On Believing Oil Company Executives
Few Americans can escape notice of high gasoline prices in the US currently. The causes are many, but one sure fire part of the problem is oil company business practices. Don’t believe me? Just ask the oil company executives:
Fifty-nine percent of oil executives said investor pressure to maintain capital discipline is the primary reason publicly traded oil producers are restraining growth, according to a Federal Reserve Bank of Dallas survey released Wednesday.
Today, oil companies are under enormous pressure from Wall Street to return cash to shareholders through dividends and buybacks, instead of investing in badly needed supply.
One executive surveyed pointed to the staggering losses suffered by shareholders in recent years. The energy sector, comprised largely of oil-and-gas firms, was easily the worst performer last decade.
“Investors dumped huge funds into shale drilling only to discover that when oil prices dropped, very little value existed at the end of the day,” the executive said.
But surly, you say, the Biden Administration’s policies are exacerbating this, since investors must be trying to wring profits before oil is “shut down.” Nope:
Just 6% of executives polled by the Dallas Fed pointed to government regulations as the primary reason publicly-traded oil companies are restraining production growth.
Another 11% pointed to environmental, social and governance (ESG) issues. The ESG movement has led many investors to shy away from fossil fuel companies in favor of clean energy ones.
About 15% of executives said “other” factors were to blame, including personnel shortages and supply-chain problems.
So to reiterate – you are paying more at the gas pump because oil company executives are more concerned with their dividend rates then anything else. No amount of signaling from any White House will overcome that, contra earlier essays here. Should you be interested in seeing the data – Its HERE.
So, do you want us to be mad at oil exexs, or oil investors?
Or perhaps we should be mad at the incentives we all rely on that encourage investors to pressure execs?
I feel like this is akin to being mad at a person for their estimated wealth.Report
Be mad at the people repeatedly telling you it’s Biden’s fault you are paying more for gas. Because it’s not. These oil execs are telling us so in spades.Report
“Investors dumped huge funds into shale drilling only to discover that when oil prices dropped, very little value existed at the end of the day,” the executive said.
From the last link, here’s the entire quote:
If you look through the comments from executives in the “Special Questions Comments” section, you’ll see government policy and the Biden administration’s hostility to oil coming up over and over.
Think about what “investor pressure maintain capital discipline” actually means: Investors don’t want management to make investments that aren’t going to make at least the risk-adjusted market rate of return. If government policy lowers the expected return on investments in oil production, and this leads investors to discourage management from investing in new capacity, which of these is the “primary reason?”
Anyway, you seem to be trying to insinuate that there’s something untoward here, but this is exactly how we should want corporations to behave. If internal reinvestment of profits can’t beat the market, profits should be retuned to investors so that they can redirect the money to better investments. From a social welfare perspective, this is especially true when it’s a product with negative externalities, like oil. Ostensibly you’re concerned about global warming—why do you want investors to subsidize CO2 emissions at a loss?
Finally, it doesn’t make sense to make long-term investments in response to short-term changes in market conditions. As discussed in the source document, there’s some concern that the high prices are only temporary, and that there’s a risk of building out a lot of capacity only to have prices fall to a level at which the investment can’t be recouped.Report
I don’t think there’s anything untoward. I do think this provides more clear evidence that the Presidents rhetoric – which is not backed up by legislative proposals or regulatory changes yet – is not a significant driver. Which tells me that if we want lower gas prices in the US we need to do a better job of grappling with reality.Report
Or also, we could be mad at the people who have freely chosen to construct a world dependent on single occupant personal automobiles.
It does amaze me how deep this idea is in America even among liberals, that cheap and abundant gasoline is just some sort of entitlement, and when it isn’t available, how quickly people fly into a murderous rage.
We’ve known since I was a little boy during the Arab Oil Embargo in 1973 how fragile and unsustainable our supply of cheap gasoline is, and we’ve had repeated reminders since then and yet people still insist on living in a world where they drive a 10MPG SUV 30 miles each way every day to work and back.
And when that becomes painful, someone must pay!Report
If we had raised the gas tax two cents a year each year after the embargo, we would have a very different and healthier economy gradually enough achieved to mitigate short-term hardship.Report
Or also, we could be mad at the people who have freely chosen to construct a world dependent on single occupant personal automobiles.
This choice seems to be pretty consistent around the world. Once a country gets rich enough, the people opt for personal transportation. Grabbing places at random, Italy has about 660 cars per thousand people. Japan about 640. Even Singapore, which strikes me as an insane place to own a car, has about 200.
One of the reasons people remember the Reagan years fondly is that he convinced the Saudis, who were the swing supplier in those days, to hold the global price of oil at about $20/bbl in 1980 dollars for many years.
If the automakers’ advertising is to be believed, the future of personal transportation is electric cars. Assuming that emerges in reality, presidents will be judged not on the price of a gallon of gasoline, but the price of a kWh.Report
They may be, but in many parts of the country if you design your solar system correctly you will be able to generate enough electricity to offset that cost and keep your home running and your car charged. Granted, good chargers for current battery systems take hours not minutes and storage capacity is both a requirement and an impediment. But it’s a lot more in the control of individuals then global crude oil prices.Report
FYI personal solar installation costs is largely affected by local codes and utilities and not hardware costs.Report
They are also affected by the size of the system, including the size of battery back up. And as you may recall some months ago we discussed whether “normal” home solar systems were big enough to charge an EV. So all I’m saying is a PV system big enough to run most houses and charge an EV is, at the moment, not cheap.Report
No, it’s not, and that is something Biden could try to do something about, rather than telling everyone to just buy an EV.Report
The most beautiful words in the English language:
Governor Newsom is from the government, and he’s here to help!
California Could Give Car Owners Up to $800 in Gas Cards
We’re proposing $9 billion in tax refunds to address rising gas prices — $400 per registered vehicle, up to 2 per person. We’re also proposing grants so public transit can be free for 3 months.
We know Californians are paying at the pump & with this refund, millions get $ back.Report
To me it just sounds like 9 billion dollars more upward pressure on gas prices. I fail to see how it’s good sense economically speaking but I can see how it might be helpful politically.Report
Agreed on both counts.
But I can’t help but wonder if it isn’t a bit of trolling from Newsom, intended to draw Republican fire or at least blunt the “Biden is raising gas prices” stuff.Report
After the Solindra boondoggle from the last administration I suspect not. Which is sad.Report
This fun post seems to just come at everything in the mirror angle of the post Russell wrote a bit back trying to lay all the blame for gas prices at the feet of the administration.
The obvious reality is that our current high oil prices (and let’s be clear, it’s all oil, gas is simply a product of oil) are the offspring of our previous very low oil prices which, in turn, were the offspring of our previous high oil prices etc.
Back when covid hit, the shale oil sector was pouring out oil* everywhere while demand tanked. We were genuinely running out of places to fishin store oil. The value of oil actually dipped into negative territory for a little while; it cost more to store it than you could sell it for. Obviously this was a problem for oil producers and their financial backers so they did very obvious no brainer things that one does when one finds oneself in a hole- they stopped digging; or drilling in this case. Now roll time up to our current point- the economy has rebounded, demand for oil has skyrocketed but all those oil wells didn’t get drilled. Oil is selling at a premium but oil producers cannot wave their magic oil wand and conjure more producing wells. It doesn’t work that way. They have to hire workers, rent equipment and do the actual work. It takes time. Also, as BB notes in his excellent comment above, oil businesses have to take a longer view than now. If producers sink capital into drilling wells because of prices today but the prices tank by the time the well comes online that’d be money poorly spent. Also oil creditors, who took quite a bath during the previous oil glut, are understandably demanding that those fungible dollars be spent recouping their investment for a while before they be sent into developing more supply. This is all pretty understandable and rational- and not in the least bit perfidious.
*And let us not forget that the shale oil boom was, itself, the result of higher oil prices during the Obama era that encouraged a lot of oil producers to go “hmmm how can we get more oil to sell at these high prices?”.
The idea that oil producers should sell the oil they have on hand for lower prices than they can get is ludicrous. The idea that the government (which doesn’t produce oil) is responsible for the cycle of oil production and pricing is equally ludicrous. The basic economic realities aren’t hard to grasp.
But, of course, we also have a basic political reality which is just as real as the economic realities. People don’t like high gas prices and they like easy answers. So when oil prices spike the right wing gibbers about gummint interference and the left jabbers about evil oil execs. What the left should probably be doing is trying their darndest to take advantage of the pressure high prices create to develop and advance alternative energy sources. As for the right? Who the fish knows; they certainly don’t. If they get into power, they’ll just cut taxes for the rich.Report
Russel actually got the basics of the contributors to high gas prices right – where he went off track was thinking that signaling from Biden was the most important factor.
As to the rest – I’d love to see some consolidation in a left side legislative blitz on this stuff. Increasing federal tax incentives for solar, wind and such in an individual basis as well as EV price support. Hell I’d like to see the executive agencies go 100% EV for motor pool – which would drive private EV costs down by creating demand. I’m not hopeful we will see it though.Report
We are paying more at the pump because a barrel of crude oil is more expensive than it was in October 2020. The futures market matters more for a gallon of gas than almost anything. Except for state gas taxes. CA does not have the highest gas tax in the nation (that’s PA,) but it does have the worst regulations beyond that on oil and gas, especially transportation regulations.Report
The oil companies seem not to have noticed that:
Which translates into oil companies not buying more crude oil, and refining it into gasoline, because they want to maintain high investor returns. The futures market certainly plays a role in the price they are paying for crude when they buy it, but its not driving production output – unless you believe the CEO’s are lying.Report
What do you mean? You do realize that the price of a gallon of gasoline doesn’t immediately fall because if bought at an inflated rate before it goes down, it takes time for the supply price to go down. As in, when the gas is bought by the supplier determines its price.
The inflated price of a barrel of crude is leading to more exploration, but all of that takes time. It isn’t immediate. That’s not how prices work for a commodity.Report
Capital discipline is more about investing in wells, not buying more oil. One assumes that every active well is pumping, so there is not some reserve of supply ready to buy that no one is touching.
And as others have noted, investors took a bath when the price fell, they are within their right to insist on some recovery.
We all benefitted when prices were rock bottom…Report