Business Essentials for Professionals


The Reason Behind Oil Giants Like BP, Shell, Are Making So Much Profits Now

The Reason Behind Oil Giants Like  BP, Shell, Are Making So Much Profits Now
The large oil companies, including ExxonMobil and Norway's Equinor as well as UK-based BP and Shell, have been announcing astounding profit numbers.
They are all profiting from the rise in oil and gas prices as a result of the invasion of Ukraine.
People struggle to pay their energy bills and fill up their cars while these businesses profit handsomely, prompting calls for higher taxes on these businesses.
What is their method of income generation, and should the government intervene to put a stop to it?
The combined earnings of Big Oil companies are displayed in a bar graph. They increased by more than twofold to $222 billion in 2022.
Worldwide trade in oil and gas results in price increases if sellers can charge more due to low supply and high demand.
Russia was the biggest exporter of oil and natural gas prior to the Ukraine War.
The Russian government received a large portion of the money consumers paid for that oil and gas; in 2021, those exports accounted for 45% of the country's budget.
After the invasion, Western nations—including the UK and EU—tried to halt (or at the very least drastically reduce) their energy imports from Russia in order to avoid supporting a hostile regime and providing funding to the Russian military.
Oil produced elsewhere had to be purchased at much higher prices by nations that didn't want to purchase from Russia.
As economies recovered from Covid-19 lockdowns, oil prices had already been rising as a result of the increased demand for the commodity.
An oil price line graph for Brent Crude. A barrel of Brent Crude was worth $85.09 on February 8, 2023.
The price of oil surpassed $100 per barrel the day after the Russian invasion, reaching a peak of over $127 in March before falling back to about $85. After the invasion, gas prices also rose sharply.
Almost every aspect of modern life depends on oil and natural gas. Natural gas is used for heating and cooking, while oil is used to make gasoline and diesel.
They are also utilized in industrial processes that produce everything from plastic to fertilizer, as well as in agriculture, electricity production, and other processes.
Therefore, a persistent increase in oil and gas prices drives up the price of many other things we buy, contributing to the recent cost of living crisis that has engulfed the UK and other nations.
Finding oil and gas reserves hidden in rocks beneath the earth's surface and drilling down to release them are how oil companies make money.
Despite price changes, the costs do not change significantly; however, sales revenue does.
Therefore, when oil prices increased following the invasion of Ukraine, the revenue these companies received from selling oil and gas also significantly increased.
As it scaled back plans to cut the amount of oil and gas it produces by 2030, BP on Tuesday announced record annual profits of $27.7 billion. These profits were more than twice what they were the year before.
Shell announced its highest profits in 115 years in February. By 2022, profits had doubled to $39.9 billion from the previous year.
A large number of regular people own shares in BP, Shell, and other international oil companies, so not all of the profits they make are lost. They may not even be aware that this is happening through their pension funds.
Increased dividends and share repurchases are two ways that some of the additional profits are distributed to shareholders (which increases the share price).
But the calls for higher taxes will persist as long as the billions come in and consumers struggle to pay their bills.
Even after giving billions to governments all over the world, large oil companies still made their record profits.
Because they have their headquarters in the UK but only produce a small amount of oil and gas in UK waters, BP and Shell are in a difficult situation. The majority of their revenue comes from global operations.
Out of a $13 billion tax bill worldwide in 2022, Shell paid $134 million in taxes on its UK operations.
Out of a $15 billion tax bill worldwide, BP paid $2.2 billion in taxes for its UK operations.
Oil companies already pay a 40% tax on their UK oil and gas production profits, which is higher than the tax rate for other businesses.
However, they can lower that tax bill by writing off the cost of closing down old oil rigs or compensating future investments and losses from prior years.
BP and Shell have occasionally not paid taxes on their UK operations and have instead received payments from the UK government.
After the invasion of Ukraine, there were calls for the government to impose an additional "windfall tax" on energy company profits in order to offset skyrocketing energy costs.
This was introduced in May 2022, and in November, the percentage increased from 25% to 35%. It is now anticipated that between 2022 and 2028, all businesses using UK waters will contribute an additional £40 billion.
The windfall tax, however, only applies to the profits from UK oil and gas production, which make up a relatively small portion of the profits of some businesses.
Additionally, businesses can significantly lower their tax obligations by deducting more than 90% of the cost of new exploration and production from their windfall tax bills.
The entire UK tax bill for Shell and $700 million of BP were caused by the windfall tax.
Political figures, environmentalists, labor unions, and anti-poverty activists have criticized the record profits of oil companies and called for higher windfall taxes.
They argue that high prices are the result of a war, which is outside the control of oil companies, and that it is unfair that these companies are making money off of the suffering of others.
Some claim that because they are simple to collect and difficult to dodge, higher windfall taxes are a good way for governments to raise revenue.
Even Ben van Beurden, the former CEO of Shell, questioned whether governments would always need to impose higher taxes on energy producers in order to defend the most vulnerable members of society.
However, oil companies contend that a higher windfall tax would discourage them from investing in UK production and force them to look for oil in countries with lower taxes.
Because of the windfall tax, Harbour Energy, which is the top producer of oil and gas in the UK, is eliminating jobs and rethinking its commitment to the country.
If the UK government decided to impose a higher tax on BP and Shell's global profits, they might relocate their corporate headquarters outside of the country in order to avoid the new tax and deprive the UK of a significant portion of the money they currently pay.
Oil companies must function in a world where the price of oil can change abruptly, going up as well as down. Profits from profitable years help offset losses from years with low oil prices.
Many oil companies lost billions of dollars on their investments in Russia last year; for instance, BP wrote off $24 billion in investments in Rosneft, a Russian oil company.
In order to maintain oil supplies until the world transitions to renewable energy sources, they must also invest billions in the search for new oil reserves.
In that transition, energy companies will also play a significant role. Some of the billions that BP and Shell earn from the sale of oil and gas are put toward the construction of solar and wind farms, as well as electric vehicle charging facilities.
In addition to investing in the switch to green energy, BP CEO Bernard Looney claimed that the British company was "helping provide the energy the world needs."
These are "incredibly difficult times - we are seeing inflation rampant around the world," according to Shell CEO Wael Sawan, but Shell is doing its part by investing in renewable technologies. According to Shell's chief financial officer Sinead Gorman, the company paid $13 billion in taxes worldwide in 2022.
However, because of the high demand for oil and gas, BP reduced its plans to reduce its carbon emissions this year.

Christopher J. Mitchell

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