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The Impact of the Russia and Ukraine War on the U.S. Oil and Gas Industry

May 25, 2022

Prices and Inflation

In response to Russia’s invasion of Ukraine, on March 8, 2022, President Biden declared that the United States would prohibit the import of oil, refined petroleum products, natural gas, and coal from Russia. These restrictions on Russian energy imports have contributed to higher gas prices and increased inflation pressure across the United States.

Increased energy prices operate the same as a tax on the consumer, lowering demand for other goods and services.

They also contribute to a rise in overall consumer price inflation, which is already at its highest level in 40 years: 8.8% in March.

Further exacerbating the issue, oil production in the United States is still significantly below pre-pandemic levels. U.S. oil fields produced roughly 13 million barrels of crude per day in February 2020; March 2022, they produced fewer than 11.9 million barrels per day.

Industry Profits

This lack of supply coupled with market volatility is causing gasoline prices to soar, with U.S. oil and gas businesses expecting to gain windfall profits by the tens of billions.  According to new research by Global Witness, Greenpeace USA, and Oil Change International, the United States' upstream oil and gas industry would get a windfall of $37 to $126 billion in 2022.

Big oil companies have been earning unprecedented profits this year, with crude oil prices surging to more than $100 per barrel and the American Automobile Association stating that the average national gas price hit a new high of $4.59 per gallon (at the time of publishing). ExxonMobil made $5.5 billion after taxes in the first three months of 2022, Chevron $6.3 billion, and ConocoPhillips $5.8 billion.

Smaller energy producers, known as wildcatters, are also reaping huge paydays. Pioneer Natural Resources reported $2 billion in first-quarter profitability, while Marathon Oil recorded $1.3 billion in revenue. 

Government Reaction

The Biden Administration is pressuring American energy corporations to assist in bringing down prices by adding more rigs, pumping more petroleum, and expanding supplies. President Biden stated in March, "The CEOs of major oil companies have said they’ll increase investment and production."

Senator Sheldon Whitehouse (D-RI) and Representative Ro Khanna (D-CA) have presented a windfall tax proposal, under which oil firms would pay a tax based on the difference between the current oil price and the pre-pandemic price. (When economic conditions allow for higher-than-average earnings, governments often levy a windfall tax on specific businesses.)

If oil prices remain at their current levels for the rest of the year, the windfall tax proposal would tax half of company profits. That would raise about $20 billion of tax revenue at last year's profit levels. If profit levels grow by one-third to meet rising oil prices this year, the tax will raise more than $25 billion.

Tax Strategy

The rise in profitability unlocks an opportunity for many oil and gas companies to take advantage of net operating losses they incurred in the early stages of their growth to reduce their current tax bills. Under current U.S. tax law, a majority of development costs can be expensed upfront, leading to net tax losses in a company’s initial years or years with significant drilling. These losses are carried over year-to-year on the company’s tax return until such time as the company incurs a profit and can use these net operating losses (NOLs) to offset their tax burden. While many companies have held these NOLs without benefit for many years, we are seeing companies begin to utilize them to offset their 2021 and 2022 profits under the current pricing environment.


The Russian invasion of Ukraine has caused a negative supply shock, disrupting outputs and raising prices to extraordinary levels. Rising energy costs, such as the price of oil, natural gas, and gasoline, as well as increasing food prices, have a significant impact on inflation. Another complication is that the Ukraine supply shock comes on top of a worldwide supply shock caused by the coronavirus pandemic, which closed businesses and significantly inhibited growth in a number of industries, clogged international supply lines, and boosted the price of everything from vehicles to food.


With oil and gas companies currently experiencing higher than expected profits, companies should speak to their tax advisors about reassessing their tax position and entity structure to optimize cash flow and efficiency.  Many favorable U.S. tax provisions still exist for this industry and they become more important than ever in periods of high profitability.

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Richard Stepler

Richard Stepler is a Partner in the Private Client Services Group and leader of the Oil and Gas Services Group.

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