Several days ago, President Biden made a media splash when he threatened oil companies with windfall taxes and “other restrictions” if they don’t stop returning cash to shareholders and start investing this cash in more oil production.
The industry, via the American Petroleum Institute, responded with yet another reiteration of the fact that the oil market is a global one, and producers don’t have complete control over prices because it is also a free market.
Oil producers, big and small, did not react to the U.S. President’s latest attack on it. The industry simply continued what it has been doing since oil prices rebounded: returning cash to shareholders and planning its spending carefully.
Bloomberg’s Javier Blas summed the situation up in a pithy commentary that basically reminded everyone that this same administration that is now calling for more oil, just two years ago pledged to reduce oil drilling in the U.S. as much as possible. And that this administration, along with other powerful institutions was the same one that convinced the oil industry there was really no point in including strong production growth in their long-term plans.
The Financial Times also published an analysis with the same message this week: too many agencies wanted the oil industry to stop expanding its business by increasing the production of oil. What we see now is the logical consequences of this behavior.
None other than the International Energy Agency has just warned that oil demand growth will peak by the mid-2030s, the FT noted, and the U.S. president wants oil companies to spend billions on what will effectively become stranded assets in a few short years. Related: Saudi Arabia Cuts Oil Prices For Asia
Of course, the IEA has been known to be wrong before, and it wasn’t that long ago. The agency published its now notorious roadmap to net zero in May 2021 and said in it that we would need no more new oil and gas exploration after that year.
Just a few months later, in its October Oil Market Report, the IEA directly called for more investment in oil and gas because of the tight supply situation amid stronger than expected recovery in energy demand.
The IEA may be wrong, as it often is, but Wall Street is a whole other story. Per the FT, it is banks that want oil companies to keep returning cash to shareholders instead of investing it in new production.
Shareholders themselves would certainly agree: they spent years watching how much cash was poured into relentless production growth and then they saw prices go negative, even though it was only for a little while. The price crash of 2020 was very real and very painful.
Besides, shareholders, especially in Big Oil majors, are applying another sort of pressure on the companies: ESG pressure. It was not a whim that all Big Oil majors had to come up with net-zero plans, targets, and strategies how to get there. Although environmentalists continue accusing them of just greenwashing their business, Big Oil is expanding in low-carbon energy and EVs, and that also means considerable spending.
Doing a 180-degree turn and redirecting more money to oil and gas exploration would definitely make some investors unhappy, and the oil industry has already had enough trouble with unhappy investors, especially those of an activist bend.
Although the industry might need to remind the Biden administration that it is shareholders who own the oil companies and not the White House, it remains a fact, and an important fact, that any company seeks first and foremost to keep its owners happy.
Earlier this week, the chief executive of Halliburton said that the era of “exponential” growth in U.S. oil and gas was over. “We’ll see growing investment, but quite frankly, nothing even close to what we saw from 2008 to 2014,” Jeff Miller said at the ADIPEC conference in Abu Dhabi, adding, “Companies were spending at a rate of 120 percent of their cash flow and that can’t go on indefinitely.”
“I think they have a responsibility to act in the interest of their consumers, their community and their country to invest in America by increasing production and refining capacity,” President Biden said of oil companies in his Monday speech.
In fact, the plain truth is that they do not have any of these responsibilities. Oil companies have responsibilities to their shareholders, creditors, and employees. It’s the government that has a responsibility to act in the interest of consumers, communities, and the country.
The Biden administration has not been doing a very good job of it. And it has been quite slow in realizing its stated plans to decimate the oil industry might backfire before too long. Now, everyone is paying the price for this slow realization. Everyone but oil companies, which are buying back shares, increasing dividends, paying off debt, and going easy on the production growth front.
By Irina Slav for Oilprice.com
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The first is that oil companies make their money from selling crude oil, petroleum products and gas. They invest in oil exploration and production because they are the most lucrative business in the world and where the overwhelming majority of their shareholders want them to be so they get the best return on capital.
The second fact of life is that the global economy will continue to be driven by oil and gas throughout the 21st century and probably far beyond.
The third fact of life is that despite the excessive pressure by environmental activists on the oil industry and the green policies promited by Western countries, oil companies will have to invest in oil and gas to satisfy global oil demand otherwise the global economy will collapse and energy crises become permanent fixtures of the world.
The fourth fact is that if the oil industry stops investing in oil and gas production which is what the global economy badly needs, they lose their raison de’tre. While renewables can satisfy a part of the global demand for electricity, they are incapable of satisfying the total energy demand of the global economy now or in the future.
Dr Mamdouh G Salameh
International Oil Economist
Global Energy Expert