With crude oil prices soaring to more than $100 a barrel this year and AAA reporting last week that the average domestic gasoline price reached a record high of $4.37 a gallon, big oil companies are posting historic profits. In the first three months of 2022, Exxon Mobil made $5.5 billion after taxes, Chevron $6.3 billion and ConocoPhillips $5.8 billion. Smaller energy producers, concentrated in the U.S. and often referred to as wildcatters, are also reaping huge profits. Last week, Pioneer Natural Resources reported first-quarter profits of $2 billion and Marathon Oil revenues of $1.3 billion.
Some Democrats in Congress have called for a temporary tax on oil companies. The Biden administration has not supported the idea, but it has been pressuring U.S. energy companies to lower prices by building more rigs, pumping more oil, and increasing supply. “Big oil CEOs say they're going to increase investment and production,” President Biden said in March. “They have the ability to do that… My message is that now is the time. A time of war is not a time to make money. It's time to reinvest in America.” But despite such appeals, overall U.S. oil production remains far below pre-pandemic levels. In February 2020, U.S. oil fields produced about 13 million barrels of crude oil per day, but last month it was less than 11.9 million barrels per day.
The shortfall raises the question of whether energy companies are deliberately treading water to keep prices and profits high. “They're not using that money to produce energy domestically,” Senate Majority Leader Chuck Schumer recently argued. “They're using that money to buy back stock. They're using it to boost stock prices.” The oil industry's latest earnings releases seem to back up Schumer's claim. Exxon said it plans to triple its share buybacks from investors, a financial strategy companies use to reduce the number of shares outstanding and increase earnings per share. The company said it will spend up to $30 billion on share buybacks between now and the end of 2024. Chevron said it plans to dedicate $10 billion to share buybacks this year, double its previous target.
What about increased production? Both Exxon and Chevron reported that total oil and gas production pumped from their drilling rigs around the world was slightly down in the first quarter compared to the previous quarter. Domestically, both companies said that crude oil production at their U.S. operations in the first quarter of this year was slightly lower than the previous three months, but higher than the first quarter of 2021. Some Republicans and oil industry lobbyists blame the administration's decision to cancel the Keystone XL pipeline and freeze new drilling leases on federal lands for U.S. oil production not fully recovering. Senior administration officials I spoke to strongly dispute this claim, saying no oil company has told the White House that they will not increase production because of pipeline shortages. In a recent earnings report, Exxon said production from the Permian Basin, which straddles Texas and New Mexico, will increase by more than 25% this year, while Chevron said production in the same region will increase by 15%.
A key factor holding back U.S. crude production, industry analysts say, is the attitude of smaller energy companies, which account for a significant chunk of total production. “We're not capitalizing on higher prices to fund growth. We're staying disciplined,” Marathon Chief Executive Lee Tillman told Wall Street analysts last week. Pioneer Chief Executive Scott Sheffield was even clearer: “We're not going to change our growth plans whether oil is $150, $200 or $100,” he said in February. On an earnings call with Wall Street analysts last week, Sheffield reiterated that Pioneer would limit growth to 5% this year and next.
The refusal to add significant new production capacity has infuriated many in the administration, including Biden. “They don't want to increase supply because Putin's higher prices mean higher profits,” Biden said in a recent speech. The president is certainly on to something, but the problem isn't just about greedy CEOs. By calling on oil producers to act patriotically, the White House is confronting an entire industry that currently operates according to the strict logic of shareholder capitalism, a logic that has no room for petty profits, angry SUV owners, or solidarity with Ukraine.
During the fracking boom a decade ago, many shale oil producers expanded production and raised large sums of money from investors, especially private equity firms. When oil prices crashed in 2014, profits evaporated, many shale oil producers went bankrupt, and investors suffered some of the biggest losses Wall Street — and the oil industry — has ever seen. “Many oil CEOs believe that expanding production too quickly will punish them, not reward them,” Jason Bordoff, founding director of the Center on Global Energy Policy at Columbia University, told me. “Energy companies lost a lot of money on shale expansion for a decade, and investors have been telling CEOs that they don't want to repeat that performance.”
In a recent survey of executives from more than 100 oil and gas companies by the Federal Reserve Bank of Dallas, nearly 60% of respondents said that “investor pressure to maintain capital discipline” was the main factor impeding production growth. Given this pressure from Wall Street, many energy executives, especially those at smaller companies, are willing to defy the White House. Executives of major oil companies with operations around the world know that they may have to turn to the U.S. government at any time to protect assets or resolve disputes with host countries. Domestic producers do not have this concern, and as a result the White House has less leverage over them.
In addition to publicly pressuring oil producers, the Biden administration has pledged to release 1 million barrels of crude oil per day from the Strategic Petroleum Reserve for six months and is also seeking to improve ties with Saudi Arabia and Venezuela. OPEC In energy-rich member states, the administration has launched new efforts to encourage the use of clean energy technologies to reduce long-term reliance on fossil fuels. But a key clean energy proposal that was part of Biden's “Build Back Better” plan remains stalled in Congress. “The world clearly needs more oil production now, but in the long run it needs to produce less,” said Bordoff, who served as an energy and climate change adviser in the Obama administration. “We have to figure out how to increase supply now without compromising our ability to transition to clean energy in the long run. That's a tough problem.”
In a speech on inflation on Tuesday, Biden pointed to some of his administration's efforts to lower gasoline prices and attacked his Republican critics, saying, “They have no plan to lower energy prices today, and they have no plan to lead us to a cleaner, more energy independent future tomorrow.” That's true, but the White House is well aware that Republicans will ruthlessly try to exploit high gasoline prices in this fall's midterm elections.
