Windfall Profits in a Time of War: Who Benefits?

The ongoing US-Iran conflict has created a perfect storm for oil companies, with prices soaring and profits skyrocketing. American oil giants Exxon Mobil and Chevron will announce their second-quarter earnings this week, and analysts predict large windfalls for these corporations.

Key players in the supply chain are reaping huge benefits from the conflict. The Strait of Hormuz, a critical waterway for global oil shipments, has been largely shut down since January, leading to increased prices and shortages. This has resulted in higher fuel costs for drivers, airline passengers, and governments, which have implemented fuel rationing measures in some countries.

In Australia, gasoline rationing has become a reality, while in Nepal and Sri Lanka, government office closures are forcing officials to work from home. Refineries, including those owned by Exxon and Chevron, are making huge profits due to high “crack spreads.” This is the difference between the cost of crude oil and the price of refined products like gasoline and jet fuel.

Historically, crack spreads have hovered around $20-$25 per barrel; however, in late July, refineries were looking at potential profits of $50-$60 per barrel. Patrick Galey, fossil fuels lead at Global Witness, notes that while oil producers are enjoying record profits, hundreds of millions of people worldwide are struggling with rolling blackouts, electricity curbs, rationing, and food queues.

“It’s not justifiable for the rest of the world to be paying this price,” he argues. Lawmakers have taken notice, proposing a windfall profits tax on major oil producers to redistribute excess funds to consumers. Sen. Sheldon Whitehouse (D-RI) introduced legislation in March that would impose an excise tax on companies producing or importing at least 300,000 barrels of oil per day.

The average price for a gallon of regular gasoline reached $4.10 this week – about $1 higher than last year’s cost – and consumers are feeling the pinch. As Sen. Whitehouse pointed out, “It makes a real difference.” The real issue here is not just the profits being made by oil companies; it’s also how those profits are distributed and who benefits from them.

While Exxon and Chevron claim they don’t set the price of American oil, their refineries are enjoying historically high crack spreads, which translates to huge profits. Critics argue that this is a classic case of corporations profiting while consumers suffer. As Timothy Fitzgerald, a University of Tennessee professor of business economics, noted, “If you’re a company that owns a bunch of refinery capacity, things look pretty good.”

In other words, the companies best positioned to benefit from the conflict are those with ample oil supply and refining capacity. As the US-Iran conflict continues, it’s essential to examine the implications for consumers and the broader economy. With prices expected to remain high, it’s clear that something needs to change.

The windfall profits tax proposal is a start; however, more needs to be done to address the root causes of this issue – namely, the concentration of power in the oil industry. As policymakers move forward, they must ensure that corporations are held accountable for their profits and that consumers are protected from excessive price increases.