Big Oil's Wartime Profits Reveal a Problem of State Design, Not Corporate Greed

THE NARRATIVE is simple. A war has broken out, oil prices have surged, and the oil companies have grown fat on the suffering of others. Politicians, activists and a frustrated public agree on this much. What they cannot agree on is what to do about it.

The default answer is a windfall tax. The British one, introduced in 2022 and extended to 2030, now stands at 38%. Five EU countries are calling for another round. In America, where no such tax exists at the federal level, Democratic lawmakers including Senator Sheldon Whitehouse have reintroduced a proposal that would claw back half the excess profits and redistribute them to lower-income households. The appeal is obvious: why should private shareholders keep money created by state violence?

The trouble is that the question itself points in the wrong direction. Big Oil's wartime profits are not a story of corporate greed. They are a story about what happens when governments create rents and then struggle to decide who should capture them.

Who owns the war premium?

The conflict between the United States, Israel and Iran began on February 28th 2026. Within days, tanker traffic in the Strait of Hormuz - through which about a fifth of the world's oil flows - had virtually stopped. Iran's production from its three main southern oilfields fell by 70% to 1.3m barrels a day, according to Reuters. Gulf producers including Iraq, Kuwait and the United Arab Emirates curtailed output because they ran out of storage space. The International Energy Agency described it as the largest oil supply shock in history.

Brent crude, the international benchmark, jumped from roughly $70 a barrel before the war to a peak of $126. It averaged $101 between the outbreak and early June, when a brief ceasefire and the reopening of the Strait allowed it to retreat almost to pre-war levels. Fighting has since resumed. As of this week, Brent hovers around $84.

The price move was dramatic. The production cost was not. According to the American Petroleum Institute, a trade body, the cost of actually extracting oil has not changed much. Hence the windfall: revenues surged while costs stayed roughly flat. BP, a British firm, more than doubled its quarterly profits to $3.2bn in the first three months of 2026. ExxonMobil and Chevron together reported $26.5bn in recent quarterly profits. Global Witness, a pressure group, calculated that the world's top 100 oil and gas firms earned $30m every hour in excess profits during the first month of the war. Taken over four years since Russia's invasion of Ukraine, the five supermajors - BP, Shell, Chevron, ExxonMobil and TotalEnergies - have recorded almost $467bn in total profits, with $444bn of that flowing to shareholders as dividends and buybacks.

The numbers are large enough to justify moral outrage. They are too simple to justify a good policy.

The rent-seeking state

Windfall profits, in the technical sense, are returns that arise from circumstances beyond the firm's control. An oil company that drilled its wells when Brent was $70 did not anticipate selling at $126. The extra return is, by definition, a windfall. Textbook economics says that taxing windfalls does not distort investment, because the investment was already made. The problem is that in practice, it is hard to separate windfall from expected return, and nearly impossible to separate them once politicians start talking about permanent taxes.

More fundamentally, the windfall is not the oil companies' doing. The supply shock was created by military action, sanctions and the disruption of a waterway - all of which are the work of states. The production costs haven't budged, according to the American Petroleum Institute. The profit surge comes from government action.

That does not absolve the companies. ExxonMobil has spent $15.1bn on structural cost reductions since 2019 and continues to prioritise shareholder payouts over low-carbon investment. UK oil majors spent, on average, 10 times more rewarding shareholders than investing in renewables between 2022 and 2025, according to Global Witness. Capital allocation in the energy sector has tilted decisively towards extraction and distribution rather than transition. That is a separate problem from wartime rents.

But conflating the two leads to confused policy. The windfall tax is aimed at the symptom - high profits - while the cause - state-created supply disruption - remains untouched.

The tax trap

The case against windfall taxes is not sentimental. It is institutional.

America tried one before. The crude oil windfall profit tax of 1980 was repealed after oil prices collapsed and the tax raised far less than projected. The design was complicated, the loopholes were predictable, and the investment signal was clear: the government will reach for your profits when prices spike.

Today's proposals are worse, if only because they have not been designed with this lesson in mind. The Whitehouse proposal taxes the gap between current oil prices and the 2025 average at 50%. Another proposal taxes the gap above $75 per barrel at 100%. A third raises the excise tax on stock buybacks to 25%. None of these are genuine windfall taxes. The first two are excise taxes on production, which create a wedge between what consumers pay and what producers receive. As AEI, a conservative think-tank, points out, they apply only when prices are high and offer no relief when they are low, punishing investment asymmetrically. The buyback tax, if perceived as permanent, would directly raise the cost of new capital.

To be sure, the industry's defence is not unimpeachable. The American Petroleum Institute warns that windfall taxes erode the certainty needed for investment. That is a legitimate concern, but it is also a standard industry line that appears whenever the revenue tap is turned on. And the UK experience offers a counterweight: its Energy Profits Levy, now at 38%, has raised £2.6bn, £3.6bn and £2.9bn in its first three fiscal years. That is not a trivial sum.

Yet the UK's levy is not particularly well targeted, either. Shell earns only about 5% of its revenue in the UK, so most of its wartime windfall falls outside the tax net. BP's trading business generated exceptional profits, much of which was booked overseas. The levy captures North Sea production but misses the bulk of the supermajors' global operations. It is, in effect, a tax on geography rather than on excess returns.

A better mechanism

The question is not whether oil companies should contribute to the costs of the crisis they have profited from. They should. The question is how to do it without discouraging the production the world still needs, without rewarding governments for creating the crisis in the first place, and without building a system that will be invoked every time oil prices rise.

The better answer is a revenue-sharing mechanism rather than a windfall tax. Norway's sovereign wealth fund, built on the state's share of North Sea production, is the model. When prices are high, the state captures a larger share. When they are low, the share falls. The mechanism is permanent, transparent and predictable. It does not depend on a discretionary threshold that changes with every political cycle. It treats oil revenue as a public asset rather than a private windfall.

America does not have a Norwegian-style sovereign fund. It could start by converting the Strategic Petroleum Reserve - which the International Energy Agency recently used to release a record 400m barrels - into a permanent price-stabilisation mechanism. Instead of releasing stockpiles reactively and letting prices swing between $70 and $126, the reserve could be managed as part of a broader fiscal framework that captures the war premium through transparent revenue-sharing arrangements. The money could fund the Strategic Petroleum Reserve itself, a clean-energy transition fund, or direct rebates to consumers.

The danger is not that oil companies will go bankrupt. ExxonMobil generated $52bn in operating cash flow in 2025. The danger is that ad hoc windfall taxes will become the default response to every geopolitical shock, turning a one-off crisis into a permanent feature of energy taxation. That would be a mistake. Investors price uncertainty. If the expectation is that profits will be seized whenever a war breaks out, capital will flow elsewhere - to jurisdictions without the reflexive reach.

The deeper lesson

The story of Big Oil's wartime profits is ultimately a story about governments. The United States and its allies created a supply shock that pushed oil prices up. Consumers paid higher prices at the pump. Shareholders of oil companies received higher dividends. The state collected little of either, save in countries like Britain and the EU that had a levy already in place.

The incentive structure is perverse. The state fights a war, the market adjusts, private shareholders capture the surplus and the public bears the cost. The natural political response - a windfall tax - captures part of that surplus but at the cost of investment certainty and with poor targeting. It is a second-best response to a problem the state itself created.

A wiser approach would be to treat oil revenue as a shared national asset, not a private windfall. Revenue-sharing is predictable, permanent and politically durable. It captures the upside without punishing the downside. It aligns the interests of the state, the investor and the consumer rather than pitting them against each other in a cycle of tax and retrenchment.

Wars create rents. The question is who collects them. The companies are not blameless, but they are not the ones who started the shooting.