Rising oil prices have fueled a boon for the industry – Marketplace
It’s a very good time to be an oil company. Riding on “Putin’s price hike”, Exxon Mobil on Friday reported first-quarter profits of $5.5 billion, more than double what it had made in the same period last year.
What is Exxon going to do with the windfall created by crude prices around $100 a barrel? Much of that will be spent on share buybacks to the tune of $30 billion by the end of next year. For the Joe Biden administration and environmental groups, these are fighting words.
The administration wants US energy companies to produce more oil and natural gas, at least in the short term. But that’s easier said than done, according to energy industry analyst Paul Sankey. Texas oilfields are not immune to what is happening in the rest of the economy.
“You will find that they are actually short of manpower. They are short steel for piping. These are short, arguably high-quality rigs,” Sankey said.
A decade ago, big companies like Exxon were investing more in wells and equipment. But as oil and gas prices stagnated in the mid-2010s, shareholders didn’t see big returns, said Stewart Glickman of investment research firm CFRA.
So, over the past few years, the oil investor’s mantra has been less “Drill, baby, drill” and more “Dividend, baby, dividend.”
“The industry finally got the message, got the religion, and really focused more on appeasing investors,” Glickman said. “And that meant more dividends and share buybacks.”
Oil companies are also worried that those high prices won’t last long enough to justify more drilling, Glickman said, especially if those prices drag down the rest of the economy.
“Oil above $100 a barrel, I think, risks pushing the economy into recession. They really don’t want that,” he said.
Because then oil prices would be really drop. Meanwhile, outsized profits and stock buybacks are prompting closer scrutiny from policymakers and environmental advocates.
“Congress can help end this and relieve consumers with bills that tax these windfall profits,” said Sujatha Bergen of the Natural Resources Defense Council.
Congress passed a windfall tax on oil companies in 1980. But that law expired in 1988, and no similar proposal has gained much traction since then.
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