Wall Street pressures and peak demand undercut US call for more oil

Joe Biden wants US oil companies to boost production. Two powerful forces are acting against the President’s call.

Wall Street wants oil groups to hand over billions in profits to investors rather than spend freely on new supplies. And the International Energy Agency has warned that oil demand will peak in the middle of the next decade, reducing the possibility of huge new investment.

These tensions were on display last week, when ExxonMobil and Chevron reported net profits that were the biggest in their history for the past two quarters.

The two US oil supermajors said they would send cash to shareholders in the form of higher dividends and share buybacks. They have not said they will spend more to increase production.

Goldman Sachs argues that the sum total of these decisions, which have affected small US shale oil companies, will be a long period of oil prices above $100 per barrel. The price of West Texas Intermediate oil reached $90 per barrel on Wednesday.

Biden on Monday accused oil companies of “war profiteering” after Russia’s full-scale invasion of Ukraine and threatened new taxes if they did not ramp up output. “I believe they have an obligation to act in the best interest of their consumers, their community and their country to invest in America by increasing manufacturing and improving capacity,” the president said in a speech.

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But investments by U.S. supermajors, which remain more committed to their core oil and gas businesses than their European rivals, have fallen about 30 percent from their pre-pandemic plans.

Exxon said in 2019 it planned to spend $30 billion to $35 billion a year on its business, but now aims for about $23 billion a year. Chevron had announced annual capital spending of about $19 billion to $22 billion before the pandemic, but now plans to spend $15 billion to $17 billion.

Column chart of combined capital expenditures of the world's major oil companies ($ billion) showing that spending is slowing for Big Oil

Both companies will update spending plans in December, but neither said they planned to raise medium-term targets when asked by the Financial Times last week. Chevron aims to increase oil and gas production by 3 percent a year and Exxon by about 2 percent a year, largely from investments made years ago.

Raymond James analyst Pavel Molchanov says. “Oil companies can drill more, but they don’t want to because their shareholders have pushed them to invest less and instead pay more dividends and share buybacks, and their shares in most cases don’t exist at all. – all-time highs.”

Exxon shares are up 79 percent this year, even as the broader S&P 500 index has fallen 21 percent. It’s a remarkable turnaround for a company that lost a landmark proxy battle 18 months ago, in part because activist investor Engine No.

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Chevron is up 52 percent in 2022. “The signals from our investors don’t suggest they want to see more investment in manufacturing,” chief executive Mike Wirth told the Financial Times last month.

Exxon CEO Darren Woods last week defended the company’s big spending on dividends at a time of high fuel prices for consumers.

“There have been discussions 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,” he told investors after Exxon reported quarterly net income of $19.7 billion.

Independent U.S. shale producers, which have provided much of the growth in global oil supplies over the past decade, are also holding costs steady. Pioneer Natural Resources CEO Scott Sheffield told analysts last week that his company’s “low reinvestment rate” would “stun oil production growth” but generate free cash flow that could be paid out to shareholders.

Quarterly earnings column chart ($ billion) shows profits rising for major oil groups

Just days before the industry’s latest bumper profit, the IEA said for the first time that it sees “conclusive” signs that oil demand will peak under current government policies. It said crude demand is likely to grow less than 1 percent a year before peaking in 2035, although it still predicts demand will remain high until 2050.

Wirth and other oil executives say investors are reluctant to invest in part because of policies and rhetoric in the U.S. and Europe aimed at weaning the economy off fossil fuels to combat climate change.

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“Mood music is important,” Wirth said. “When you ask investors, ‘Do you want me to take the cash that could be coming back to you and instead let me put it back into this business that policymakers have said they want out of? : Investors say, “Whoa, I’ll take the cash.”

Despite the expected slowdown in consumption, the IEA says the industry will still need to spend about $470 billion a year on oil and gas projects this decade to keep up with demand, about 50 percent more than in recent years.

Goldman Sachs argues that “structural supply underinvestment” in the oil industry could underpin a sustained period of crude oil prices above $100, even if the economy slows.

The market may need “a sustained increase in oil prices in the coming years, given the reluctance to invest in oil during the energy transition,” the bank’s analysts said.

Additional reporting by Derek Brower in San Ramon, California

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