Journalism is about ‘gee-whizz’ factors, and oil and gas companies have yielded plenty of them this summer. Saudi Aramco’s net income of US$48.4bn for the April-June quarter was almost as much as the US$50bn-plus reported by Exxon, Chevron, Shell, BP and TotalEnergies put together.

Each of the record-breaking amounts elicited oohs and aahs from the media as they were announced, but the lack of perspective was lamentable.

Two years ago, there were tens of billions of red ink as these fossil fuel companies wrote off asset values in the expectation not only of declining prices, but potential ‘stranded assets’ en route to a net-zero world.

The cyclicality of these companies is as obvious as the volatility in oil and gas prices. In the past 20 years, daily oil prices (West Texas Intermediate) have swung between a peak of US$147 per barrel in 2008 to minus US$40 when Covid struck in the spring of 2020, according to Trading Economics. (It was around US$95 at the time of writing.)

Taking Shell as an example: in 2020 it lost more than US$21bn post tax; in 2021 profits exceeded US$20bn. In the second quarter alone of this year, it made US$18bn, boosted by a partial reversal of asset impairments.

Flexible giants

It’s complicated and too often journalists don’t do complicated. The neglected story is how flexible the behemoths have been since 2014, when oil prices were above US$100 per barrel and before the Paris Climate Agreement and Covid.


Jane Fuller is a Fellow of CFA Society of the UK and Visiting Professor at City, University of London

A windfall tax is a stick, but taxes can also provide a carrot

The impact on all-important cashflow at these capital-intensive, long-term businesses has been mitigated by cuts in capital spending, dividends and share buybacks.

The other side of the gee-whizz story has been to compare the big profit numbers with the increase in UK households’ energy bills. UK households paid an average of about £1,300 in 2021. This winter the level could be more than £2,000 higher; next year the average cost could peak at well over £4,000. A crude way of thinking about it is that every £1,000 increase for the UK’s 28 million households costs £28bn.

It is easy to see how imposing a windfall tax – the 25% Energy Profit Levy – to raise £5bn over the next year would be (a) easily affordable for the companies and (b) help fund government measures to cushion the impact of rising bills.

Bear in mind that windfall taxes have been imposed by Conservative, Labour and coalition governments in the past 40 years, and that the effective tax rate of 65% on UK profits will not set either a historical record for the UK or an international record.

But also bear in mind that the UK represents a small part of global operations. Looking at Shell’s 2021 Report on Payments to Governments, Nigeria, Malaysia and Norway take the prizes. The UK actually saw a tiny rebate, helped by decommissioning allowances.

A windfall tax is a stick, but taxes can also provide a carrot. So new incentives to invest in the North Sea will mitigate the overall impact.

Companies accustomed to volatile prices and a future that confounds predictions just add government U-turns and mixed messages to the list.