This week, major oil and natural gas companies will announce what is expected to be record high earnings for the second quarter, just two years after experiencing historic losses, demonstrating yet again that the industry is defined by highs and lows that require big picture strategic planning to build a sustainable energy sector.
These high prices have been caused, on a global scale, by a massive supply-and-demand imbalance as economies have accelerated their recovery out of the COVID-19 pandemic, as well as high inflation. As AAA noted last month:
“The cost of a barrel of oil is nearing $120, nearly double from last August, as increased oil demand outpaces the tight global supply. Meanwhile, domestic gasoline demand rose last week in the wake of a robust Memorial Day weekend of travel. As a result, the national average for a gallon of gas surged 25 cents in one week to hit $4.86.” (emphasis added)
Simply put, with consumers and businesses roaring back to life, there hasn’t been enough supply of oil and natural gas to meet the increased demand.
Energy Companies Don’t Control Prices
Ahead of second quarter earnings, fringe Democratic politicians and anti-energy activist groups have pushed a #BlameBigOil campaign that accuses the industry of price gouging and have called for a windfall profits tax.
The campaign is based on the false premise that energy companies control the price of oil and set the price of gasoline – and are keeping the price high just to make more money.
“Crude oil prices are determined by global supply and demand.”
Further, oil companies and refiners don’t even own most of the gasoline stations in the United States, as the American Petroleum Institute explains:
“Refiners own less than 5 percent of the 145,000 retail stations. When a station bears a particular refiner’s brand, it does not mean that the refiner owns or operates the station. The vast majority of branded stations are owned and operated by independent retailers licensed to represent that brand.”
It means that no one U.S. company, or even a group of companies control the price of oil and on the global market and control the price of gasoline at the pump. This is demonstrated by the fact that the price of oil and gasoline hit highs of $114 per barrel and $5.03 per gallon in June 2022 only two years after falling to lows of $16.55 per barrel and $1.93 per gallon in April 2020 amid corrupted economic demand during the worst part of COVID.
In reality, refiners, who convert crude oil to refined petroleum products, purchase oil on the global market and sell the refined product in competitive markets to retail distributors. If any business in the supply chain ultimately could have some control over the price of gasoline, it would be the retailers – but the reality is that they barely even make a profit on gasoline. In fact, local media in California reports that gas station operators actually prefer lower prices:
“Shami Naderi, 66, owns the Valero on South Main Street in sleepy downtown Soquel. He has had to deal with the uncertainties and erratic gas-consumption patterns during Covid-19, and the rising price of gasoline, which surprisingly is not a good thing for gas stations. ‘Definitely lower prices are better. People buy more gas and buy more often. There’s more traffic in the store. When you sell more, you make more,’ he says.”
Managing a Sustainable Business
Despite the prospect of record earnings, market analysts remain conservative looking ahead to the rest of the year. A Bloomberg interview with Scotiabank’s Paul Cheng, an oil and natural gas equities analyst, points out that this quarter’s earnings may not be cause for celebration:
“Most of the companies in this quarter are going to report record earnings no question. But with the potential for a severe recession and memories of 2020, I expect management teams to be conservative.”
Analysts from Citigroup echoed Cheng’s claims. According to Bloomberg reporting, Citigroup expects major energy companies to use their profits to lower debt and continue to reduce risk.
The extreme price and demand swings of the last few decades show why this conservative approach is warranted. The commodities market is a cyclical business – when prices and profits are high, companies fortify the house for the next storm. In February 2021, the New York Times reported:
“Exxon Mobil, BP and other large oil companies collectively lost tens of billions of dollars last year, posting their worst performance in years and, for some companies, in decades. … Exxon reported that it lost $22.4 billion in 2020 … BP said on Tuesday that it lost $5.7 billion last year … Conoco Phillips, the largest American independent producer, lost $2.7 billion for the year. Chevron said last week that it had lost $5.5 billion.”
Bloomberg reported on how the COVID-driven spring 2020 price crash put a pause on job growth and investment in the industry, and helped lay the foundation for tight supply in the future:
“Shell cut its dividend for the first time since the Second World War. Tens of thousands of oil workers lost their jobs. Even the mighty Exxon Mobil Corp. was forced to make deep cuts to its ambitious investment plans.”
Strong quarterly earnings followed by the threat of a recession shows the many highs and lows of the oil and natural business and exemplifies why companies must build a sustainable business during solid earnings, so they are well prepared for economic downturns.
Windfall Profit Tax Isn’t the Answer
A proper understanding of the energy markets shows that a windfall profit tax would actually undermine domestic production, and in the midst of a supply crunch, would only increase prices. Speaking on CNBC earlier this year, Austan Goolsbee, former Chairman of the Council of Economic Advisors under President Obama, said:
“I’m not a big fan [of the windfall profit tax]. I don’t see what that’s going to solve. I think that there’s a high chance, the way they described it in that segment, that it would lead for oil and gas prices to go up.” (emphasis added)
“It’s not price gouging or a grand plot by the industry. This is how the business functions.”
If the last three years are any indicator, there will be more storms for the industry to weather in the future. The EIA predicts that petroleum and other liquid fuels will remain the world’s largest energy source through 2050. In a fragile economic environment, unpredictable and punitive changes to the tax code will only decrease investment and limit oil companies’ ability to produce energy responsibly, sustainably, and consistently for decades to come.
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