by Several days ago, President Biden made a splash in the media when he threatened oil companies with windfall taxes and “other restrictions” if they didn’t stop returning cash to shareholders and start investing more of that money in oil production.
The industry responded through the American Petroleum Institute by reiterating that the oil market is global and producers do not have complete control over prices because it is also a free market.
Oil producers big and small did not react to the US president’s latest attack on it. The industry simply continued to do what it has been doing since the rise in oil prices: returning cash to shareholders and carefully planning its spending.
Bloomberg’s Javier Blas summed it up with a succinct comment that basically reminded everyone that this same administration now demanding more oil promised just two years ago to reduce US oil drilling as much as possible. And that this administration, along with other powerful institutions, was the same one that convinced the oil industry that there really was no point in including strong production growth in their long-term plans.
The Financial Times also published an analysis this week with the same message: too many agencies wanted the oil industry to stop expanding its business by increasing oil production. We now see 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 US president wants oil companies to spend billions on what will effectively be junk within a few years. Related: Saudi Arabia cuts oil prices in Asia
Of course, the IEA has been known to be wrong before, and it wasn’t that long ago. The agency released its now-infamous roadmap to net zero in May 2021, saying in it that we don’t need any more oil and gas exploration after that year.
Just a few months later, in its October oil market report, the IEA directly called for more investments in oil and gas, as the supply situation was tight as energy demand recovered stronger than expected.
The IEA may be wrong, as it often is, but Wall Street is a whole other story. According to FT, it is the banks that want oil companies to return cash to shareholders instead of investing it in new production.
Shareholders themselves would surely agree: they watched for years how much money was poured into ruthless production growth, and then they saw prices turn negative, if only for a moment. The 2020 price crash was very real and very painful.
In addition, shareholders, especially Big Oil majors, are putting another kind of pressure on companies: ESG pressure. It was not on a whim that all the Big Oil majors had to come up with plans, goals and strategies on the net to get there. Although environmentalists accuse them of merely greenwashing their company, Big Oil is expanding into low-carbon energy and electric cars, which also means significant expenses.
A 180-degree turn and more money going into oil and gas exploration would certainly make some investors unhappy, and the oil industry has already had enough problems with disgruntled investors, especially with the activist bend.
While the industry may need to remind the Biden administration that shareholders own the oil companies and not the White House, it remains a fact, and an important fact, that every company’s primary goal is to keep its owners happy.
Halliburton’s CEO said earlier this week that the era of “exponential” growth in U.S. oil and gas is over. “We’re seeing increased investment, but frankly nothing close to what we saw between 2008 and 2014,” Jeff Miller said at the ADIPEC conference in Abu Dhabi, adding: “Companies were spending 120 percent of their cash flow, and that can’t go on forever.”
“I believe they have an obligation to act in the best interest of their consumers, their communities and their country to invest in America by increasing production and refining capacity,” President Biden said of the oil companies in a speech on Monday.
In fact, the plain truth is that they have none of these responsibilities. Oil companies have obligations to their shareholders, creditors and employees. The government has a responsibility to act in the interest of consumers, communities and the country.
The Biden administration hasn’t done that very well. And it has been rather slow to implement its announced plans to destroy the oil industry, which may backfire before too long. Now everyone is paying the price for this slow implementation. All but the oil companies, which are buying back shares, increasing dividends, paying down debt and going easy on the production growth front.
Irina Slav for Oilprice.com
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