We told the big oil companies not to invest. Don’t complain now


The cure for high oil prices is high prices, as the commodity industry adage goes. Let the invisible hand of the free market work its magic. High prices will simultaneously reduce demand and increase supply, ultimately making the good cheaper.

This has been true for centuries: in commodities, a crash follows every boom. This happened after the Klondike Gold Rush in 1896, during the second oil crisis in 1979 and after the last US shale boom a decade ago. Generations of petroleum engineers, geologists and financiers grew up swearing by him.

But the axiom no longer seems to govern the oil market.

True, the high cost of crude suppresses the appetite. But the other side of the equation – supply – doesn’t work. The industry simply has not reacted to the high prices by investing more as it has done before. This means that demand will have to do all the work to rebalance the oil market. This will likely result in a slower economy and more sustained energy costs than in the past.

Why isn’t the supply lever working? Money is definitely not the issue. Big Oil announced its best six-month period, making more than $100 billion in profits from April to September. Exxon Mobil Corp. just had its best quarter in 152 years of history, which dates back to John D. Rockefeller.

Neither Exxon nor rivals Chevron Corp., Shell Plc, TotalEnergies SE and BP Plc have announced any major spending increases beyond what they had already expected. Institutional investors, led by BlackRock Inc., convinced virtually all oil executives to keep their spending under control. Pierre Breber, Chevron’s chief financial officer, put it this way: “We’re not really paid for growth by the market.” Instead, they funnel profits into dividends and share buybacks.

In the past, some leaders would have tried to kick-start a boom-to-bust cycle: increase spending early, increase production, then cash in before prices crash. Today, shareholder pressure to remain frugal is so strong and uniform across the industry that from the outside it almost looks like a cartel. And the result looks like a cartel: Big Oil collectively underinvests a lot.

Last year, the industry spent $305 billion on oil exploration and production, well below what is needed to meet oil demand through the end of the decade based on the worst-case scenarios. probable. According to the International Energy Agency, the global energy industry needs to spend almost 50% more per year ($466 billion) from 2022 to 2030 to meet global oil needs based on policies. current climate change issues. Even if governments implement current strategies and other climate commitments they have made, including some net zero targets, investments still need to increase by 25% from current levels until at least 2030.

Let’s face it. 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 almost unanimous. One can hardly blame the leaders for doing what they were told. The industry, of course, quickly realized that spending less was pretty good business, especially when very few were deviating. Only a handful of state oil companies in the Middle East are now significantly increasing their spending on fossil fuels.

The industry has calibrated itself for a world of peak oil and rapidly declining oil demand. But that world simply does not exist today, nor will it exist tomorrow or in the near future. Russia’s invasion of Ukraine has made this all too clear.

In the face of high oil prices, Western governments are now trying to force industry to accelerate spending. But after seeing how profitable it can be to ignore the old industry adage, oil executives are very reluctant to cooperate. They know that more spending means lower prices.

On Monday, US President Joe Biden threatened industry with higher taxes unless companies agree to boost not only oil production but also oil refining. White House officials describe the speech as an olive branch for the fossil fuel industry — a direct plea that represents a 180-degree policy shift from Biden’s campaign, when he promised “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, although they are unlikely to be effective. Reducing an industry’s profitability through higher levies does not encourage more spending.

If Biden wants more oil, he needs to completely reset the conversation, which means loudly telling environmental activists and investors on Wall Street that America needs fossil fuels right now.

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Javier Blas is a Bloomberg Opinion columnist covering energy and commodities. A former Bloomberg News reporter and commodities editor at the Financial Times, he is co-author of “The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources.”

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