There has been discussion in the US about our industry returning some of our profits directly to the American people. In fact, that’s exactly what we’re doing in the form of our quarterly dividend.
President Biden, via Twitter:
Can’t believe I have to say this but giving profits to shareholders is not the same as bringing prices down for American families.
American oil companies are not ramping up production. They are exercising what investment firms call "capital discipline." They have been burned in the recent past. Exxon, a decade ago the most valuable company in the U.S., was dropped from the group of 30 stocks that make up the Dow Jones Industrial Average. Oil companies were looking at public enthusiasm toward conversion to electric cars. They were looking at endowment funds bowing to pressure to "divest." Fossil fuel companies were out of favor. They were looking at repositioning themselves to survive in a dying industry.
There was real risk if they leaped into new production capacity in the face of $90, $100, and even briefly $120 oil. They had experience with bear markets in oil. There were three in the prior 12 years.
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| Trading Economics, via John Mauldin, Thoughts from the Frontline |
There is a good reason why oil companies are cautious. U.S. oil fields have oil--but at a price. Fracked oil is profitable at $70/barrel and wildly profitable at $90/barrel. But Russia and the Middle East could deliver oil at prices well below break-even for domestic producers of fracked oil--if they wanted to. On the chart above, those sharp drops look like temporary blips. In the life of an oil company executive and the stockholders of oil companies, those were a decade of misery. They had stranded assets. They were selling their product for less than cost. Plus they had environmentalists telling them they were destroying the planet. What if Biden had succeeded in getting Saudi Arabia to pump more? What if Russia and Ukraine negotiate a peace?
Meanwhile, here is the reality of renewable energy. It is not yet a substitute for fossil fuels:
The chart is a snapshot of reality--80% fossil fuel. Every one of the non-fossil fuel energy sources has some problem. Nuclear has an intractable waste problem. If solutions to isolating nuclear waste were easy there would not be storage tanks at Hanford still "temporarily" storing nuclear waste from World War Two. Wood, biomass, and biofuels are renewable, but they release carbon when they burn. Hydropower changes rivers and kills fish. Wind kills birds and enough people object to seeing them that they are difficult to site. People like solar, but the panels come from China, and the power is intermittent. If the transition to renewables were easy and cost effective, we would have done it.
Senator Ron Wyden, Chair of the Senate Finance Committee, has campaign advertisements saying he favors a windfall profits tax on oil companies. They are making extraordinary profits. Some of that profit comes from the refinery spread--a doubling of the normal markup between crude oil and refined product. That is the oil companies charging what the market will bear. The U.S. is under-stocked with refineries in some parts of the country. They are hard to site, and energy companies are looking ahead at demand in 20 years and don't want to over-invest in what may be unused capacity. Some of their extra profit comes from the higher world price of oil, due to dislocations arising from the Russia invasion of Ukraine. A windfall profits tax will be popular. That tax probably makes policy sense, if it is combined with some kind of price support if prices fall again. Support could be tied to some kind of co-production agreement, combining wind and natural gas, or solar and natural gas.
Voters will hate the notion of subsidies for oil companies if prices drop and gasoline becomes cheap again. A complicated bill would be necessary to get the issue passed. Plus, it is in the interest of American consumers for the domestic oil industry to survive. Prepare for it: A windfall profits tax will need to come with strings attached. There is a reason oil companies aren't drilling to scoop up quick profits. The market could turn again.
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4 comments:
All of the climate advocacy is not working. Greta Thunberg can scold all she wants, but even “green” countries like Germany are not going to consent to freezing in the dark.
It’s time to stop, pretending that “renewables“ are going to replace carbon based energy any time soon. It’s either going to be nuclear, or ocean fertilization, or something else that can actually work.
If this is such a big f***ing emergency, then it’s time to take emergency measures; unless it’s just virtue signaling, and they don’t really mean it.
The Democrats’ Climate Problem
Oil and gas development destroys the surrounding environment. The extracted oil and gas pollute our land, sea and air. The greenhouse gas emissions they produce are literally killing us.
Climate change has already cost the U.S. $500 billion in the last 5 years, and the Office of Management and Budget estimates that doing nothing could cost us $2 trillion per year by 2100. Of course, that's 80 years from now and we won't be here, so only those who care about their offspring give a rip.
“We do not inherit the Earth from our ancestors; we borrow it from our children.”
Thank you Peter.
The blog today is a dose of reality. Early 1980s I lived and worked in Wyoming and saw the refineries in operation. New fields of oil and gas were explored worked and capped waiting for the price to rise to profitability and refinery capacity opened. These fields remained capped and new leases were also explored and capped. Too expensive to build new refining capability due to environmental and land use regulations. Actually Amaco shuttered and dismantled its plant near Casper. Sinclair was two plants of three operating when I left Wyoming. Pipelines had been completed into Utah where there was a newly expanded refinery north of Salt Lake. I believe the west coast has but three operating refineries today (two in California and one in Washington). New refining capacity is difficult to site. The southern states have a majority of refineries. They need upgrades and maintenance. Taking one off line for retrofit or maintenance has an immediate affect on the price of gas and diesel. We see these effects acutely on the west coast while southern states enjoy the lowest prices for fuel.
The Green New Deal seeks to expand the availability of alternatives to fossil fuels. Presently the possibility of replacing all fossil fuels with alternative energy is years away maybe decades. We are a net producer of fossil fuels but energy companies don't want to risk been legislated into bankruptcy. A windfall profits tax is unlikely to pass. However, there is a 15 percent minimum tax for all companies with revenue of a billion dollars or more. I expect the tax receipts will reflect additional revenue in 2023/24.
One last thought. The petroleum companies must be asking themselves "What becomes of our investment in new plants and newly tapped oil and gas fields when petroleum fuels are 20% of the mix and alternatives are 80%?"
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