Article published: Fossil Fuel Taxes in the Shadow of Ukraine and New Culprits
In the shadow of the tragic events in Ukraine, many processes are unfolding that will radically transform our society and economy. At some point, they will take center stage in public and political decision-making. One such issue is the “windfall profit tax”—as described by the media in Europe—imposed on sectors that are reaping excessive (unearned) profits amid the war in Ukraine. This topic emerged in the European media landscape this spring and has now made its way onto the agenda of European Union leaders.
Estimates of how many millions or even billions Russia earns each day from the sale of fossil fuels to Europe were widely publicized shortly after the start of Russia’s invasion, and these, along with other considerations, served as the basis for the sanctions. It is worth noting here that Gazprom’s profits this year are already twice as high as the company’s profits over the past two years.
In the spring, the topic of “excess profits” in the “big fossil fuel industry” (commonly referred to as “big oil”)—meaning the six largest global Western fossil fuel companies—began to surface in both government institutions and the media in Western European countries. Calls to impose a windfall profit tax on these companies grew particularly loud in the summer after the release of their first-half business results and the astronomical levels of profit growth.
Facts that the authors found shocking circulated in Western media—each liquefied natural gas (LNG) carrier reportedly brought an American company profits of around 150 million euros or more. The European Union was buying gas at any price, outbidding every competitor—as Michael Meiers from the Berliner Zeitung had reported in mid-August.
Banker and energy expert Laurent Segalen has calculated that companies in the U.S. can fill a ship with gas and ship it across the Atlantic for just under 60 million euros, while in Europe, that same shipment could fetch around 270 million euros. Economists at the energy analytics firm Vortexa also point to these enviable profit margins.
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Meanwhile, analysts at Rystad Energy cite figures on profit levels—oil and gas production companies, including ExxonMobil, BP, and Shell, will earn 776 billion euros in profits this year, a new record, exceeding last year’s record of 493 billion euros by 70%. Most of this is returned to investors. Investment in new oil and gas fields remains relatively low—if there is no investment, fuel prices will not fall. British oil company BP has achieved its best results since 2008—the group tripled its profit in the second quarter to $8.5 billion, surpassing analysts’ estimates of $6.8 billion.
“The company is doing well and is getting stronger,” BP CEO Bernard Looney told Reuters. When he took office in 2020, he promised to transition from fossil fuels to renewable energy sources—now he wants to increase spending on new oil and gas extraction sources by $500 million. This is reportedly the company’s response to the global supply crisis. So we can only hope that investments in renewable resources will come at some point later on. The world’s largest oil producer is also reaping huge profits from the fallout of the war in Ukraine; specifically, Saudi Aramco posted record profits of $48 billion in the second quarter.
Traditional and New Culprits
Is it “fair” to make so much money amid the war in Ukraine—a conflict for which Russia is directly to blame? This question is now high on the agenda in discussions among Western European experts and politicians. It has moral, financial, and social dimensions.
A few weeks ago, certain EU member states—Poland foremost among them—appealed to Norway to lower the price of fossil fuels, but their request was rejected on the grounds of free-market principles. If there is an opportunity to make a windfall profit, companies will take advantage of it. This age-old truth applies not only to fossil fuel extraction companies—it applies even more so to oil refining companies. The reason is simple—there is insufficient oil refining capacity, so these companies can charge almost any price for diesel, gasoline, and other products.
Gasoline and diesel prices at gas stations had become decoupled from the price of crude oil, a trend that had already begun in March. In Germany and elsewhere, experts concluded by summer at the latest that the price of diesel was rising much more sharply than the price of crude oil. In just one year, the price of diesel fuel has risen four times as much as the price of crude oil, for no apparent reason. The end consumer pays for this
This is precisely what the German government’s recent response to a question from the Left Party’s parliamentary group reveals. According to the response, the price of diesel fuel has risen by 36% over the course of the year, while the price of crude oil has increased by only 9%.
Schoren Pellman (The Left) accused Federal Minister of Economics Robert Habeck of the Green Party of inaction: “Before the summer, the Minister of Economics promised to take action against oil companies, but nothing has happened. We need to set a cap on gasoline prices.” Given the price of crude oil, diesel fuel should be about 40 cents cheaper.
Excess profits at the oil refining stage have been reaped not only by global leaders such as Shell, ExxonMobil, and TotalEnergies, but also by Poland’s PKN Orlen.
PKN Orlen, Poland’s largest oil refiner, owns six refineries: three in Poland, two in the Czech Republic, and one in Lithuania. It, too, has profited thanks to the current “peculiarities” of the market: while the company’s refining profit was $7.70 per barrel in February, by March it had already reached $39.30 Dollars.
In early October, officials from Germany and France delivered a surprise. First to speak out was Germany’s economy minister. “Issues we need to address”: Economy Minister Robert Habeck accused certain suppliers of fossil fuels, including gas, of charging exorbitant prices—first and foremost the Americans. “Some countries, even friendly ones, are in some cases demanding astronomical prices.” “The U.S. turned to us when oil prices rose sharply, and as a result, national oil reserves were also tapped in Europe. I think that such solidarity would also be useful in reducing gas prices,” said Habeck.
A few days later, the French Minister of the Economy made even harsher remarks against the Americans. In his speech to parliament, he accused the Americans of selling gas to Europeans at four times the price they charge themselves, warning against allowing American dominance over Europe and the weakening of Europe.
These public accusations against the Americans as a European hegemon give the impression of utter desperation. Against the backdrop of the war in Ukraine, the Americans are the big winners of the energy crisis in Europe—a conclusion discussed many times in Western media and expert circles, and one that The Wall Street Journal also reached a couple of weeks ago.
There is no record of the U.S. government owning any companies involved in the extraction or processing of fossil fuels. These companies remain private and operate for profit, and they generally tend to dictate terms to their government rather than heed well-intentioned calls. In contrast, U.S. President Joe Biden’s calls for the country’s fossil fuel industry to lower prices have been widely analyzed. Equally evident at the moment is the extremely low level of responsiveness that the U.S. fossil fuel industry is openly demonstrating toward these calls—prices for fossil fuels in the U.S. are not falling significantly, and there is no light at the end of the tunnel.
For now, it is unclear whether the leaders of Germany and France have any idea at all how the U.S. government could credibly curb the profit-seeking motives of private fossil fuel companies. Moralizing about how much profit is acceptable during wartime is not enough—neither for Americans nor Norwegians, and even less so for Arab countries.
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In August, Jacobin magazine estimated that the additional profits generated by German energy companies this year due to rising prices amounted to 113 billion euros, which is equivalent to nearly a quarter of the entire federal budget.
The Federation of German Consumer Organizations reacted swiftly, calling for a 66% tax on so-called excessive or windfall profits. The European Commission’s plan is similar, though it proposes a tax rate of “only” 33%.
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One of the first to take a stand on this issue was Hungarian Prime Minister Viktor Orbán. In May, Hungary introduced a tax (or levy) on large companies and banks for “extra profits.” Hungary held parliamentary elections in April, and Orbán had already introduced various mechanisms to control energy prices well in advance of the election to make life easier for consumers. The excess profits would thus be redirected toward addressing social problems.
Spain, Italy, and Belgium have already introduced a windfall profit tax. Germany has so far opposed this. Federal Finance Minister Christian Lindner (Free Democratic Party) recently claimed that such a tax would affect the wrong people in this country, thereby siding with the fossil fuel industry.
Italy taxes the revenue of oil companies operating at gas stations, while Spain wants to impose a 4.8% tax on bank profits and customer fees. This issue has garnered widespread attention in European Union countries.
In London, former Prime Minister Boris Johnson had already begun discussing a special tax on excess profits. The United Kingdom currently imposes a 25% tax on the profits of oil producers in the North Sea. Inflation in the United Kingdom is at its highest level in 40 years. While households are primarily suffering from higher energy prices, oil companies are reaping billions in windfall profits. The British government now wants to redistribute a portion of those profits and use approximately 15 billion pounds to support citizens. Oil and gas companies must pay a 25% tax on their windfall profits. However, as the government points out, these companies will be able to deduct 80% of these expenses from their taxes to encourage investment in the energy sector—so here, too, fossil fuel companies are receiving a very lenient and favorable treatment. While introducing this new tax, the British government is just as decisively reducing an existing tax.
The overall conclusion is crystal clear—we can congratulate those who have invested their money in the stocks of “big oil” companies, and we can also encourage others to rush out and buy these stocks, as they will continue to yield good returns for a long time to come.
The author is Armands Gūtmanis, director of the consulting firm Meta Advisory