… U.S President criticized record energy company profits

Despite weaker oil prices during the third quarter, the oil industry is still booking strong financial results.

According to some, this is “awkward” because it is happening during a time of economic hardship. Besides being awkward, however, Big Oil’s profits will likely draw more political pressure from desperate governments.

Bloomberg reported this week that, based on data it had compiled, the collective profits of Exxon, Chevron, Shell, BP, and TotalEnergies for the last quarter would come in at $50.7 billion.

This is palpably lower than the record $62 billion the five supermajors reported for the second quarter—drawing the ire of politicians—but it is still a large number and will, in all likelihood, draw more ire and calls for sharing the money.

“It’s definitely awkward,” Abhi Rajendran, a research scholar at Columbia University’s Center on Global Energy Policy, told Bloomberg. “These companies won’t want to be beating their chest over strong business results that are coming at the expense of consumers and a difficult economic environment.”

This is an interesting take, given that in 2020, when Big Tech raked the cash in thanks to the lockdowns—also at the expense of consumers forced to stay at home, nobody really blamed Amazon or Apple, or Microsoft for it.

Yet the oil industry has a special place in the heart of almost every Western politician, with the energy transition still high on the official agenda even as the cost of renewables soars and Europe returns to coal to survive the winter.

The oil industry made a great culprit for the energy crisis when it began unfolding, and record profits helped strengthen the factually flimsy argument. Now, this argument will probably be made again, and we might hear more talk about windfall profit taxes.

It’s not just the five Big Oil majors, either. Based on the first reports coming in this profit season, the industry had another excellent three months. Halliburton, for instance, saw its profits double between July and September to $544 million. Valero booked earnings of $2.8 billion for the period, noting stronger demand for fuels than in 2019.

Indeed, the Biden administration, for one, has been quick to call on oil companies to “to pass through lower energy costs to consumers right away.” Claiming that input costs for refiners are falling while their margins are rising, the White House said in a recent fact sheet that the industry must immediately share its higher profits with consumers by lowering end prices for their products.

Meanwhile, Energy Secretary Jennifer Granholm talked to industry executives this week to try and get them to boost the production of fuels. This sounds incongruous with the allegations made in the fact sheet but reflects a reality where demand for fuels is on the rise while the capacity to produce fuels has declined.

Unfortunately, oil executives appear to have shattered the administration’s hopes for the return of shuttered refining capacity. Understandably, there are also no plans to build new refining capacity in the context of federal energy policies seeking to reduce the economy’s reliance on fossil fuels.

Meanwhile, the attempts of 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. Ever since the EU and the UK announced plans for windfall taxes on the oil sector, both the industry and analysts have been warning this would lead to lower investment appetite. Instead, companies will continue to prioritize the return of cash to shareholders, which would further undermine the security of future supply.

“If you’re planning your capital budget, you have to think twice now that you have a new risk,” Christyan Malek, JP Morgan’s global head of energy strategy, told Bloomberg earlier this year. “It encourages majors to return cash to shareholders as they use that free cashflow that could have been used in investment.”

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 shore is inherently a risky and expensive business, so our members need the UK’s fiscal rules and other regulations to be stable and predictable before they consider investing the hundreds of millions of pounds needed for such projects.”

It could well be argued that if it were any other industry, governments would celebrate its resilience and the taxes this resilient industry would be paying into the state’s coffers. Yet Big Oil, and the oil industry as a whole, has been picked as the villain of the age, and nothing they do seems right.

Oil companies are damned if they do it—produce more oil and invest in new exploration, which brings prices down—and they are just as damned if they don’t do it, shunning more exploration and focusing on the return of cash to shareholders, while demand exceeds the supply of oil. If they can’t win, why even try?

Meanwhile, President Joe Biden of the United States  has criticized record energy company profits after Shell Plc announced its second-highest earnings ever while raising its dividend and expanding buybacks.

 “That’s more than twice of what they made in the third quarter of last year, and they raised their dividends as well, so the profits are going back in their shareholders instead of going to the pump and lowering the prices,” Biden said at an event in Syracuse, New York.

Biden has repeatedly demanded that oil companies forgo buybacks and dividend increases, calling on them to reduce prices at gasoline pumps for American motorists instead of returning profits to shareholders.

Energy companies, he said, need to “bring down the cost of a gallon of gas that reflects the cost they’re paying for a barrel of oil.”

Biden’s comments drew a swift rebuke from oil industry leaders.

“Refiners do not set the prices consumers pay at the pump or the prices for crude oil,” and are running “facilities as hard as we safely and responsibly can to maximize the supply of gasoline, diesel and jet fuel that Americans and economies around the world need,” said Chet Thompson, president of the American Fuel and Petrochemical Manufacturers association.

And the American Petroleum Institute suggested the president’s focus was misplaced.

“With energy costs and geopolitical instability around the world continuing to rise, it’s time for Washington to focus on leveraging American energy production to confront the global mismatch between energy demand and available supply that has driven fuel prices higher,” the trade group said in an emailed statement.

A Shell spokesman didn’t immediately respond to Biden’s comments.

A gallon of gasoline cost $3.76 on average in the US on Wednesday, according to the motor club AAA. Shell’s shares rose more than 5% on Thursday, to 2,425 pence in London.

Energy analysts and officials say there is generally a lag between shifts in the prices of crude oil and gasoline, in part because it takes time for costs to filter through the supply chain.

High oil prices are proving a bonanza for multinational energy companies. Exxon Mobil Corp. is expected tomorrow to disclose the second-highest quarterly profit in the company’s 152-year history.

Democrats, who face headwinds in midterm congressional elections on Nov. 8 in part because of inflation and high gasoline prices, have castigated oil company profits.

“$9.5 billion is a crapload of money,” Connecticut Senator Chris Murphy said in a tweet. “We don’t have to put up with this. But if you elect Republicans in two weeks, they will do the bidding of these guys.”

But Democratic proposals to impose so-called windfall profit taxes on energy companies have repeatedly failed, even when the party controlled both chambers of Congress.

Shell said Thursday it will buy back another $4 billion of shares over the next three months, bringing total repurchases for the year to $18.5 billion. It plans to increase its dividend by 15% for the fourth quarter, subject to board approval.

Shell reported a record profit in the second quarter of $11.47 billion, when oil prices exceeded $100 a barrel. Benchmark Brent crude closed at about $97 on Thursday, up $1.27.

Some of Shell’s peer companies also reported outstanding financial results Thursday. TotalEnergies SE disclosed a record profit, and Repsol SA said it will pay a higher dividend than previously announced.

By Irina Slav for Oilprice.com