The world could not function without crude oil and its associated products. For consumers, it delivers gasoline, diesel and a host of other transportation fuels, and enables the development of plastics, pharmaceuticals, medical supplies and much more. For producers, the revenues derived from this natural resource are vital for their economies and populations.

The narrative we often hear is that every increase in price raises fuel costs, bringing increasing revenue for oil producers, to the detriment of consumers. This narrative can lead to finger pointing and pit consumers against producers, rather than acknowledge that all are stakeholders in the energy industry, with legitimate needs and concerns. Furthermore, this narrative does not tally with the facts.  

It is important to recognize that the price paid by consumers at the pump is determined by a number factors: the price of crude oil, refining, transportation and marketing costs, oil company margins and taxes. Breaking this down provides some enlightening insights and figures.

Revenues can indeed be generated, but analysis shows that they are earned primarily by major oil consuming countries via taxation. For example, OECD economies earn far more revenue from the retail sale of petroleum products than OPEC countries make from the original sale of their oil.

From 2019 to 2023, OECD economies earned on average about $1.915 trillion/year more (based on weighted average prices) from retail sales of petroleum products than OPEC Member Countries made from oil revenues. A significant amount of the final retail prices of petroleum products is attributed to taxation.

In fact, during 2023, the OECD average share of total tax on the final retail price increased year-on-year and amounted to approximately 44%, and for some countries it was even more. Across the year, in several European countries, taxes represented more than 50% of the final retail price.

The importance of this revenue source is further underscored by the UK Office for Budget Responsibility, which says: “Fuel duties are levied on purchases of petrol, diesel and a variety of other fuels. They represent a significant source of revenue for government. In 2023-24, we expect fuel duties to raise £24.7 billion. That would represent 2.2 per cent of all receipts and is equivalent to £850 per household and 0.9 per cent of national income.”

Therefore, for many consumers, taxation can be a more significant factor than the original price for crude, in feeling any pinch in their pocket at the pump.

For consuming countries’ governments, this revenue is generally pure windfall, which will continue to be received from the sale of petroleum products in their territories. For producing countries, on the other hand, a huge portion of their own take is reinvested into the sector for exploration, production and transportation projects, in order to be able to continuously satisfy the world’s oil needs.

In other words, producing countries, often with social, economic, infrastructural and other challenges, do not have the liberty to spend all their revenues on these and other needs, as they have to re-invest part of their take in the industry, in order to secure current and future supplies to consumers.

It is obviously a sovereign right for countries and governments to develop their own taxation systems, but when there is talk of concerns about the effect of high pump prices on the disposable income of populations, it is important to remember how much of this is from taxes flowing to finance ministries around the world.

What these taxation levels underscore, is that the revenue generating potential of petroleum and petroleum products is recognized by producers and consumers alike. Furthermore, governments from producers and consumers use these revenues to invest in public services, delivering for their peoples. The idea of pitting consumers against producers is at a minimum, distorting the reality that more unites both groups than divides them.

On a final note, some governments simultaneously seek to utilize the revenue generating potential of petroleum, while seeking to phase out oil, alongside subsidizing other energies. In advocating this approach, they should consider the question of how they will replace the revenues lost from taxation on oil. Might similar taxation levels need to be placed on other energies?

Tuesday, 17 September 2024