Energy: EU fuel tax cuts could increase Russian oil profits

19 September 2022

Fillinh up a car

Filling up our cars has become expensive. Many European countries have considered cutting fuel taxes to support consumers, but this could increase Russia’s revenue from oil.

An EU-wide fuel tax cut of €0.20 per litre could increase oil profits in Russia by more than €8 million per day in the first one to three years, according to a modelling study published in Nature Energy. The findings suggest that alternative policies to fuel tax cuts might be needed for the EU to support households without undermining its geopolitical goals.

The Russian invasion of Ukraine led Western nations to impose sanctions on Russia, including restrictions on EU imports of crude oil and gas. Alongside post-pandemic increases in demand, energy prices have risen dramatically. Many European countries have been considering fuel-tax reductions to help consumers manage. However, understanding how these cuts may influence oil-company incomes, particularly those of suppliers in Russia, is important.

Daniel Sapiro and Henrik Wachtmeister from Uppsala University, together with Johan Gars from the  Beijer Institute for Ecological Economics, analysed the impact of an EU-wide fuel tax cut on Russian oil profits. The authors assumed a common tax cut across the EU of €0.20 per litre, based on different possible responses by member states. The team then constructed a model that considers global oil markets, EU road transport fuel demand, and oil supply from Russia compared to the rest of the world.

Lower prices for consumers

In the first year following tax cut implementation, EU consumer price is predicted to decrease by almost the full tax reduction, at a financial cost to the EU of €170 million per day. However, Russian oil companies are predicted increase their profits with approximately €8.4 million per day during this period. Looking at up to three years after the tax cuts, supply is predicted to become elastic, with financial costs per day decreasing and profit gains in Russia decreasing slightly to €8.2 million per day.

“This is an effect of Russia being such a large oil producer globally, and the fact that Europe – ­and the rest of the world for that matter – is still completely dependent on oil for its transport. Sometimes this is forgotten, but oil is still the world's largest source of energy and accounts for 30 percent of the world's energy supply. And 11 percent of that oil is produced by Russia. Even small increases in the price of oil lead to large increases in revenue for Russia,” explains Henrik Wachtmeister, Post-Doctoral Researcher at the Department of Earth Sciences at Uppsala University.

Flexibility in spending choices

The authors also model an alternative policy involving the direct transfer of cash to consumers with the same total financial burden to the EU as the fuel tax cut. In this scenario, fuel prices would increase very slightly, however, profit gains in Russia would be around 15% of those under the fuel tax cut. Consumers would also have flexibility in their spending choices.

“Petrol and diesel tax cuts have been discussed and implemented in Sweden during the year, but this has also happened in most other countries in Europe. You might feel that it doesn't matter too much what Sweden does, but if the whole of Europe were to implement a tax cut, the effect on the oil market would be significant, as we show in the study,” notes Daniel Spiro, Senior Lecturer and Associate Professor at the Department of Economics at Uppsala University.

Last modified: 2021-02-14