High oil prices aren't the cure they were as Exxon, Chevron, Shell underinvest
The invisible hand of the free market is not working like it used to in balancing oil supply and demand.
ByJavier Blas
November 2, 2022, 5:00 AM UTC
The cure for high oil prices is high prices, or so says the commodity industry’s adage. Let the invisible hand of the free market work its magic. High prices will simultaneously reduce demand and increase supply, eventually making the good less expensive.
This has proven true for centuries: In commodities, a bust follows every boom. It happened after the Klondike Gold Rush in 1896, during the second oil crisis in 1979 and following the most recent US shale boom a decade ago. Generations of petroleum engineers, geologists and financiers have grown up swearing by it.
But the axiom no longer seems to be governing the oil market.
To be sure, the elevated cost of crude is suppressing appetite. But the other side of the equation — supply — isn’t working out. The industry simply hasn’t been reacting to high prices with more investment as it has before. This means demand will have to do all the work to rebalance the oil market. The result is likely to be a slower economy and more sustained energy costs than in the past.
Why isn’t the supply lever working? Money certainly isn’t the problem. Big Oil has reported its best-ever six-month period, earning more than $100 billion in profits from April to September. Exxon Mobil Corp. just enjoyed its best quarter in its 152-year history, which goes all the way back to John D. Rockefeller.
Neither Exxon nor its competitors Chevron Corp., Shell Plc, TotalEnergies SE and BP Plc have announced any major increases in spending beyond what they have already planned. Institutional investors, led by BlackRock Inc., have convinced virtually every oil executive to keep spending under control. Pierre Breber, the chief financial officer at Chevron, put it this way: “We’re not really paid for growth by the market.” Instead, they are channelling the profits into dividends and share buy backs.
In the past, some executives would have tried to kickstart a boom-to-bust cycle: Boost spending early, increase production and then cash in before prices crashed. Today, the pressure from shareholders to remain frugal is so strong and uniform across the industry that from the outside it almost looks like a cartel. And the result is cartel-like: Big Oil is collectively underinvesting by a lot.
Over a Barrel
Oil industry spending in production and exploration, in billions of dollars
Last year, the industry spent $305 billion on oil exploration and production, significantly below what’s required to meet oil demand until the end of the decade based on the most likely scenarios. According to the International Energy Agency, the world’s energy industry needs to spend nearly 50% more annually ($466 billion) from 2022 to 2030 to meet the world’s oil needs based on current climate change policies. Even if governments implement current strategies and other climate pledges they have made, including some net-zero targets, investment still needs to grow by 25% from current levels until at least 2030.
Let’s not kid ourselves. Oil companies are doing what we told them to do: Spend less on fossil fuel production. From green philanthropists to big Wall Street investors, the message has been nearly unanimous. One can hardly blame the executives for doing as they were told. The industry, of course, soon realized that spending less was rather good business, particularly when very few deviated. Only a handful of state-owned oil companies in the Middle East are today boosting their fossil fuel spending meaningfully.
The industry has been calibrating for a world of peak oil and rapidly declining petroleum demand. But that world simply does not exist today, nor will it tomorrow or in the near future. Russia’s invasion of Ukraine has made that all too clear.
Facing high oil prices, Western governments are now trying to force the industry to accelerate spending. But having witnessed how profitable it can be to ignore the industry’s old adage, oil executives are very reluctant to cooperate. They know more spending means lower prices.
On Monday, US President Joe Biden threatened the industry with higher taxes unless companies agree to boost not just oil production but also oil refining.
White House officials portray the speech as an olive branch to the fossil fuel industry — a direct plea that represents a 180-degree policy change from Biden’s campaign, when he promised “no more drilling.”
Government officials are wise to arm themselves with a stick when negotiating with a powerful business sector. Windfall taxes could play a role in the talks — though they’re unlikely to be effective. Reducing the profitability of an industry via higher levies doesn’t encourage more spending.
If Biden wants more oil, he needs to reset the conversation completely, and that means telling green campaigners and Wall Street investors — loud and clear — that America needs fossil fuels right now.
As far as commentary goes I'm going to go with a post by a member on another forum who lays it out far better than I ever could:
This article is absolutely correct. I've been in the oil business for 25 years. I've seen many a boom and bust. Every single time we go into a bust cycle, I hear "we're never doing that again", referring to ramping up production when oil prices go high.
This time, they didn't. From what I'm seeing, the plans on exploration and development haven't changed in light of increasing oil prices. This is like a new frontier in the oil business.
Honestly, being on the receiving end of 6 or 7 boom bust cycles and dealing with the uncertainty that brings, I welcome it. Also, listening to the current administration blather about windfall profits makes me want to puke.
Anyone with a basic grasp of math can average the earnings of any of the majors compared to say an Apple or Google and see that those tech companies are making way more money.
This admin planted this garden, they get to enjoy what it produces. - E from LA.
I will add that what is hardly ever reported is that the companies that are making money hand over fist now lost 20 Billion during the covid shutdowns.....Tater can shove his WPT up his ass.
The invisible hand of the free market is not working like it used to in balancing oil supply and demand.
ByJavier Blas
November 2, 2022, 5:00 AM UTC
The cure for high oil prices is high prices, or so says the commodity industry’s adage. Let the invisible hand of the free market work its magic. High prices will simultaneously reduce demand and increase supply, eventually making the good less expensive.
This has proven true for centuries: In commodities, a bust follows every boom. It happened after the Klondike Gold Rush in 1896, during the second oil crisis in 1979 and following the most recent US shale boom a decade ago. Generations of petroleum engineers, geologists and financiers have grown up swearing by it.
But the axiom no longer seems to be governing the oil market.
To be sure, the elevated cost of crude is suppressing appetite. But the other side of the equation — supply — isn’t working out. The industry simply hasn’t been reacting to high prices with more investment as it has before. This means demand will have to do all the work to rebalance the oil market. The result is likely to be a slower economy and more sustained energy costs than in the past.
Why isn’t the supply lever working? Money certainly isn’t the problem. Big Oil has reported its best-ever six-month period, earning more than $100 billion in profits from April to September. Exxon Mobil Corp. just enjoyed its best quarter in its 152-year history, which goes all the way back to John D. Rockefeller.
Neither Exxon nor its competitors Chevron Corp., Shell Plc, TotalEnergies SE and BP Plc have announced any major increases in spending beyond what they have already planned. Institutional investors, led by BlackRock Inc., have convinced virtually every oil executive to keep spending under control. Pierre Breber, the chief financial officer at Chevron, put it this way: “We’re not really paid for growth by the market.” Instead, they are channelling the profits into dividends and share buy backs.
In the past, some executives would have tried to kickstart a boom-to-bust cycle: Boost spending early, increase production and then cash in before prices crashed. Today, the pressure from shareholders to remain frugal is so strong and uniform across the industry that from the outside it almost looks like a cartel. And the result is cartel-like: Big Oil is collectively underinvesting by a lot.
Over a Barrel
Oil industry spending in production and exploration, in billions of dollars
Last year, the industry spent $305 billion on oil exploration and production, significantly below what’s required to meet oil demand until the end of the decade based on the most likely scenarios. According to the International Energy Agency, the world’s energy industry needs to spend nearly 50% more annually ($466 billion) from 2022 to 2030 to meet the world’s oil needs based on current climate change policies. Even if governments implement current strategies and other climate pledges they have made, including some net-zero targets, investment still needs to grow by 25% from current levels until at least 2030.
Let’s not kid ourselves. Oil companies are doing what we told them to do: Spend less on fossil fuel production. From green philanthropists to big Wall Street investors, the message has been nearly unanimous. One can hardly blame the executives for doing as they were told. The industry, of course, soon realized that spending less was rather good business, particularly when very few deviated. Only a handful of state-owned oil companies in the Middle East are today boosting their fossil fuel spending meaningfully.
The industry has been calibrating for a world of peak oil and rapidly declining petroleum demand. But that world simply does not exist today, nor will it tomorrow or in the near future. Russia’s invasion of Ukraine has made that all too clear.
Facing high oil prices, Western governments are now trying to force the industry to accelerate spending. But having witnessed how profitable it can be to ignore the industry’s old adage, oil executives are very reluctant to cooperate. They know more spending means lower prices.
On Monday, US President Joe Biden threatened the industry with higher taxes unless companies agree to boost not just oil production but also oil refining.
White House officials portray the speech as an olive branch to the fossil fuel industry — a direct plea that represents a 180-degree policy change from Biden’s campaign, when he promised “no more drilling.”
Government officials are wise to arm themselves with a stick when negotiating with a powerful business sector. Windfall taxes could play a role in the talks — though they’re unlikely to be effective. Reducing the profitability of an industry via higher levies doesn’t encourage more spending.
If Biden wants more oil, he needs to reset the conversation completely, and that means telling green campaigners and Wall Street investors — loud and clear — that America needs fossil fuels right now.
As far as commentary goes I'm going to go with a post by a member on another forum who lays it out far better than I ever could:
This article is absolutely correct. I've been in the oil business for 25 years. I've seen many a boom and bust. Every single time we go into a bust cycle, I hear "we're never doing that again", referring to ramping up production when oil prices go high.
This time, they didn't. From what I'm seeing, the plans on exploration and development haven't changed in light of increasing oil prices. This is like a new frontier in the oil business.
Honestly, being on the receiving end of 6 or 7 boom bust cycles and dealing with the uncertainty that brings, I welcome it. Also, listening to the current administration blather about windfall profits makes me want to puke.
Anyone with a basic grasp of math can average the earnings of any of the majors compared to say an Apple or Google and see that those tech companies are making way more money.
This admin planted this garden, they get to enjoy what it produces. - E from LA.
I will add that what is hardly ever reported is that the companies that are making money hand over fist now lost 20 Billion during the covid shutdowns.....Tater can shove his WPT up his ass.
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