality, it seems neither churlish nor outrageous to demand a windfall tax. The collected revenues could be used to subsidize home and school heating bills or help pay for home insulation programs, which would have the benefit of reducing carbon emissions.

If oil prices retreat because the war ends and Russia stops using energy as a weapon, the tax would be eliminated. We are in the midst of a cost-of-living crisis that will not vanish tomorrow. Eye-popping profits for oil companies while consumers pay eye-popping prices for energy are just not right.

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