Now, read this properly, again

The oil and gas industry has delivered $2.8bn (£2.3bn) a day in pure profit for the last 50 years, a new analysis has revealed.

The vast total captured by petrostates and fossil fuel companies since 1970 is $52tn, providing the power to “buy every politician, every system” and delay action on the climate crisis, says Prof Aviel Verbruggen, the author of the analysis. The huge profits were inflated by cartels of countries artificially restricting supply.

The analysis, based on World Bank data, assesses the “rent” secured by global oil and gas sales, which is the economic term for the unearned profit produced after the total cost of production has been deducted.

The study has yet to be published in an academic journal but three experts at University College London, the London School of Economics and the thinktank Carbon Tracker confirmed the analysis as accurate, with one calling the total a “staggering number”. It appears to be the first long-term assessment of the sector’s total profits, with oil rents providing 86% of the total.

Oil rents. That’s what governments have gained from it all.

Royalties, taxes. 86% of it.

Hmm, I might have slightly over done that. Here’s the definition of rent being used:

NY.GDP.PETR.RT.ZS
Indicator Name Oil rents (% of GDP)
Long definition Oil rents are the difference between the value of crude oil production at regional prices and total costs of production.
Source World Bank staff estimates based on sources and methods described in the World Bank’s The Changing Wealth of Nations.
Topic Environment: Natural resources contribution to GDP
Periodicity Annual
Aggregation method Weighted average
Statistical concept and methodology The estimates of natural resources rents are calculated as the difference between the price of a commodity and the average cost of producing it. This is done by estimating the price of units of specific commodities and subtracting estimates of average unit costs of extraction or harvesting costs. These unit rents are then multiplied by the physical quantities countries extract or harvest to determine the rents for each commodity as a share of gross domestic product (GDP).
Development relevance Accounting for the contribution of natural resources to economic output is important in building an analytical framework for sustainable development. In some countries earnings from natural resources, especially from fossil fuels and minerals, account for a sizable share of GDP, and much of these earnings come in the form of economic rents – revenues above the cost of extracting the resources. Natural resources give rise to economic rents because they are not produced. For produced goods and services competitive forces expand supply until economic profits are driven to zero, but natural resources in fixed supply often command returns well in excess of their cost of production. Rents from nonrenewable resources – fossil fuels and minerals – as well as rents from overharvesting of forests indicate the liquidation of a country’s capital stock. When countries use such rents to support current consumption rather than to invest in new capital to replace what is being used up, they are, in effect, borrowing against their future.

So we do not in fact know the split between government and oil company. In Saudi it’s 100% the government. Here that 86% is likely the govt – we’ve had oil royalty rises which reduced output so we’re close to the peak – at least – of taxing all rents. Elsewhere, well, hmm.

But it’s not going to be long before someone starts insisting we should tax the oil companies $50 trillion and change, is it?

12 thoughts on “Now, read this properly, again”

  1. I was perfectly happy when Bjelke Petersen taxed the miners and used the loot to lower our taxes.

    But I wasn’t so happy when Labor got into power and decided to waste it on what they wanted.

  2. Sale price minus cost of production? That’s “profit” innit? Flour, yeast, water, cooker costs me 2 zarbles, sell loaf for 3 zarbles, that’s called 1 zarble profit innit? Earned profit even. Those 3 zarbles would never appear without me combining that flour, yeast, water and cooker. Even if the water cost zero zarbles.

  3. Yeah, it’s not as if we the public get any benefit at all from, well, the stuff that makes modern life possible.

  4. @jgh: It’s not even profit. It doesn’t account for taxes and may not include fixed overheads. Plus the unit cost is an averaged estimate.

    Rents would surely be calculated as…rent? Specifically the difference between renting land with oil reserves vs without? Or just the cost of extraction rights?

    As for where the rent went: the first landowner to know they had oil, some rights-holders who realised unexpected price changes, and governments who expropriated the reserves.

    Excluding expropriation of oil rights, you’ll probably never know tax effects on rents because taxes won’t be assessed on rent or land value.

  5. The definition was written by someone who did not understand what he/she was writing. You can only get the average cost by dividing aggregate cost by number of units. Having done this he/she then multiplies said average cost by number of units …

    Rent is not pure profit, it is before interest cost and (for the companies) taxes.

  6. The other oil and gas update: Russia is still toying with the mouse.

    NordStream 1 is (slightly surprisingly) back in operation, but at 40% capacity. Seems to be deliberately calibrated to ensure there’s a winter energy crunch in Europe while maintaining not-very-plausible deniability, a revenue flow, and the implicit threat of future “interruptions”.

    Germany is already in crisis mode and starting to get stinky:

    Habeck has talked of a “nightmare scenario” facing Europe, especially Germany, Europe’s largest economy.

    Habeck, who is dealing with the crisis from his home, having contracted coronavirus, has spoken of the steps he has taken to reduce his personal energy consumption, including taking shorter showers and turning off lights, just as German consumers and municipalities have been urged to do. This is all part of a three-part emergency gas crisis plan that was triggered earlier this year.

    The third and final part of the plan would be a dramatic step involving intervening in the internal market to specify which industries received what level of supplies.

    There’s a lot of peripheral activity around firing up brown coal plants, new LNG terminals, etc. but no serious effort yet to address the root problem that Europe needs energy to be both abundant and affordable or the economy as we know it will curl up and die. Of course, some powerful people want to kill the economy – you’ll own nothing, and you’ll like it.

    LNG isn’t the answer, it’s too bloody dear. The Krauts are still wedded to their inane Atomkraft phobia, and new nuclear power usually takes decades to come online anyway. Fracking is still, of course, verboten.

    The sanctions have not only failed to deter Russian aggression, they’re doing a lot more damage to us than they are Russia. The rational response would be to change the sanctions, but that seems politically untenable at this point and there’s no particular reason to expect Russia to cooperate with what it calls ‘unfriendly’ countries. Also the US would try to destroy any of its satellites if they start getting funny ideas about having an independent foreign policy. So there’s that.

    Apart from that, uh, slight energy malfunction… everything’s perfectly all right now. We’re fine. We’re all fine here now, thank you. How are you?

  7. Steve

    They’ll be saying you’re a ‘tin foil hatter’ next….

    A great post – although perhaps more ‘serious’ than your usual….

  8. Tough titties, EU and Germany.

    You dug yourself a deep hole in deciding to deprecate all hydro carbons but to continue to use them by buying them in from an unreliable source.

    That hole would rise up and bite you (hmmm – kinda mixed metaphor there) one way or another – it was always clear that Russia could 9and therefore would) hold you to ransom one way or another one of these days. Maybe not cutting you off; maybe just trebling the price. To begin with.

    So freeze, you stupid buggers. Perhaps your electorates will one day actually get a clue.

    [and you lackwits in the UK, same to you]

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