Making the oil industry pay for the war

William Todts — March 31, 2022

How is Europe subsidising Putin's war?

Last week T&E joined an Avaaz backed anti-war rally in Brussels. Leading the rally were Arina Bilai and Ilyess El Kortbi, two Ukrainian youths, barely 16 years of age, who, having first fled from Ukraine, had taken the bus all the way from Warsaw to deliver a powerful message to the European Commission. 

Iryna and Ilias talked about Mariupol, Kiev and Kharkiv; they talked about how they were climate activists before their country was invaded by an oil dictator; about Europe and the blood money it’s paying the Kremlin. Their courage and leadership was humbling and inspiring.

By the end of the week I felt ashamed. After days of talks the EU has once again agreed to do nothing to cut back on its Russian oil imports. Proposals were made by a number of Easternand Baltic countries – those most dependent on Russian oil – but Germany, France and others brushed these aside dubbing them “irresponsible”. 

Subsidising the war

Instead, responsible governments have now introduced oil tax cuts worth nearly 14 Billion euros allegedly to “prevent social unrest”. 

The truth is fuel tax cuts are stupid, expensive and regressive. For example, a 15 cent cut in fuel excise over six months will reduce a BMW X5 driver’s bill by €300 compared to €85 for a Citroën C3 driver. Take the bus and you get nothing. 

Economists, central bankers and commentators all agree fuel tax cuts are bad policy. Government officials agree in private. And yet, fuel tax cuts have proven irresistible for our politicians. 

If there’s one silver lining it is that the fuel tax cuts are temporary and could be replaced by smarter measures. For example, German greens and socialists proposed a generous cash allowance for low and middle-income families. This is an excellent idea. 

Making a killing

Whilst Ukrainians are fighting for their lives, the oil industry is having a good war. European oil majors always had a sketchy record in Russia. Since 2014 Shell, Total, BP alone bought more than $100 billion worth of Russian oil. Between 2019 and 2020, they purchased oil equivalent to a quarter of Russia’s military budget. Only after the recent bout of sanctions did oil majors reluctantly pull out of Russia. 

These are small losses compared to the money they’ve made in Russia, and the profits they are now making thanks to the war. Oil prices are up 50% since last December and with prices above €100 barrel, oil producing nations, oil companies and refiners will post record profits

Who should pay for the war?

The financial cost of the Ukraine war will be significant. Putin’s gas games and the ongoing oil market disruption puts pressure on energy prices. The planned shift from Russian gas to LNG will structurally increase the cost of gas. Food prices too are badly affected. Combined, this puts inflation on steroids. 

In addition, government measures to cap energy prices or lower energy bills are expensive and need to be paid for by tax revenue or increased borrowing.

It doesn’t have to be that way.

One much discussed idea is to impose a punitive tax on Russian oil imports. EU countries would raise €27 billion this year from an import tariff of $25 a barrel on Russian oil. Russia’s oil industry would have to absorb the cost as they have no alternatives to selling on the European market in the short term. 

But if our leaders are unwilling to go after Russian oil, perhaps they would consider a tax on big oil’s war profits, as has been proposed by US Democrats and Labour in the UK? Why should we allow the oil industry to get rich off a war they have enabled? Legally this is not a problem as explained in a recent study for T&E. 

The elephant in the room

The bigger question is what we do about oil demand. The narrative on this is good. For example, when Commission president Ursula Von Der Leyen met climate activists last week she reassured them of her commitment to get rid of fossil fuels. 

But so far, not a single new measure has been announced that would reduce oil demand in Europe. It’s worth remembering demand for oil is recovering quickly from its COVID lows. Unless we act, oil demand will go right back to where it was in 2019 with no significant change in the next decade. 

This might change. By mid May the Commission will publish a comprehensive new energy strategy, including oil. The biggest potential for immediate oil demand reductions lies in home working and speed reductions, as the International Energy Agency has proposed. Near term, say by 2025, electrification can play a big role, by increasing EV sales to 50%, and by focusing battery vehicles in high mileage segments such as company cars. The EU executive should also issue guidance to member states on how to better support low and middle income families and tax oil companies.

Surely there will be opposition to whatever the Commission proposes. But now is a time for courage and leadership, not for cowardice. This is the lesson coming from Ukraine.


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