President Biden this week made a splash in the world of news as he once again pointed the finger at the oil industry, accusing companies of “war profiteering” and threatening what essentially comes down to a financial punishment unless they turn the taps on.
It’s a rhetoric that sounds familiar and takes one back to the summer when Biden was trying a similar approach with Saudi Arabia. It also coincides with a statement from OPEC indicating that oil demand will continue to grow strongly until at least the middle of the century.
To make things even more complicated, Biden tweeted on Monday that gasoline prices were down more than $1.20 per gallon since the peak they reached this summer and have been declining for three consecutive weeks. The tweet came just a few days after the accusations of profiteering that the U.S. president leveled at the oil industry.
This industry must be quite confused right now. On the one hand, oil companies—especially Big Oil because of its Big Profits—are being targeted with threats for windfall taxes and “other restrictions” of an as-of-yet undetermined nature.
The threats are accompanied by calls to invest more in production, which goes counter to the Biden administration’s energy transition agenda, as most recently laid out in the Inflation Reduction Act. From the oil industry’s perspective, the U.S. president is basically demanding that they spend money on what will soon become stranded assets if the transition succeeds as planned.
On the other hand, there’s OPEC saying that oil demand is going nowhere. On the contrary, it is going to grow more strongly than previously expected, the group said in its World Oil Outlook report, which came out this week.
In it, OPEC estimated that oil demand globally would expand by 2.7 million barrels daily between this year and next, to a total 103 million bpd. By 2030, global oil demand will reach 108.3 million bpd, OPEC said in its report.
That could be reason enough to boost drilling, but only for some companies. Most of Big Oil has made big bets on things like wind, solar, hydrogen, and EV charging because the companies’ investors have pushed these companies to make these big bets. Management has also been on board, sensing an uninterrupted ESG shift in the investment world.
This is not to say that Big Oil—or smaller independents in the Permian, for that matter—cannot boost production and avoid getting windfall taxed. They probably can, but the President’s statements compared to his energy policy are not enough to stimulate more investment in production.
The industry seems to have a better memory than the average voter and remembers that the very first thing Biden did when he took office was to kill the Keystone XL pipeline in what many saw as the first shot in his administration’s perceived war on the U.S. oil industry.
“Rather than taking credit for price declines and shifting blame for price increases, the Biden administration should get serious about addressing the supply and demand imbalance that has caused higher gas prices and created long-term energy challenges,” the President of the American Petroleum Institute, Mike Sommers, said in a statement in response to the President’s threats for windfall profits.
“Oil companies do not set prices—global commodities markets do,” Sommers went on to say. “Increasing taxes on American energy discourages investment in new production, which is the exact opposite of what is needed. American families and businesses are looking to lawmakers for solutions, not campaign rhetoric.”
This is not the first time the industry has tried to explain to members of the Biden administration, including the President himself, that fuel markets are not as simple as one might assume based on the summaries of quarterly financial reports.
It may be, however, the first time a head of state that defines itself as a democracy has threatened privately owned companies with repercussions if they continue prioritizing the interests of their shareholders, in other words, owners over the interests of the administration, which is what it all comes down to, with the midterms now just days away.
Indeed, gasoline prices in the U.S. have fallen significantly since the summer peaks and are now just about $0.35 above the average for this time last year, according to the AAA. Yet based on Biden’s fervor in urging oil companies to bring prices further down, this is not enough. And in all honestly, whatever oil companies do, they wouldn’t be able to bring prices down by Sunday.
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Over the longer term, the situation remains confusing and highly uncertain, too, further discouraging the industry from doing what the administration wants. OPEC expects higher oil demand, but the IEA said a few days ago that oil demand is set to peak by 2030.
It cannot be easy to navigate a landscape of such contradictory forecasts for oil demand, which is essentially the only factor that determines investment decisions in the oil industry. So, in a context of so much uncertainty, oil companies are doing what anyone would do in their shoes—they remain cautious and careful with their money. A windfall tax will only reinforce the caution.
By Irina Slav for Oilprice.com
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As a result, the global oil industry is hesitant to invest extensively in exploration and expansion in production capacity.
President Biden is right to consider imposing a windfall tax on Big Oil for the huge revenues they are getting from rising oil prices without much efforts or investments on their part. But he is wrong to believe that Big Oil has direct control over prices. Oil companies do not set prices, Global commodities markets do.
And while windfall taxes can be a one off affair, increasing taxes on regular basis discourages investment in new production, which is the exact opposite of what is needed now.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert