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Is Windfall Tax the Only Solution to Curb Rising Oil Prices?
Stock Analysis & Ideas

Is Windfall Tax the Only Solution to Curb Rising Oil Prices?

Oil companies across the world have reported record profits for the first quarter of 2022 on the back of soaring oil prices, which have hit a new high. A decrease in oil supply due to Western sanctions on Russia, following its invasion of Ukraine, has led to an unprecedented rise in oil prices.

Oil prices were already increasing before Russia invaded Ukraine in February, as oil demand increased after economies across the world eased COVID-19 restrictions. Further, with the resumption of international flights and domestic travel, the two-year-long lull in the oil market came to an end.

Call for Windfall Tax

Campaigners in the U.K. have called on the government to impose a windfall tax on oil majors like BP PLC (NYSE: BP) and Shell PLC (NYSE: SHEL), which reported record first-quarter profits last week.

They want the government to use the amount collected under windfall tax for initiatives aimed at reducing the burden of rising energy bills on households.

On May 3, BP reported its highest quarterly profit of $6.2 billion in over 10 years. This was followed by Shell posting a profit of $9.1 billion on May 5, which is nearly thrice the amount ($3.2 billion) reported in the first quarter of last year.

Shell’s first-quarter profit is also higher than the fourth-quarter profit of $6.3 billion and the Street’s estimate of $8.7 billion. Further, the figure has been reached after deducting $3.9 billion as costs related to the company’s exit from Russia.

After Shell released its results, Ed Miliband, U.K.’s Shadow Energy Secretary, said, “Another day, another oil and gas company making billions in profits, and yet another day when the government shamefully refuses to act with a windfall tax to bring down bills.”

Greenpeace U.K.’s oil and gas campaigner, Philip Evans, said, “By using a big chunk of the bloated profits that Shell, BP and others are raking in to make homes warmer, more energy-efficient and kitted out with heat pumps, the government could start to really tackle the climate and cost of living crises simultaneously.”

Government Resists

However, the Boris Johnson government is resisting the pressure and the Prime Minister said, “Such a move would discourage oil and gas producers from making investments into domestic energy.”

However, BP’s CEO Bernard Looney said that the company will not drop its plan to invest £18 billion in the country if a windfall tax is levied.

Additionally, Ben van Beurden, the CEO of Shell, who intends to invest £20 billion to £25 billion in the local energy sector, said, “While a windfall tax may not force the company to shelve specific projects, large investments required a stable and predictable financial outlook.”

Take Away

Russia is one of the major global oil exporters, and most of its crude oil and condensate exports went to Europe, the U.S. and Canada last year. Oil companies will continue to gain from the Russia-Ukraine conflict until the world finds a substitute for Russian exports.  

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