A few days ago, President Biden caused a stir in the media when he threatened oil companies with windfall taxes and “other restrictions” if they didn’t stop returning money to shareholders and start to invest that money in more oil production.
The industry, through the American Petroleum Institute, reiterated once again that the oil market is global and that producers do not have full control over prices because it is also a market free.
Oil producers big and small have not reacted to the US president’s latest attack on them. The industry has simply continued what it has been doing since the oil price rebound: returning cash to shareholders and carefully planning its spending.
Bloomberg’s Javier Blas summed it up in a nutshell comment it basically reminded everyone that this same administration, which is now asking for more oil, pledged just two years ago to reduce oil drilling in the United States as much as possible. And that this administration, along with other powerful institutions, was the same one that had convinced the oil industry that there was really no point in including strong production growth in their long-term plans.
The Financial Times also published a analysis with the same message this week: too many agencies wanted the oil industry to stop expanding its business by increasing oil production. What we see now are the logical consequences of this behavior.
No one but the International Energy Agency has just warned that oil demand growth will peak in the mid-2030s, the FT noted, and the US president wants oil companies to spend billions on which will effectively become escrow assets in a few years. Related: Saudi Arabia cuts oil prices for Asia
Of course, the IEA was known to be wrong before, and not so long ago. The agency released its now notorious roadmap to net zero in May 2021 and stated there that we would not need any new oil and gas exploration after this year.
A few months later, in her October Oil market reportthe IEA directly called for more investment in oil and gas due to the tight supply situation amid a stronger than expected recovery in energy demand.
The IEA can be wrong, as it often is, but Wall Street is a whole different story. According to the FT, it is the banks who want the oil companies to continue returning money to shareholders instead of investing it in new production.
Shareholders themselves would certainly agree: they spent years watching how much money was being poured into the relentless growth of production, and then they watched prices turn negative, even if only for a small moment. The 2020 price crash was very real and very painful.
In addition, shareholders, particularly oil majors, exert another form of pressure on companies: ESG pressure. It was no whim that all major oil companies had to come up with net zero plans, targets and strategies to achieve this. Although environmentalists continue to accuse them of simply whitewashing their company, Big Oil is expanding into low-carbon energy and electric vehicles, which also means hefty spending.
Making a 180 degree turn and redirecting more money to oil and gas exploration would certainly make some investors unhappy, and the oil industry has already had enough trouble with unhappy investors, especially those in an activist turn.
While the industry may need to remind the Biden administration that the shareholders own the oil companies, not the White House, the fact remains, and an important fact, that any business seeks first and foremost to satisfy its owners.
Earlier this week, Halliburton’s chief executive said the era of “exponential” oil and gas growth in the United States was over. “We will see increasing investment, but frankly nothing 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% of their cash flow and it can’t go on forever.
“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 the oil companies in his speech on Monday.
In fact, the plain truth is that they have none of these responsibilities. Oil companies have responsibilities to their shareholders, creditors and employees. It is the government that has the responsibility to act in the interests of consumers, communities and the country.
The Biden administration has not done a very good job. And he’s been pretty slow to realize that his stated plans to decimate the oil industry could backfire before too long. Now everyone is paying the price for this slow realization. Everyone but the oil companies, which are buying up stocks, raising dividends, paying down debt and getting soft on the output growth front.
By Irina Slav for Oilprice.com
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