Germany, Spain, Portugal, Italy, Poland and Austria are pushing the European Union toward a common response to an increasingly difficult political problem: oil companies are earning unusually large profits while European households and businesses are paying substantially more for fuel because of the Iran war. The six countries want EU finance ministers to discuss a framework for taxing windfall profits at their September meeting in Dublin, arguing that the economic burden created by the energy shock should not fall disproportionately on consumers and governments.

The proposal comes after a sharp increase in energy prices following the disruption of oil flows through the Strait of Hormuz. According to figures cited by the six governments, oil prices have risen about 25 percent since the conflict began, while European diesel prices have increased by more than 70 percent and gasoline prices by around 20 percent. The ministers argue that measures already taken by individual governments have not been sufficient to provide lasting relief and that a coordinated European approach is therefore required.

The initiative is significant because the countries are not simply demanding higher taxes on profitable companies. They are asking for a framework specifically designed to identify exceptional profits created by the crisis, including profits earned abroad by multinational oil companies. That reflects the increasingly international structure of the energy industry, where crude production, refining, trading and retail sales can occur across several countries and jurisdictions.

The debate is also being shaped by the experience of the 2022 energy crisis, when European governments introduced measures to capture part of the exceptional profits earned by energy companies. This time, the six countries want a more targeted system and are seeking an investigation into refinery margins to determine whether unusually high fuel prices are entirely explained by supply shortages or whether some companies are benefiting disproportionately from the disruption.

Germany, Spain and Portugal Seek a Common European Response

Germany, Spain and Portugal are among the countries seeking to put the windfall-tax issue on the formal European agenda because the energy shock is creating a problem that individual national policies cannot easily solve. Fuel prices are determined by international markets, while many of the companies involved operate across multiple European countries. A national tax can therefore capture only part of the profits generated by a global price shock and may create differences between member states.

For Germany, Europe’s largest economy, the issue is particularly sensitive because higher energy costs can affect industrial competitiveness as well as household budgets. German manufacturers depend heavily on energy and transportation, meaning that a prolonged fuel-price increase can work its way through production costs and weaken companies already facing international competition. The government therefore has an interest in reducing the economic impact without relying indefinitely on taxpayer-funded subsidies or price relief.

Spain and Portugal have their own exposure to higher energy costs, while both have previously supported stronger European intervention during energy crises. Their participation in the initiative indicates that the proposal is not limited to countries with a particular type of oil industry. Instead, the emphasis is on the consequences of higher energy prices for consumers and businesses and on whether companies receiving exceptional gains should make a larger contribution toward mitigating those consequences.

The three countries also have an incentive to favour an EU-wide system rather than competing national measures. A common framework could reduce differences in taxation between member states and make it harder for multinational companies to shift profits or corporate structures between jurisdictions. The ministers’ proposal specifically calls for greater attention to foreign profits, showing that the countries see multinational energy companies as a central part of the problem.

Italy, Poland and Austria Want Crisis Gains Shared

Italy, Poland and Austria have joined the initiative as energy prices create different but interconnected pressures across their economies. Italy is particularly exposed to imported energy and has repeatedly faced the political challenge of protecting households and businesses when international fuel prices rise. A tax on exceptional energy profits could provide governments with another source of funding for measures aimed at reducing the effect of higher prices without placing the entire cost on public finances.

Poland’s participation reflects a somewhat different concern. The country has spent years reducing its dependence on Russian energy and strengthening alternative supplies, but the Iran war demonstrates that diversification does not eliminate exposure to global oil and refined-fuel prices. Even when a country has multiple suppliers, an internationally traded commodity can become more expensive when a major supply route is disrupted. Taxing exceptional profits could therefore be viewed as one way of redistributing part of the financial consequences of a global energy shock.

Austria, meanwhile, faces the broader European problem of rising costs moving through transport, industry and household consumption. Its support gives the proposal additional political weight because the six countries represent economies with different energy structures and different relationships with the oil industry. Their common position is therefore less about attacking a particular national industry and more about establishing whether extraordinary crisis gains should be subject to extraordinary taxation.

The six governments’ argument rests on the distinction between ordinary commercial profit and a windfall. Oil companies invest heavily and accept substantial risks, and governments cannot reasonably treat every increase in earnings as profiteering. The political case for a windfall tax becomes stronger when profits rise because of an exceptional supply disruption rather than because a company has become significantly more productive or efficient.

Europe Is Using the 2022 Crisis as a Taxing Lesson

The current proposal is closely connected to Europe’s experience after the energy shock triggered by Russia’s invasion of Ukraine. European governments introduced temporary measures designed to capture some of the surplus profits earned by energy producers and fossil-fuel companies. The European Union’s earlier approach included a temporary solidarity contribution on surplus profits in parts of the fossil-fuel sector, providing policymakers with a precedent for the current discussion.

The six countries now want to improve on that model. Their letter calls for a more specific assessment of how foreign profits of multinational oil companies can be included, suggesting that the earlier system did not fully address the international structure of large energy companies. The aim is to create a mechanism that captures profits generated by exceptional European market conditions without relying entirely on where a company’s headquarters or tax residence happens to be.

This is an important distinction because large oil companies can earn money at several stages of the supply chain. A company can benefit from higher crude prices through production, from wider margins through refining, from volatility through trading and from higher retail prices through fuel stations. A tax system that focuses on only one part of that chain could miss significant portions of the financial gains created by the crisis.

The six countries are also demanding the results of a European investigation into refinery margins. That demand goes to the heart of the political argument. Refining margins have risen sharply because the war has disrupted crude supplies, damaged refining capacity and reduced the availability of finished fuels. If the investigation finds that unusually high margins are primarily the unavoidable result of scarcity, the case for taxing them becomes more complicated. If it finds that margins have expanded beyond what supply conditions reasonably justify, pressure for intervention will increase.

Oil Companies Are Benefiting From the Fuel Shortage

The reason the tax debate has gained momentum is that the Iran war is creating exceptional conditions for parts of the oil industry. The disruption has reduced the availability of crude and, more importantly in several markets, refined products such as diesel, gasoline and aviation fuel. Refiners with functioning facilities have therefore gained significant pricing power because customers are competing for a smaller pool of available fuel.

This explains why company earnings have risen even as consumers face higher prices. Ampol, Australia’s leading fuel retailer and refiner, reported first-half underlying profit of 857.2 million Australian dollars, almost five times the previous year’s figure. Its refining margin more than tripled, demonstrating how a shortage of finished fuel can create extraordinary earnings for companies with operating refinery capacity.

Large American refiners have experienced an even more dramatic version of the same phenomenon. Companies including Valero, Marathon Petroleum, Phillips 66 and Exxon Mobil have benefited from refining margins exceeding $50 a barrel during periods of exceptionally tight fuel supply. US refineries have been operating above 95 percent utilisation for more than 11 consecutive weeks, illustrating how valuable available refining capacity has become during the crisis.

Major international oil companies have also benefited through a combination of production, refining and trading. Recent estimates indicate that several of the world’s largest oil companies generated tens of billions of dollars in profits during the second quarter as energy prices and market volatility increased. European companies are therefore not merely passive recipients of higher prices; many possess integrated operations that allow them to capture gains at several points in the energy supply chain.

The unusual feature of the present crisis is that the shortage is increasingly a shortage of refined fuels rather than simply crude oil. Refinery closures and reduced capacity in Europe and other Western markets have weakened the system’s ability to respond quickly when supplies are disrupted. Recent analysis indicates that European refining capacity is expected to decline substantially over the coming decade even as new capacity is being developed elsewhere, making Europe’s remaining refineries strategically more important during emergencies.

That creates the central dilemma for the six European countries. They want to capture part of the exceptional profits created by the war because consumers are bearing the cost of the same disruption. But they also need companies to keep investing in refining capacity, maintenance and energy infrastructure. A tax that is too aggressive could reduce those incentives, while no intervention could leave households and businesses carrying a disproportionate share of the crisis.

The September discussion will therefore be less about whether oil companies should be profitable and more about where governments should draw the line between normal commercial returns and crisis-driven windfalls. Germany, Spain, Portugal, Italy, Poland and Austria are effectively asking the European Union to decide whether profits generated by an extraordinary geopolitical shock should be treated differently from profits generated through ordinary business activity.

Their proposal also reflects a broader political calculation. Governments can provide subsidies or tax relief to consumers, but those measures ultimately place costs on public finances. Taxing exceptional energy profits offers an alternative route in which part of the money flows from companies benefiting from the crisis toward measures designed to reduce its impact. The challenge will be designing that system accurately enough to capture genuine windfalls without weakening the investment Europe needs to maintain fuel security during the next disruption.

(Adapted from EuroNext.co)

Categories: Economy & Finance, Regulations & Legal, Strategy