Transcript
Speaker: I'm Jane Williams. This is the Red Eye Podcast. You can hear our live broadcast on Saturday mornings from 10 till noon at 100.5 FM in the Lower Mainland.
Speaker: Coming up in this episode, I speak with economist Hadrian Mertens Kirkwood about the need for the oil industry to pay higher taxes on its profits from the war in Iran.
Speaker: The war on Iran is a humanitarian, environmental, and political crisis. And one of the consequences of that war is that it's provided the oil industry with the opportunity to engage in rampant profiteering.
Speaker: In the first month of the war, the Canadian oil industry made after-tax profits in excess of $6 billion. $6 billion. If oil prices stay this high for a year, it's on track to make $90 billion dollars in profits. Both of those figures represent a threefold increase over what the industry would have made without the war.
Speaker: Hadrian Mertens Kirkwood and David McDonald argue in a recent article that the current windfall could be Canadian oil's final boom, so the proceeds should be taxed and invested into economic diversification.
Speaker: Hadrian Mertens Kirkwood is a senior researcher and political economist at the Canadian Centre for Policy Alternatives, and he joins me today from Ottawa. Hello, Hadrian. Hi, nice to speak with you again.
Speaker: Yeah, nice to speak with you too. How did you come up with the figure I quoted for the amount of profit of 90 billion over a year? Well, we've got our own internal oil industry model. We've done some research on this over the past few years. But at a really high level, we start with the price of oil. We start with how many barrels of oil the industry is producing. You multiply those by each other, and that's total revenue. I'm simplifying a bit. You subtract all their expenses, you subtract the taxes they pay and the royalties they pay, and then what you're left over with is profit. So by changing those variables, like the price of oil, we can make estimates about how much profit the industry is making. But they are only estimates. We won't know for sure until these companies start either paying out dividends to their shareholders or start reporting their taxes, which you know we'll get that information later in the year. But these are our best guesses to date for what the industry is making due to the war in Iran.
Speaker: As I understand it from your figures, the reason for these exorbitant levels of profits is that the industry's profit margins are already extremely high. That's right. So the industry is already making lots of money. We thought they were going to make $30 billion dollars this year, or something in that ballpark.
Speaker: But as the price of oil goes up, that means that the amount of money the industry makes from selling oil goes up as well. But their expenses don't really go up. So even though oil got 50% more expensive, it didn't get 50% more expensive to produce oil. So the industry is just pocketing the difference from that increase in prices.
Speaker: Now, public revenues from the sale of oil are also going up, given that that part of the cost of a barrel of oil is federal and provincial taxes and public royalties. And you say that the Alberta government is doing very well out of the oil shock.
Speaker: That's right. The Alberta government in its budget just a few months ago anticipated a pretty major deficit this year and in the billions of dollars. And overnight that changed. All of a sudden, the province is going to be running ah a pretty major surplus this year, at least based on current prices. So it made a big difference for Alberta, a slightly less big difference, but still significant for the federal government, which collects corporate income taxes on on oil companies. So already the public does get a cut of increased oil prices. It's just that the industry takes a far bigger cut of that increase in revenue.
Speaker: So let's go back to that figure of $90 billion dollars in after-tax profits. Where is that money then coming from? So it comes from international markets for the most part. So there's a bit of a disconnect. We think about, you know, as as consumers, households in Canada, we we do consume oil products, gasoline in cars and and home heating oil and things like that. But most of what we consume is coming from refiners in the U.S.
Speaker: So our oil industry sells crude oil internationally. It gets refined and then we buy it back in Canada. So it's it's a little bit complicated. But the the bottom line is that its global consumers are paying more for oil in Canada and elsewhere. And then oil producers in Canada and elsewhere are making more money off of that. So we're seeing in transport fuels, for example, which are then passed on. So we're seeing higher inflation, that kind of thing.
Speaker: Exactly. And anyone who's still got a gas car, which is most households in this country, they've seen how high prices have gone over $2 a litre in some parts of the country. But really, those oil industry profits, they're coming in pretty much everything we buy as consumers.
Speaker: That's right. I mean, you still need to ship food to grocery stores, for example, and they they have to pay the fuel fuel price there. and And everything else we do, ah oil is still pretty fundamental to our economy. And so we all pay the price directly and indirectly as oil prices go up.
Speaker: The only real beneficiary are the oil producers. Do you have an idea of how much it's going to cost Canadians if prices don't come back down? It's hard to say. Inflation is already up a little bit in our most recent numbers from Statistics Canada. The big variable right now is how long this crisis lasts and how long prices stay high.
Speaker: It's possible we see inflation like we did during COVID, which was quite catastrophic for the economy, frankly. But it's hard to say. It's too early to know how bad the inflation picture is going to get.
Speaker: And presumably that economic pain, does it hit lower income households harder? It does, yes, because lower income households spend more of their income on essentials, things like transportation, things like food, where we'll be seeing that inflation. So it does absolutely hurt lower income households more. And conversely, when you take measures like the federal government did to cut the gas tax, for example, that actually disproportionately benefits higher income households who spend more money in total on fuel, even if it's less of a share of their household budgets. So that Mark Carney cut didn't really help that much?
Speaker: Probably not. Not the gas tax cut. Now, the the federal government did announce what they're calling this groceries and essentials benefit earlier in the year, which is essentially ah an increase to the GST credit.
Speaker: That actually does benefit lower income households more. So that's not bad policy from that perspective, but it is still very expensive. And it doesn't actually address the root causes of this affordability problem, which is our dependence on fossil fuels.
Speaker: So you're calling for a kind of windfall tax on the oil industry's profits, and you lay out several scenarios, one of which people will remember from the pandemic, the Canada recovery dividend. How did that work?
Speaker: During the pandemic, there was a real concern around profiteering in some sectors of the economy and the federal government brought in this 15% excess profits tax on the financial sector, on banks and insurance companies. It's sort of a curious historical case because it wasn't only the banks and insurance companies that were making big profits during COVID. The oil industry was at the time as well, but they only brought in this tax on that one sector. But the point is that there is recent historical precedent for this. and it raised quite a bit of money at the time. If you if you brought in place the same sort of thing today for the oil industry, it would raise billions of dollars over the next year.
Speaker: Canadians for tax fairness have a different proposal. What are they suggesting? So they would like to see a more significant tax. Instead of 15%, they think there should be a 33% windfall tax on profits above 120% of pre-crisis profit levels. That's the language they use. But it basically means that if any industry is making a certain amount of money, and then all of a sudden, because of an external crisis, their profits increase significantly, they would pay an extra tax on that windfall. So that's what Canadians for Tax Fairness would like to see.
Speaker: So that would generate, I guess, twice as much as the Canada recovery dividend. Yeah, so we estimated that it would it would generate about $18 billion dollars over the next year based on current oil prices.
Speaker: Now, the most radical model of all of your three dates from 1940. What happened back then? Well, 1940, as we all know, was around the start of the Second World War. And at the time, the entire Canadian economy was reoriented around the war effort and producing goods and services to serve the war effort.
Speaker: And a lot of companies were making a lot of money because of that. All of a sudden, you have captive audience, not a lot of competition or captive market, rather. And the federal government wisely brought in place an Excess Profits Tax Act, which which said that all these companies that are producing goods and services for the war effort, making lots of money because of the war, had to pay so a 75% tax on all those profits, on all the profits above their pre-war average. And that excess profits tax, it it evolved over the course of the war. At one point, it was essentially 100% on excess profits, although with the caveat that the government would pay back 20%. But the point is that they were taxing and at an extremely high rate what they considered excess profits during that particular crisis. And we could do the same today.
Speaker: i think this is, as you say, a pretty extreme suggestion. But if we apply that 75% on the oil industry today. Again, that's only on excess profits, not on all of their revenues or anything like that. But even bringing in place this excess profits tax could generate, we estimate, $46 billion dollars over the next year, just a a truly staggering amount of money. And what's amazing is even if we did that,
Speaker: when the federal government brought in an extra $46 billion, dollars the industry would still pocket $44 billion dollars in profit. So, you know, when we talk about an excess profits tax, we're not actually talking about really hurting these companies at all. They still make enormous profits. They just make slightly less than they would have otherwise.
Speaker: Now, it's easy to think of that amount of money going into any number of public priorities, but you're making the case that actually it should be reinvested into addressing the direct costs and structural causes of the crisis. What would that look like?
Speaker: Well, think it's important to note, we use the term profiteering in this piece, and and that's that language is coming up a lot. What's interesting, for folks who aren't familiar, I mean, profiteering doesn't have like a legal definition, really. It's actually ah' a moral definition. It's do we think that these profits are unfair? Because the oil industry making all of a sudden tripling its profits because of this war in Iran, the Canadian oil industry did not cause this war. They they happen to be beneficiaries of it.
Speaker: and And so there's an argument that they deserve all of those profits. But I think many people feel, and certainly this is the case we're making, that it is an unfair and unreasonable amount of profit that the industry is making. And therefore, we should tax it. And we should use that money to address the root causes of the problem China. Canada. So it is, as I say, ultimately a moral argument. But I think there's a strong case to be made. And what we suggest is, yeah, if you were bringing in something on the order of $50 billion, dollars which is a huge amount of money, you know, we're talking one to 2% of GDP,
Speaker: You could do a lot of good to address our fossil fuel dependence domestically. Things like supporting public transit, installing heat pumps in homes, supporting the expansion of electric vehicles and electric vehicle charging infrastructure. There's all sorts of things we could do with that money that would insulate Canadian households from rising fossil fuel costs.
Speaker: And it makes sense that if our dependence has caused this, then this should help us get off that dependence. And that's exactly what many countries around the world are doing. We're not really having this conversation in Canada right now, but right now, much of the world is scrambling to reduce its dependence on fossil fuels. So we have countries like the UK, which has just said, no more fossil fuels and new buildings. All new homes are going to be you know carbon neutral carbon neutral. Many countries accelerating the adoption of renewable energy and saying, we've got to stop importing fossil fuels. It's such a vulnerability for us. So we have an economic security incentive to decarbonize. It's not even about climate. It's just about economic security.
Speaker: So this is happening very, very quickly. We've seen, for example, the export of solar panels and batteries from China has spiked to historic levels in the past two months because the rest of the world is recognizing like we need to get away from oil.
Speaker: That's the solution here. And it's very different from previous oil shocks. When we look back at the 1970s, there was an oil crisis, actually a very similar oil crisis in many respects. And at the time, the solution for most countries was we need to find new sources of oil.
Speaker: and You know, if oil is expensive, we we're we're limited in how we import it. We need to find new sources of oil. And that led to the creation of the oil sands in Canada, that that crisis. But the response in 2026 is entirely different. Countries around the world are saying oil is very expensive.
Speaker: Oil is very volatile. It's dangerous for us to depend on oil. We need to decarbonize. And that's what we're seeing. So what's with Canada? Is it because we're actually an oil producing country? Is that it? In short, yes, we have a vested interest in continuing to produce oil. And we would love it if the rest of the world, instead of buying solar panels and heat pumps and so on, would buy Canadian oil instead of Middle Eastern oil. And that seems to be our economic strategy and our response to this crisis. But it's ultimately short-sighted. The real question, if we're thinking you know big picture economics over the next 50 years, it's not whether the world stops using oil and gas. It's just how fast. That's the real question is how fast.
Speaker: And Canada right now, industry and government are banking on that transition happening slowly. The assumption that we'll continue to export oil and gas to other countries for many decades to come.
Speaker: I think that's a very risky assumption. Well, it's really great to talk with you again, Hadrian. And thanks so much. I'll point people towards your article. Thanks very much. I've been speaking with Hadrian Mertens Kirkwood, senior researcher and political economist at the Canadian Centre for Policy Alternatives. He is co-author with David MacDonald of a recent article on oil industry profits. If you'd like to take a look, it's called The Oil Industry is Making Billions from the Iran War. It should be taxed. And you can find it at policyalternatives.ca.
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Speaker: I'm Jane Williams. Thanks for listening.
