Why are BP, Shell and other oil giants making so much money right now?

Big oil companies – from UK-based BP and Shell to international giants such as ExxonMobil and Norway’s Equinar – are posting staggering profit figures.

All of them are benefiting from the rising price of oil and gas after the invasion of Ukraine.

While they are making profits, people around the world are struggling to pay their energy bills and fill their cars – leading to calls for higher taxes on these companies.

So how are they making so much money, should the government step in to stop them?

Oil and gas are traded around the world, and if supplies are short and demand is high, sellers can charge more and the price will rise.

Before the war in Ukraine, Russia was the world’s largest exporter of oil and natural gas.

Much of what people paid to buy that oil and gas went to the Russian government — those exports accounted for 45% of the Russian government’s budget in 2021.

After the invasion, Western countries, including the UK and EU, tried to stop (or at least massively reduce) their energy imports from Russia to avoid funding the Russian military and supporting a hostile regime.

Countries unwilling to buy from Russia had to pay higher prices for oil produced elsewhere.

Oil prices are already rising as economies reopen after Covid-19 lockdowns and people need more oil.

The day after the Russian invasion, the price of oil rose above $100 a barrel and was above $127 in March, before returning to around $85. Gas prices also skyrocketed after the attack.

Oil and natural gas are critical to every aspect of modern life. Oil is used to make petrol and diesel and natural gas is used for heating and cooking.

They are used in agriculture, power generation and other industrial processes, making everything from fertilizers to plastics.

So the continued rise in oil and gas prices raises the cost of many other things we buy, adding to the cost of living crisis that has gripped the UK and other countries in recent months.

Oil companies make money by finding oil and gas deposits buried in rocks beneath the earth’s surface and drilling down to release them.

Costs don’t change as the price goes up or down, but the money they earn by selling it does.

So when oil prices skyrocketed after the invasion of Ukraine, the money these companies made by selling oil and gas increased massively.

The profits they make won’t disappear – lots of ordinary people own shares in BP, Shell and other global oil companies. It could be through their pension fund and they may not be aware of it.

Some additional profits are paid out to shareholders through higher dividends and share buybacks (which increases the share price).

But as long as billions roll in as consumers struggle to pay their bills, calls for higher taxes will continue.

Big oil companies made their record profits even after paying billions to governments around the world.

BP and Shell are in a complicated position because they produce relatively small amounts of oil and gas in UK waters despite being headquartered in the UK. They make huge profits from their worldwide activities.

Shell paid $134m (£110m) in tax on its UK operations in 2022, on a worldwide tax bill of $13bn.

BP paid $2.2bn (£1.8bn) in tax on its UK operations out of a global tax bill of $15bn.

Oil companies already pay 40% tax on profits from oil and gas production in the UK – higher than taxes on other companies.

But they can lower that tax bill by deducting the cost of shutting down old oil rigs or offsetting future investments and losses from earlier years.

In some years, BP and Shell paid no tax on UK operations and instead received payments from the UK government.

After the invasion of Ukraine, the government faced calls to introduce an additional “windfall tax” on energy company profits to help pay skyrocketing energy bills.

It was introduced in May 2022 and increased from 25% to 35% in November. Between 2022 and 2028 around £40bn is expected to be raised from all companies operating in UK waters.

However, the windfall tax only applies to profits from UK oil and gas production, which only accounts for a small share of some firms’ profits.

And firms can deduct more than 90% of new exploration and production costs from their windfall tax bills, significantly reducing what they have to pay.

The windfall tax accounted for nearly all of Shell’s UK tax bill and $700m (£538m) of BP’s.

Politicians, environmentalists, trade unions and poverty campaigners have attacked the record profits of oil companies and argued for higher windfall taxes.

They say the high prices are the result of war – something beyond the oil company’s control – and that it is unfair that oil companies are profiting from people’s suffering.

Some say that high windfall taxes are a good way for governments to raise money because they are easy to collect and hard to avoid.

But oil firms argue that a higher windfall tax would make them less willing to invest in production in the UK and look for oil elsewhere where taxes are lower.

Harbor Energy, which produces more oil and gas in the UK than any other, is cutting jobs and reconsidering its UK investments due to the tax windfall.

If the UK government decides to tax BP and Shell Global Profits are high, they can move their headquarters out of the country – avoiding the new tax and losing much of the income they currently pay to the UK.

Oil companies have to operate in a world where oil prices can go up and down with little warning. Money made in good years helps balance out years when oil prices are low.

Many oil companies lost billions from Russian investments last year – for example BP wrote off $24bn of investments in Russian oil company Rosneft.

They will need to invest billions in finding new reserves of oil to keep supplies running until the world switches to renewable energy sources.

Energy companies will play a big role in that switch-over. BP and Shell invest some of the billions they make from oil and gas into renewable energy, such as solar and wind farms and charging stations for electric cars.

BP boss Bernard Looney said the British company was “helping provide the energy the world needs” while investing in the transition to green energy.

Shell chief executive Wale Savan said “times are incredibly difficult – we’re seeing inflation around the world” but Shell was playing its part by investing in renewable technologies. Shell paid $13bn in tax globally in 2022, added its chief financial officer Sinead Gorman.

However, BP scaled back its plans to cut its carbon emissions this year because demand for oil and gas remains so strong.

A fuel price cap was introduced in 2019 to stop companies overcharging people who don’t shop around for the cheapest deals. It targets energy suppliers and does not affect the profits of oil and gas producers.