Oil prices are through the roof and oil companies are raking it in. The oil industry has made a truly unbelievable turnaround after prices bottomed out last year during the early phases of the novel coronavirus pandemic and now some industry insiders are even speculating whether oil is on track to hit $100 a barrel.
In early 2020, as Covid-19 rapidly spread around the globe, industry shut down and people were driven into their homes, causing demand for oil to plummet seemingly overnight. As OPEC+ entered talks to strategize their response, Saudi Arabia and Russia began a spat which developed into an all-out oil price war. Soon, a global oil glut had flooded the market to such an extent that storage was at a premium and owning oil became a liability. This is how, on April 20, 2020 the West Texas Intermediate crude benchmark did the previously unthinkable and plunged into the negatives, ending the day at nearly $40 below zero a barrel.
Now, at the time of writing, West Texas Intermediate is at $83.89 a barrel. Last week Saudi Arabia warned the world that global spare oil capacities are falling rapidly. So has the pandemic-fuelled oil crisis ended? On the contrary, oil prices have skyrocketed thanks to the newest phase of the Covid-19 crisis thanks to a ‘scarcity premium.’ Around the world, supply chains are still reeling and energy supply has been unable to keep up with demand as it bounces back to pre-pandemic levels. China, India, and the European Union are now all facing a very serious energy crunch heading into a very grim winter.
So now that oil companies are rolling in the dough will they increase production to help out the world’s energy supply squeeze? Don’t count on it. “Exxon Mobil Corp., Royal Dutch Shell Plc and Chevron Corp. confirmed this week that, for the most part, they’ll spend their windfall profits on share buybacks and dividends,” Bloomberg recently reported. While capital expenditures will increase in 2022, the report continues, “the increases come off 2021’s exceptionally low base and within frameworks established before the recent surge in fossil-fuel prices.”
This is a huge change in behavior for the oil industry, which usually brings a “drill, baby, drill” mentality to even the smallest upticks in oil prices. The oil industry has been historically characterized by booms and busts as the oil sector reacts to high prices by flooding the market with oil, which then sinks those prices. The oil industry then repents, curbs production, waits for oil prices to rise, and then starts the cycle all over again. Until now.
For the duration of the Covid-19 crisis, oil producers have shown uncharacteristic restraint and held tight to their pledged production cuts. And now that restraint will turn into a payoff for shareholders. While this is bad news in the short term for countries suffering from an energy crunch, in the long run this move is good news for climate change mitigation.
Big Oil is more than aware that world leaders are getting more serious than ever about the clean energy transition, and the future of fossil fuels is far from certain. “We will not double down on fossil fuels,” Shell CEO Ben Van Beurden was quoted by Bloomberg. Supermajors might just stay the course on their production caps and focus on diversifying in the coming years.
By Haley Zaremba for Oilprice.com
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