Fossil fuel giants profit while households and environment suffer

After fossil fuel giants funnelled record profits to their shareholders, it’s clear they have no intention of driving the low carbon transition.

Fossil fuels were more profitable in 2022 than in any other year in history. The western fossil fuel majors - Shell, BP, Chevron, Exxon Mobil, TotalEnergies and Equinor - made combined profits of £213 billion.

Texas-based Exxon Mobil set a record for the highest profit margin in the history of the entire western oil industry – until that record was broken again a week later by Norwegian giant Equinor. UK-based BP and Shell both made more money in 2022 than in any annual period in the last 114 years.

Fattened profit margins mean beefed-up returns for investors. BP hiked up dividend pay-outs by 10 per cent and announced a share buyback scheme worth £2.3 billion. Shell opted for a 15 per cent dividend hike and buybacks worth £3.2 billion. BP’s executives are so confident in their business model that they have committed to funnelling nearly two-thirds of profits from the coming year to shareholders through buybacks.

The problem with share buybacks

Companies can buy back their own shares from investors when they want to return profits to their shareholders without channelling it through dividends. Buyback programmes reduce the total number of outstanding shares, spreading the company’s value over fewer holdings and thereby inflating the value of each shareholder’s remaining assets. This enriches investors, board members – and executives, whose remuneration is often partially paid in stock options.

When a company like BP or Shell chooses to repurchase billions of dollars of its own shares through a buyback scheme, this indicates that it has generated an extraordinary surplus of cash. It also signals that it can find no better investment of this surplus than in funnelling money to its investors. Of the £31 billion paid out by BP and Shell to their investors in 2022, the majority was via buybacks.

When a company like BP or Shell chooses to repurchase billions of dollars of its own shares through a buyback scheme, this indicates that it has generated an extraordinary surplus of cash. It also signals that it can find no better investment of this surplus than in funnelling money to its investors.

These pay-outs amount to a direct transfer of cash from bill-payers to wealthy investors. Direct ownership of UK shares is overwhelmingly dominated by the richest 1 per cent of households, according to Common Wealth. By contrast, UK pension funds hold a tiny fraction - less than 0.2 per cent - of the shares of BP and Shell.

When energy companies register record-breaking profits, the rest of us shoulder the burden of higher energy bills and petrol prices. And when these extraordinary profits are transferred to their shareholders, this represents a monumental transfer of wealth, worth tens of billions, away from our pockets and into the hands of the rich.

Oil and gas companies aren’t the only businesses doing this: Britain's largest firms have transferred profits to their shareholders at record rates. FTSE 100 companies announced £55 billion of share buybacks in 2022, 60 per cent more than any other single year in history.

Government can respond by raising taxes on shareholder pay-outs

The government could levy a number of taxes on shareholder pay-outs to redirect some of this wealth.

When shareholders receive pay-outs, they are taxed at lower rates than those of us who earn wages or salaries. This means that an investor in BP or Shell can profit from our rising energy and fuel bills while paying less tax than us. If the government closed this loophole by taxing dividends at the same level as people’s incomes it would raise £6 billion every year.

An investor in BP or Shell can profit from our rising energy and fuel bills while paying less tax than us.

We could also follow the example set by America and Canada by raising taxes on share buybacks. Biden has proposed quadrupling America’s small tax on buybacks to 4 per cent to “encourage long term investments”. The original 1 per cent tax was levied last summer to raise billions for clean energy projects. Canada has followed suite and will levy a 2 per cent tax starting from next year. An equivalent measure introduced in the UK would raise between £825 million and £1.9 billion every year.

Raising taxes on buybacks would also ensure that the major energy giants are no longer able to funnel astronomical sums to their investors at the expense of more productive investments, particularly in the green transition. Shell handed nearly seven times as much to its shareholders as it invested in ‘low carbon’ energy sources last year. In the same period, BP spent 14 times as much on its shareholders as it invested into renewables.

It’s naïve to entrust oil and gas giants with the green transition

With eye-watering profits to be made from oil and gas, energy executives have quashed any pretence that they plan to drive the transition towards renewable energy. While oil and gas prices remain at records levels it’s naïve to expect profit-driven multinationals to lead the transition away from the commodities on which their business models depend.

Shareholders want to maximise returns on their investments and executives are beholden to their short-term interests. BP’s CEO promised his shareholders that the company will focus on "maximising profits" and rolled back on previous commitments to cut back oil and gas extraction. Shell also plans to refocus its investments on fossil fuels to augment shareholder value.

Restricting shareholder pay-outs will force executives to rethink before they prioritise the interests of their investors above all else. But it is equally important that they invest their profits in the green transition.

With international subsidies for fossil fuels now at astronomical levels and over a hundred bids currently lodged for new oil and gas exploration in the North Sea, the phasedown of fossil fuels is heading in the wrong direction. In addition to introducing tax measures which encouraging companies to act beyond the narrow interests of their investors, the government must urgently provide a clear, consistent pathway towards an end to fossil fuel extraction.