Released April 08, 2022 | SUGAR LAND
en
Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Oil and Gas investors were pitted against consumers in a U.S. House of Representatives hearing on April 6. Investors emerged the winner, though continued high retail fuel prices may lead to future congressional actions.
The hearing, titled "Gouged at the Gas Station: Big Oil and America's Pain at the Pump," was held by the House Energy & Commerce Committee's subcommittee on Oversight and Investigations. It rekindled a longstanding debate among economists, business leaders and policymakers about the responsibilities, if any, that profit-seeking companies had to stakeholder groups beyond investors.
That debate started five decades ago when Nobel Prize-winning economist Milton Friedman published an article in The New York Times entitled "The Social Responsibility of Business Is to Increase Its Profits." More recently, however, business leaders have come to view Friedman's view as too narrow. In mid-2019, for example, the Business Roundtable, in a major shift, said profit-seeking corporations had obligations to non-shareholder interest groups, such as employees, customers and the broader society, and needed to balance those against shareholder returns.
Wednesday's Congressional hearings featured predictable partisan sniping, with Democrats demonizing oil companies as war profiteers and Republicans blaming the Biden administration's energy and environmental policies for the high retail prices of gasoline and diesel. Nationally, gasoline prices averaged about $4.15 per gallon this week, but some areas, such as in California, average gas prices hovered near $6 per gallon.
Senior executives from six oil and gas companies--Exxon Mobil Corporation (NYSE:XOM) (Irving, Texas), Chevron Corporation (NYSE:CVX) (San Ramon, California), Shell plc (NYSE:SHEL) (London, England), BP Plc. (NYSE:BP) (London England), Devon Energy Corporation (NYSE:DVN) (Oklahoma City, Oklahoma) and Pioneer Natural Resources Company (NYSE:PXD) (Irving) -- spent hours parrying questions from lawmakers. For related information, see March 31, 2022, article - Big Oil to Face Grilling Over High Prices.
The hearings came a few weeks before oil and gas companies are scheduled to report what are expected to be record operating earnings for the first quarter, driven by higher prices and strong demand. Global benchmark Brent crude oil is expected to average $101.08 per barrel for the first quarter, about $50 more per barrel than the year-earlier first quarter, according to the most recent Short-Term Energy Outlook from the U.S. Energy Information Administration (EIA), released March 8. West Texas Intermediate (WTI), the U.S. benchmark, is expected to average $96.85 for the first quarter of 2022, approximately $39 per barrel over its year-earlier average price, the EIA said.
Throughout 2021, Big Oil reported hefty profits. For more on that, see: May 7, 2021, article - Big Oil Recovers, Aided by Higher Prices, Stronger Demand; August 9, 2021, article - Big Oil is Back, Paced by Higher Crude Prices, Bigger Chemicals Profits and Continued Capital Discipline; and November 5, 2021, article - Big Oil Reports Good Quarterly Earnings, Eyes More Shareholder Returns, Lower Debt, Disciplined Spending.
Oil companies have said they intend to offset some of those operating profits with non-cash asset write-downs reflecting termination of oil projects and interests in Russia. ExxonMobil estimated it would book a $4 billion write-down. Separate from the hearings, Shell said it's first-quarter write-downs related to Russia could be $4 billion to $5 billion. BP said its Russia-related asset impairment costs could reach $25 billion in the first quarter. Though these write-downs are accounting entries requiring no cash outlays, they will lower companies' reported net profits.
At the April 6 hearing, Frank Pallone (D-New Jersey), chair of the Energy and Commerce Committee, did not mince words: "We are here today to get answers from the Big Oil companies about why they are ripping off the American people. At a time of record profits, Big Oil is refusing to increase production to provide the American people some much needed relief at the gas pump. Instead, they are buying back their stock at an estimated cost of about $40 billion this year. Big Oil is lining their pockets with one hand and taking billions in taxpayer subsidies with the other. Meanwhile, the American people are getting ripped off as these companies choose to keep production low so that their own profits stay high."
Diana DeGette (D-Colorado), chair of the Oversight and Investigation subcommittee, which convened the hearing, added: "Americans across the country are suffering from the skyrocketing cost of gasoline, while some the nation's largest oil companies are reporting record high profits. We will not sit back and allow the fossil fuel industry to take advantage of the American people and gouge them at the pump. We want to know what's causing these record-high prices and what needs to be done to bring them down immediately."
Republicans countered that it was the Biden administration, not oil companies, that should be blamed for high fuel prices. "Rather than deflect blame, President Biden should consider his own culpability," said Representative H. Morgan Griffith (R-Virginia). "As a direct result of President (Joe) Biden's anti-American energy agenda, prices have rapidly risen for more than a year."
Representative Cathy McMorris Rodgers (R-Washington) accused Democrats of keeping gas prices artificially high to garner more public support for their climate agenda. "Democrats have never made gas prices a priority," she said at the hearing. "Why? Because they want to usher in a green revolution. If you're wondering what life would look like under the Green New Deal, you're getting a small taste of it now."
"I want to be absolutely clear," Mike Wirth, chairman and chief executive of Chevron, told lawmakers. "We do not control the market price of crude oil or natural gas, nor of refined products like gasoline and diesel fuel, and we have no tolerance for price gouging."
Despite Republican claims, Biden's administration approved more oil and gas drilling leases on public lands--about 3,537--during his first year in office than former President Trump did in 2017, 2018, and 2019, when the then-president's rallying cry was "energy dominance." The drilling figures were from the U.S. Bureau of Land Management (BLM), a branch of the Department of the Interior (DOI). Only about 25% of oil and gas is extracted from public lands managed by the federal government, the BLM said. The BLM data was reported by CNN.
During the hearing, several oil executives pushed back against calls to slow or stop stock buybacks or dividend increases, echoing comments to investors they made earlier this year during earnings calls. "The answer is no on (reducing) dividends," Scott Sheffield, chief executive of Pioneer, told lawmakers at the hearing. BP America Chief Executive Officer David Lawler added he "can't commit" to cutting buybacks and dividends.
After years of dreary returns, oil and gas investors began clamoring for a greater share of companies' cash flows, rather than having those funds plowed back into exploration budgets. Company officials listened, and as crude oil prices and profits rose, incremental cash was used to lower debt levels and increase shareholder returns in the form of increased dividends, stock buybacks and special dividends.
These gains were in addition to companies' share price appreciations, which have been significant. Since bottoming in October 2020, the share prices of ExxonMobil and Chevron have more than doubled. Pioneer's stock price has tripled since then.
In fact, oil executives told lawmakers that high retail prices at the pump were due to difficulties getting sufficient crews, rigs and materials to drilling sites, a trend that started about two years ago when the COVID-19 pandemic hit. More recently, inflation has aggravated those pandemic-related supply chain problems. And the global market for oil has tightened in recent years: Before Russia invaded Ukraine in late-February, crude oil prices had been driven up by surging post-pandemic demand growth and slowing production gains.
As Pioneer's Sheffield told lawmakers April 6: "We are seeing severe supply constraints. We are lacking a lot of equipment. The reason we can't grow faster is we are lacking rigs. We are seeing severe inflation, and we will continue to see severe inflation over the next several years. We can't get (employees) back. Who wants to come back and work in the oil and gas industry?"
Given Wednesday's stalemate over retail fuel prices, one measure Congress has is the ability to enact a windfall profit tax. One such measure already has been introduced by Senator Sheldon Whitehouse (D-Rhode Island), but its prospects for passage appear uncertain in the closely divided Congress.
Separate from the April 6 hearing, other Democratic members of Congress called on oil companies to suspend all dividend payments and stock buybacks for the duration of the Russia-Ukraine war, and use those saved outlays to lower retail fuel prices for consumers. But that was dismissed as a "gimmick" by Mike Sommers, head of the American Petroleum Institute (API), the largest oil trade group in Washington.
Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.
The hearing, titled "Gouged at the Gas Station: Big Oil and America's Pain at the Pump," was held by the House Energy & Commerce Committee's subcommittee on Oversight and Investigations. It rekindled a longstanding debate among economists, business leaders and policymakers about the responsibilities, if any, that profit-seeking companies had to stakeholder groups beyond investors.
That debate started five decades ago when Nobel Prize-winning economist Milton Friedman published an article in The New York Times entitled "The Social Responsibility of Business Is to Increase Its Profits." More recently, however, business leaders have come to view Friedman's view as too narrow. In mid-2019, for example, the Business Roundtable, in a major shift, said profit-seeking corporations had obligations to non-shareholder interest groups, such as employees, customers and the broader society, and needed to balance those against shareholder returns.
Wednesday's Congressional hearings featured predictable partisan sniping, with Democrats demonizing oil companies as war profiteers and Republicans blaming the Biden administration's energy and environmental policies for the high retail prices of gasoline and diesel. Nationally, gasoline prices averaged about $4.15 per gallon this week, but some areas, such as in California, average gas prices hovered near $6 per gallon.
Senior executives from six oil and gas companies--Exxon Mobil Corporation (NYSE:XOM) (Irving, Texas), Chevron Corporation (NYSE:CVX) (San Ramon, California), Shell plc (NYSE:SHEL) (London, England), BP Plc. (NYSE:BP) (London England), Devon Energy Corporation (NYSE:DVN) (Oklahoma City, Oklahoma) and Pioneer Natural Resources Company (NYSE:PXD) (Irving) -- spent hours parrying questions from lawmakers. For related information, see March 31, 2022, article - Big Oil to Face Grilling Over High Prices.
The hearings came a few weeks before oil and gas companies are scheduled to report what are expected to be record operating earnings for the first quarter, driven by higher prices and strong demand. Global benchmark Brent crude oil is expected to average $101.08 per barrel for the first quarter, about $50 more per barrel than the year-earlier first quarter, according to the most recent Short-Term Energy Outlook from the U.S. Energy Information Administration (EIA), released March 8. West Texas Intermediate (WTI), the U.S. benchmark, is expected to average $96.85 for the first quarter of 2022, approximately $39 per barrel over its year-earlier average price, the EIA said.
Throughout 2021, Big Oil reported hefty profits. For more on that, see: May 7, 2021, article - Big Oil Recovers, Aided by Higher Prices, Stronger Demand; August 9, 2021, article - Big Oil is Back, Paced by Higher Crude Prices, Bigger Chemicals Profits and Continued Capital Discipline; and November 5, 2021, article - Big Oil Reports Good Quarterly Earnings, Eyes More Shareholder Returns, Lower Debt, Disciplined Spending.
Oil companies have said they intend to offset some of those operating profits with non-cash asset write-downs reflecting termination of oil projects and interests in Russia. ExxonMobil estimated it would book a $4 billion write-down. Separate from the hearings, Shell said it's first-quarter write-downs related to Russia could be $4 billion to $5 billion. BP said its Russia-related asset impairment costs could reach $25 billion in the first quarter. Though these write-downs are accounting entries requiring no cash outlays, they will lower companies' reported net profits.
At the April 6 hearing, Frank Pallone (D-New Jersey), chair of the Energy and Commerce Committee, did not mince words: "We are here today to get answers from the Big Oil companies about why they are ripping off the American people. At a time of record profits, Big Oil is refusing to increase production to provide the American people some much needed relief at the gas pump. Instead, they are buying back their stock at an estimated cost of about $40 billion this year. Big Oil is lining their pockets with one hand and taking billions in taxpayer subsidies with the other. Meanwhile, the American people are getting ripped off as these companies choose to keep production low so that their own profits stay high."
Diana DeGette (D-Colorado), chair of the Oversight and Investigation subcommittee, which convened the hearing, added: "Americans across the country are suffering from the skyrocketing cost of gasoline, while some the nation's largest oil companies are reporting record high profits. We will not sit back and allow the fossil fuel industry to take advantage of the American people and gouge them at the pump. We want to know what's causing these record-high prices and what needs to be done to bring them down immediately."
Republicans countered that it was the Biden administration, not oil companies, that should be blamed for high fuel prices. "Rather than deflect blame, President Biden should consider his own culpability," said Representative H. Morgan Griffith (R-Virginia). "As a direct result of President (Joe) Biden's anti-American energy agenda, prices have rapidly risen for more than a year."
Representative Cathy McMorris Rodgers (R-Washington) accused Democrats of keeping gas prices artificially high to garner more public support for their climate agenda. "Democrats have never made gas prices a priority," she said at the hearing. "Why? Because they want to usher in a green revolution. If you're wondering what life would look like under the Green New Deal, you're getting a small taste of it now."
"I want to be absolutely clear," Mike Wirth, chairman and chief executive of Chevron, told lawmakers. "We do not control the market price of crude oil or natural gas, nor of refined products like gasoline and diesel fuel, and we have no tolerance for price gouging."
Despite Republican claims, Biden's administration approved more oil and gas drilling leases on public lands--about 3,537--during his first year in office than former President Trump did in 2017, 2018, and 2019, when the then-president's rallying cry was "energy dominance." The drilling figures were from the U.S. Bureau of Land Management (BLM), a branch of the Department of the Interior (DOI). Only about 25% of oil and gas is extracted from public lands managed by the federal government, the BLM said. The BLM data was reported by CNN.
During the hearing, several oil executives pushed back against calls to slow or stop stock buybacks or dividend increases, echoing comments to investors they made earlier this year during earnings calls. "The answer is no on (reducing) dividends," Scott Sheffield, chief executive of Pioneer, told lawmakers at the hearing. BP America Chief Executive Officer David Lawler added he "can't commit" to cutting buybacks and dividends.
After years of dreary returns, oil and gas investors began clamoring for a greater share of companies' cash flows, rather than having those funds plowed back into exploration budgets. Company officials listened, and as crude oil prices and profits rose, incremental cash was used to lower debt levels and increase shareholder returns in the form of increased dividends, stock buybacks and special dividends.
These gains were in addition to companies' share price appreciations, which have been significant. Since bottoming in October 2020, the share prices of ExxonMobil and Chevron have more than doubled. Pioneer's stock price has tripled since then.
In fact, oil executives told lawmakers that high retail prices at the pump were due to difficulties getting sufficient crews, rigs and materials to drilling sites, a trend that started about two years ago when the COVID-19 pandemic hit. More recently, inflation has aggravated those pandemic-related supply chain problems. And the global market for oil has tightened in recent years: Before Russia invaded Ukraine in late-February, crude oil prices had been driven up by surging post-pandemic demand growth and slowing production gains.
As Pioneer's Sheffield told lawmakers April 6: "We are seeing severe supply constraints. We are lacking a lot of equipment. The reason we can't grow faster is we are lacking rigs. We are seeing severe inflation, and we will continue to see severe inflation over the next several years. We can't get (employees) back. Who wants to come back and work in the oil and gas industry?"
Given Wednesday's stalemate over retail fuel prices, one measure Congress has is the ability to enact a windfall profit tax. One such measure already has been introduced by Senator Sheldon Whitehouse (D-Rhode Island), but its prospects for passage appear uncertain in the closely divided Congress.
Separate from the April 6 hearing, other Democratic members of Congress called on oil companies to suspend all dividend payments and stock buybacks for the duration of the Russia-Ukraine war, and use those saved outlays to lower retail fuel prices for consumers. But that was dismissed as a "gimmick" by Mike Sommers, head of the American Petroleum Institute (API), the largest oil trade group in Washington.
Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.
