Despite lower oil prices in the third quarter, the oil industry continues to post strong financial results. Some say it’s “inconvenient” because it’s happening during a time of economic hardship. As well as being troublesome, however, big oil profits are likely to attract more political pressure from desperate governments.
Bloomberg reported this week that, based on the data compiled, the collective profits of Exxon, Chevron, Shell, BP and TotalEnergies for the last quarter would amount to $50.7 billion.
That’s clearly lower than the record $62 billion the five supermajors brought in for the second quarter – drawing the wrath of politicians – but it’s still a big number and in all likelihood will draw more anger and call for action. sharing money.
“It’s really embarrassing,” Abhi Rajendran, a fellow at Columbia University’s Center for Global Energy Policy, told Bloomberg. “These companies won’t want to fight for strong business results that come at the expense of consumers and a tough economic environment.”
It’s an interesting take, given that in 2020, when Big Tech raked in money from lockdowns – also at the expense of consumers forced to stay at home, no one really blamed Amazon or Apple, or Microsoft for this.
Yet the oil industry holds a special place in the hearts of nearly every Western politician, with the energy transition still high on the official agenda even as the cost of renewables skyrockets and Europe is going back to coal to survive the winter.
Related: Why Russian LNG exports to Europe boomed this summer
The oil industry was a big culprit in the energy crisis when it first began to unfold, and record profits helped bolster this factually flimsy argument. Now, that argument will likely be repeated, and we may hear more about windfall taxes.
It’s not just the big five oil companies. Based on early reports to come in this earnings season, the industry has had another excellent three months. Halliburton, for example, saw its profits double between July and September to $544 million. Valero Reserve a profit of $2.8 billion for the period, pointing to stronger fuel demand than in 2019.
Indeed, the Biden administration, for its part, was quick to call on oil companies to “immediately pass on lower energy costs to consumers.” Arguing that input costs for refiners are falling as their margins rise, the White House said in a recent fact sheet that industry must immediately share its higher profits with consumers by lowering the final prices of their products.
Meanwhile, Energy Secretary Jennifer Granholm spoke to industry leaders this week to try to get them to increase fuel production. This seems incongruous with the claims made in the fact sheet, but reflects a reality where demand for fuels is on the rise while fuel production capacity has declined.
Unfortunately, oil executives seem to have bursts the administration’s hopes for the return of closed refining capacities. Naturally, there are no plans to build new refining capacity either as part of federal energy policies aimed at reducing the economy’s dependence on fossil fuels.
Meanwhile, attempts by governments on both sides of the Atlantic to force the oil industry to part with some of its “excess” profits may be about to backfire. Since the EU and UK announced windfall oil tax plans, industry and analysts have warned that this will lead to a drop in appetite for investment. Instead, companies will continue to prioritize returning cash to shareholders, which would further compromise the security of future supply.
“If you’re planning your investment budget, you have to think twice now that you have a new risk,” Christyan Malek, global head of energy strategy at JP Morgan, Told Bloomberg earlier this year. “It encourages majors to return money to shareholders when they use that free cash flow that could have been used to invest.”
In the UK, the windfall tax was approved in July and the country’s industry lobby group warned it would threaten investment plans. The head of the body, Deirdre Michie, noted that “exploring for oil and gas and then bringing it to land is inherently a risky and expensive business, so our members need tax and other rules UK regulations are stable and predictable before considering investing the hundreds of millions of pounds needed for such projects.
It could well be argued that if this were any other industry, governments would celebrate its resilience and the taxes this resilient industry would pay into state coffers. Yet Big Oil, and the oil industry as a whole, were cast as the villain of the day, and nothing they do seems right.
Oil companies are damned if they do – produce more oil and invest in new exploration, driving down prices – and they’re just as damned if they don’t, avoiding more exploration and focusing on the return of cash to shareholders, as demand exceeds supply for oil. If they can’t win, why even try?
By Irina Slav for Oilprice.com
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