China reopens to Exxon Chevron continues to benefit DW

China reopens to Exxon, Chevron continues to benefit

Financial markets were stunned in April 2020 when oil prices turned negative for the first time ever. As demand collapsed during the first COVID lockdown, the main US oil benchmark fell to minus $30 (minus €28) a barrel.

Naysayers said prices would never recover. They warned that the days of big oil were numbered and the end of the hydrocarbon era was near. They’re right about the direction of travel, but their timing was way off.

The same five Western oil giants – ExxonMobil, Shell, Chevron, BP and Total – that have tumbled in 2020 have just collectively announced annual profits of more than $196 billion, helped by a surge in oil demand fueled by the Ukraine war and the Recovery after the pandemic.

Oil prices surpassed $100 for much of the first half of last year, and in March Brent crude hit $139 a barrel. For the rest of the year, it settled between $70 and $95 — much higher than the $40 to $50 oil majors need to turn a profit.

Exxon’s 2022 profit was a record not just for itself, but for any US or European oil giant. BP’s $28 billion profit was the highest in its 114-year history, while Shell more than doubled last year’s profit.

In addition to rising oil prices, falling debt helped oil companies increase their investments in fossil fuel production as governments fraught with energy security due to the supply shock caused by Western sanctions against Moscow and the Kremlin’s erratic energy supplies to Europe after the Moscow invasion. Priority given to Ukraine.

BP CEO Bernard Looney has been slammed by the green lobby when he says he wants to “call back” some of the energy giant’s investments in renewable energy amid the risk that oil and gas supply shortages will lead to more price volatility.

Contempt for “dirty” cash cows

Public anger at Big Oil’s announcements of record profits runs deep, and not just because of the urgent push for green energy.

Over the past year, homes and businesses have been hit hard by skyrocketing utility bills and gas prices. While many governments have attempted to limit the damage with subsidies, many see Big Oil as a beneficiary of public misery, leading to calls for windfall taxes on profits.

The UK and European Union have already imposed temporary levies on oil and gas sector profits. Politicians and trade unions are calling for this to be increased. In their earnings updates, Shell, Total and BP said the new taxes would each cost them about $2 billion — about 5% to 8% of earnings.

ExxonMobil, meanwhile, is suing the EU to get the bloc to scrap its new windfall tax. The US’s largest oil company argues that Brussels has exceeded its authority by levying what it says is normally a role for national governments.

Exxon spokesman Casey Norton said in December that the tax would “undermine investor confidence, discourage investment and increase dependence on imported energy.”

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Biden calls for tax increases for oil companies

US President Joe Biden used his State of the Union address this week to call for further pressure on energy giants and a quadrupling of taxes paid on share buybacks.

“When I spoke to a few [energy companies], they said, ‘We’re afraid you’re going to shut down all the oil refineries anyway, so why should we invest in them?’ We’re going to need oil for at least another decade,” Biden told Congress. “Instead, they used those record earnings to buy back their own stock and reward their CEOs and shareholders. Companies should do the right thing.”

According to a Portal tally, the top Western oil companies paid out a record $110 billion in dividends and share buybacks to investors in 2022.

Oil giants have trimmed their longer-term investments in recent years, partly in the wake of last decade’s US shale oil crisis but also after severe pandemic losses. With an increasingly uncertain future due to the green energy transition, reluctance to make larger investments remains.

China is reopening to fuel demand

Consumers and businesses could be in for more pain as China reopens after a three-year zero-COVID policy, further fueling demand for oil while continuing to boost Big Oil’s profits.

Although oil prices are unlikely to hit their all-time high of $150 a barrel set in July 2008 anytime soon, some analysts are predicting that the price could revisit $100 later this year — before a recession or downturn hits major economies and demand brings to a halt.

In its latest oil market forecast released on Tuesday, the Oxford Energy Institute said oil prices would hit $95.7 a barrel, partly due to demand from Asia’s strong economy. Goldman Sachs sees prices returning to $100 by December.

Russia said this week it plans to cut production by half a million barrels a day starting next month, a move that has pushed prices higher. Moscow blamed Western oil sanctions for the move, including a European Union price cap of $60 on Russian crude. The Kremlin has so far diverted the oil it sent to Europe to China and India, albeit at a 30% discount.

Another sign of strong oil demand came this week from Barclays Capital, which forecast even better earnings for the oil majors. It set a price target of 10 pounds ($12, €11.29) for BP, almost doubling Friday’s price of 5.61 pounds.

Edited by: Uwe Hessler