Opinion: Dazzling energy prices just don’t add up

A vehicle drives into a BP service station in central London, Great Britain, on Aug. 2. Oil started to rise late last year, well before the Russian invasion of Ukraine on February 24.HENRY NICHOLLS/Reuters

UN Secretary-General António Guterres called them examples of “exceptional greed.” A Friends of the Earth campaigner said: “It’s unbelievable that these companies are raising such huge sums amid a cost of living crisis.” US President Joe Biden said one of the companies in question “made more money than God this year.”

Each pointed to Big Oil’s shame for wealth as energy companies report record or near-record profits. The extraordinary merits are not the result of a sudden collective attack by management genius; it’s just easy money, a result of the war in Ukraine, which has reduced supplies and pushed up prices.

Their happiness is not shared by consumers in North America, Europe and elsewhere, where refueling has become an exercise in self-imposed pain. Maybe those gas-guzzling SUV purchases weren’t such a great idea, but that’s not the point. The point is, we need windfall taxes on oil company profits that are too big. Honesty dictates, as an extraordinarily small segment of society – investors in oil companies – wallows in happiness while the rest of us suffer the consequences.

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The price of oil started to rise late last year, well before the Russian invasion of Ukraine on February 24. After that, prices shot up. Brent oil, the international benchmark, hit $139 a barrel in early March and then fluctuated between $100 and $120 for months — a period that coincided with the oil companies’ fiscal second quarter.

The price on Friday was US$96, which provided some relief for consumers. But that had still risen by more than a third over the year, and with the ongoing war and the Kremlin’s use of energy as a weapon against any country backing Ukraine, it seems unlikely that oil prices will recover any time soon. valleys.

Note that OPEC is making little effort to put downward pressure on prices, despite Mr Biden’s flattery. As a setback for the president after his visit to Saudi Arabia, the cartel’s dominant producer, OPEC this week agreed to increase production by just 100,000 barrels per day, equivalent to 0.1 percent of global demand. .

Big Oil’s earnings were better than most analysts expected, and rest assured that the companies, recognizing the political risk of reporting extraordinarily hefty profits, used every legal accounting trick to minimize those profits. to make.

BP PLC announced this week that second-quarter profits tripled to nearly £7 billion (around $10.93 billion), the second highest in the British oil giant’s history. Italy’s Eni SpA saw its net profit quadruple to €3.8 billion (about $5 billion). Shell PLC reported a record quarterly profit of $11.5 billion (about $14.86 billion), and profits at TotalEngeries SE in France nearly tripled to $9.8 billion (about $12.66 billion).

These “strong second quarter results reflect a tight global market environment, where demand has recovered to near pre-pandemic levels,” said Darren Woods, chief executive of ExxonMobil Corp. “This situation has been exacerbated by the events in Ukraine.”

By ‘events’ he meant the war. ‘The situation got worse’ certainly didn’t make it worse for his company, precisely because of the war. Over the past year, Exxon’s stock is up 55 percent, the bulk of which has been since the beginning of this year, giving the company a market cap of $363 billion (about $469 billion). In Canada, shares of oil sands giant Suncor Energy Inc. increased by two-thirds in a year. During the height of the pandemic, when oil prices briefly turned negative, there were questions about the viability of high-priced producers like Suncor; today they are cash juggernauts.

Which brings us to the windfall tax.

The tax is already in effect in Britain, where former Chancellor of the Exchequer Rishi Sunak, one of two candidates to replace Prime Minister Boris Johnson, reluctantly imposed a 25 percent tax on “extraordinary profits” in July. The payments could be offset by tax breaks on new energy investments in the UK Pressure is being put on other governments to do the same. The arguments for this are convincing.

Why do investors buy one energy company over another? Or why buy oil companies at all?

If they only want exposure to the commodity itself, they must buy oil futures (agreements to buy or sell certain amounts of oil at predetermined prices on a set date). Those who don’t have the guts to play that risky game can buy the oil producers themselves.

But which? That all depends on an investor’s opinion of the various oil companies vying for their attention. For example, Exxon would say Chevron Corp. can win if the investor has a more positive view of Exxon management’s ability to maximize value, a process that encompasses everything from production mix and geographic risk to hedging strategy and dividend policy, all of which essentially code for capital allocation.

But the recent surge in Big Oil profits had almost nothing to do with managerial skills and almost everything to do with war. Given that reality, it seems neither rude nor outrageous to demand a windfall. The collected revenue could be used to subsidize home and school heating bills or to pay for home insulation programs, which would have the benefit of reducing carbon emissions.

If oil prices fall because the war ends and Russia stops using energy as a weapon, the tax would be abolished. We are in the midst of a cost of living crisis that will not go away tomorrow. Dazzling profits for oil companies while consumers pay dazzling prices for energy just aren’t right.

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