There is no excuse for Big Oil’s record profits

Record profit announcements by a string of fossil fuel giants over the last fortnight have underlined just how dysfunctional our global economic system is. There’s no great mystery: Every time you fill up your car, or turn on the heating, you’ll know straight away why BP, Shell, ExxonMobil and all the rest of them are making such obscene profits. Every penny or cent in their profits is being extracted directly from the rest of society, via the exceptionally high prices we saw over last year.

The price of oil and (especially) natural gas shot up last year as a direct result of the Russian invasion of Ukraine, which caused dramatic disruptions to supplies across Europe. But they were already rising thanks to the ending of lockdowns, which caused a surge in demand both across Europe and Asia, driving up prices.

Profits sometimes get justified as a reward for innovation, or taking risks. If a company invents a shiny new kind of touch-screen mobile phone, or an investor puts their money into a business that might fail, profits are paid – the theory goes – as the reward from society for success. That clearly isn’t happening to the fossil fuel companies. They haven’t invented a new kind of oil or gas to sell. They haven’t taken some massive new risk. They are doing what they always do – pumping stuff out of the ground, and selling it to the rest of us. The soaring world price of oil and natural gas over 2022 meant they could just sell the stuff for far more than they used to, with no extra effort involved.

What we’re paying them isn’t a reward for innovation or risk. What we’re paying is what economists call “economic rent”: a payment made to someone who can claim ownership over a resource. David Ricardo, one of the very first modern economists, writing in the early nineteenth century, thought landlords acted like this. They didn’t have to do anything to the land they owned to claim money from their tenants. All they were doing was exercising a legal privilege. 

The same goes, today, for the superprofits of the oil and gas companies. After making their payments for their initial investments in drilling rigs and refineries and so on, and paying their workers all the money they receive on top of this is pure economic rent. There is little to no economic justification for them to receive it, particularly when it arrives at the expense of the rest of society.

Because of this, most countries either impose very high taxes on oil and gas production, or take its production into public ownership – the majority of the world’s known oil reserves are in government hands, for instance. Britain is unusual in doing neither: it allows the private exploitation of its fossil fuel resources, and it imposes very low taxes on the companies that exploit them. Calculations from the International Monetary Fund show that the UK levies the lowest standard tax rate on fossil fuel production of any major producer. Even with the windfall tax, the effective tax rate paid by companies operating in the UK sections of the North Sea is below that paid in Canada, Saudi Arabia, Norway and many others. 

Nor is the direct cost of paying for essentials like heating and transport the only cost of the fossil fuel industry. The more of their products we consume, the more those products contribute to climate change – something that the companies themselves have known about for decades. Research published in January showed that ExxonMobil’s scientists had forecast the rising course of global temperatures, directly relating them to fossil fuel consumption, with eerie accuracy back in the 1970s. Knowledge of these impacts did not stop ExxonMobil, or the other oil majors, continuing to disrupt the public discussion of the science, with claims that the evidence for climate change was weak or uncertain. 

There are two attempted defenses of the industry that you hear in the UK. One is that the profits of UK-headquartered companies BP and Shell are paid to UK pensioners, since pension funds are shareholders in those companies. This may have been true three or four decades ago, but is today almost completely wrong: research by the Common Wealth thinktank has shown that just 0.2% of British pension funds’ investments were in Shell or BP. Pension funds in Britain today are far more likely to own government bonds than UK company shares, and UK-based companies are typically owned by investors overseas.

Alternatively, the claim is made that superprofits today are merely compensation for past losses – and necessary to encourage future investment. Those citing losses usually point to 2020, when the fossil fuel companies made heavy losses as oil prices slumped in the pandemic. But the argument makes little sense: why only look back a few years? Over their lifetimes, these companies have made vast profits – it’s why they have attracted investment and, today, fossil fuel majors are still some of the largest corporations on the planet. A few bad years do not change the picture of very healthy profits in general. 

Nor are those profits going to future investment. BP, for all its claims of being “Beyond Petroleum”, gave 14 times as much to its shareholders in 2022 as it invested in low carbon activities.  Shell spent twice as much on marketing as it spent on renewable energy. We know, ultimately, that fossil fuel investment must come to an end: there are hard limits on the amount of carbon we can dig out of the ground and burn if we are committing to restraining climate change over the rest of this century. That change isn’t going to come from within the fossil fuel industry itself, massively committed, as it is, to extracting the maximum possible surplus for its shareholders. 

Prices for oil and natural gas have now come down from their August 2022 peaks, the result of changes in demand in Europe as countries switched to alternative energy sources, and the opening of new supplies into the continent through new Liquified Natural Gas terminals. But in the long run, we cannot depend on energy sources that are so easily disrupted, that are monopolised by profiteers, and whose use causes catastrophic climate change. The switch to renewables and low-carbon generation cannot happen soon enough - and it’ll take action from governments, investing in renewables and new infrastructure, rather than greenwashing from oil companies making world-record profits, to make it happen.