Oil & Energy
Why Big Oil Isn’t To Blame For Rising Gas Prices
Good energy policy starts with a good understanding of energy issues. But both major political parties have glaring blind spots when it comes to understanding the energy sector.
Let me preface this column by noting that I am a registered Independent. I have major disagreements with both political parties, and I strive to approach issues from a completely objective viewpoint.
I think Republicans get it mostly wrong when it comes to climate change, and the importance of transitioning to alternative energy. But they seem to understand the current critical role of fossil fuels in the economy, and they mostly get it right when it comes to supporting nuclear power.
Democrats never seem to understand how the oil industry works. For example, look at the list of Democrats who signed onto the “Big Oil Windfall Profits Tax” introduced last year by Senator Sheldon Whitehouse (D-RI). In announcing the bill, Senator Whitehouse said it would “curb profiteering by oil companies and provide Americans relief at the gas pump”.
The bill was cosponsored by Senators Jeff Merkley (D-OR), Elizabeth Warren (D-MA), Bernie Sanders (I-VT), Richard Blumenthal (D-CT), Tammy Baldwin (D-WI), Sherrod Brown (D-OH), Jack Reed (D-RI), Ed Markey (D-MA), Cory Booker (D-NJ), Michael Bennet (D-CO), and Bob Casey (D-PA). Congressman Ro Khanna (D-CA-17) introduced the legislation in the U.S. House of Representatives.
In addition to claims of price gouging, this same cast of characters had sometimes blamed oil company profits for inflation. Here’s Senator Bernie Sanders doing that.
These politicians do not seem to understand that oil companies don’t control prices. Oil is the world’s most valuable commodity. Oil prices are set by buyers and sellers in global markets, based on supply and demand expectations.
Firms like ExxonMobil produce such a small share of the world’s oil they couldn’t move prices much if they wanted to. They benefit from high prices, but don’t set those prices. If they did, prices would never fall.
Saying profits cause inflation confuses cause and effect. It’s like saying hospitalizations cause car crashes. It is true that a car crash can result in hospitalization, but hospitalizations do not cause car crashes. If you believe the latter, and you try to address the problem by focusing on the hospital, you are working on the wrong problem.
Likewise, high profits in the oil industry and inflation are both caused by high oil prices. But high oil prices are caused by supply and demand factors.
Outside of rare circumstances, it’s impossible for oil companies to gouge you, because they don’t set the price.
An example of true price gouging would be if a local gas station that sets its own prices doubled them when supply is ample. But Chevron earning more from high global prices set by markets is normal capitalism. That’s how the entire global commodity markets work.
I can only imagine that in the minds of some politicians, executives of Big Oil are meeting in smoke-filled boardrooms, rubbing their greedy hands together, and deciding to raise prices because Russia invaded Ukraine. But that’s not how any of this works.
If politicians want to address oil prices, they need to address the supply side and the demand side. When politicians propose windfall profits taxes on oil companies, intending to give rebates to consumers, it might sound good, but it doesn’t address the core issue.
High prices should signal consumers to use less energy, but rebates would diminish the price signal, which wouldn’t alleviate pressure on demand.
On the supply side, punitive taxes on oil companies might sound appealing, but that’s less money that can be allocated to projects, which affects future supplies.
Former Venezuelan President, Hugo Chávez, learned this lesson the hard way, and Venezuela is still paying the price.
Some have expressed outrage that oil companies are using record profits to buy back shares or pay special dividends to shareholders. But it’s common for companies, not just in the oil industry, to buy back shares or pay dividends when profits are high. It’s a part of how our capitalist system works. If companies can issue shares, they should be able to buy them back.
For consumers worried about high oil prices, there are options. You can invest in an oil company. Thus, when oil prices rise, so do your shares. Or consider switching to an electric vehicle to reduce your reliance on fossil fuels.
In conclusion, understanding energy issues is crucial for effective policymaking, yet both major political parties often exhibit significant misunderstandings of the energy sector.
By understanding the complexities of the energy sector, policymakers and consumers alike can make informed decisions that contribute to a more sustainable and economically sound future.
By: Robert Rapier
Rapier writes for oilprice.com.
The Federal Government has expressed optimism in attracting more investments by International Oil Companies (IOCs) into Nigeria to foster growth and sustainability in the energy sector.
This is as some IOCs, particularly Shell and TotalEnergies, had announced plans to divest some of their assets from the country.
Recall that Shell in January, 2024 had said it would sell the Shell Petroleum Development Company of Nigeria Limited (SPDC) to Renaissance.
According to the Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, increasing investments by IOCs as well as boosting crude production to enhancing Nigeria’s position as a leading player in the global energy market, are the key objectives of the Government.
Lokpobiri emphasized the Ministry’s willingness to collaborate with State Governments, particularly Bayelsa State, in advancing energy sector transformation efforts.
The Minister, who stressed the importance of cooperation in achieving shared goals said, “we are open to partnerships with Bayelsa State Government for mutual progress”.
In response to Governor Douye Diri’s appeal for Ministry intervention in restoring the Atala Oil Field belonging to Bayelsa State, the Minister assured prompt attention to the matter.
He said, “We will look into the issue promptly and ensure fairness and equity in addressing state concerns”.
Lokpobiri explained that the Bayelsa State Governor, Douyi Diri’s visit reaffirmed the commitment of both the Federal and State Government’s readiness to work together towards a sustainable, inclusive, and prosperous energy future for Nigeria.
While speaking, Governor Diri commended the Minister for his remarkable performance in revitalisng the nation’s energy sector.
The Federal Government has assured investors in the nation’s gas sector of the security and safety of their investments.
Minister of State for Petroleum Resources (Gas), Ekperikpe Ekpo, gave the assurance while hosting top officials of Shanghai Huayi Energy Chemical Company Group of China (HUAYI) and China Road and Bridge Corporation, who are strategic investors in Brass Methanol and Gas Hub Project in Bayelsa State.
The Minister in a statement stressed that Nigeria was open for investments and investors, insisting that present and prospective foreign investors have no need to entertain fear on the safety of their investment.
Describing the Brass project as one critical project of the President Bola Tinubu-led administration, Ekpo said.
“The Federal Government is committed to developing Nigeria’s gas reserves through projects such as the Brass Methanol project, which presents an opportunity for the diversification of Nigeria’s economy.
“It is for this and other reasons that the project has been accorded the significant concessions (or support) that it enjoys from the government.
“Let me, therefore, assure you of the strong commitment of our government to the security and safety of yours and other investments as we have continually done for similar Chinese investments in Nigeria through the years”, he added.
Ekpo further tasked investors and contractors working on the project to double their efforts, saying, “I want to see this project running for the good of Nigeria and its investors”.
Earlier in his speech, Leader of the Chinese delegation, Mr Zheng Bi Jun, said the visit to the country was to carry out feasibility studies for investments in methanol projects.
On his part, the Managing Director of Brass Fertiliser and Petrochemical Ltd, Mr Ben Okoye, expressed optimism in partnering with genuine investors on the project.
Crude oil prices recently logged their second monthly gain in a row as OPEC+ extended their supply curb deal until the end of Q2 2024.
The gains have been considerable, with WTI adding about $7 per barrel over the month of February.
Yet a lot of analysts remain bearish about the commodity’s prospects. In fact, they believe that there is enough oil supply globally to keep Brent around $81 this year and WTI at some $76.50, according to a Reuters poll.
Yet, like last year in U.S. shale showed, there is always the possibility of a major surprise.
According to the respondents in that poll, what’s keeping prices tame is, first, the fact that the Red Sea crisis has not yet affected oil shipments in the region, thanks to alternative routes.
The second reason cited by the analysts is OPEC+ spare capacity, which has increased, thanks to the cuts.
“Spare capacity has reached a multi-year high, which will keep overall market sentiment under pressure over the coming months”, senior analyst, Florian Grunberger, told Reuters.
The perception of ample spare capacity is definitely one factor keeping traders and analysts bearish as they assume this capacity would be put into operation as soon as the market needs it. This may well be an incorrect assumption.
Saudi Arabia and OPEC have given multiple signs that they would only release more production if prices are to their liking, and if cuts are getting extended, then current prices are not to OPEC’s liking yet.
There is more, too. The Saudis, which are cutting the most and have the greatest spare capacity at around 3 million barrels daily right now, are acutely aware that the moment they release additional supply, prices will plunge.
Therefore, the chance of Saudi cuts being reversed anytime soon is pretty slim.
Then there is the U.S. oil production factor. Last year, analysts expected modest output additions from the shale patch because the rig count remained consistently lower than what it was during the strongest shale boom years.
That assumption proved wrong as drillers made substantial gains in well productivity that pushed total production to yet another record.
Perhaps a bit oddly, analysts are once again making a bold assumption for this year: that the productivity gains will continue at the same rate this year as well.
The Energy Information Administration disagrees. In its latest Short-Term Energy Outlook, the authority estimated that U.S. oil output had reached a record high of 13.3 million barrels daily that in January fell to 12.6 million bpd due to harsh winter weather.
For the rest of the year, however, the EIA has forecast a production level remaining around the December record, which will only be broken in February 2025.
Oil demand, meanwhile, will be growing. Wood Mackenzie recently predicted 2024 demand growth at 1.9 million barrels daily.
OPEC sees this year’s demand growth at 2.25 million barrels daily. The IEA is, as usual, the most modest in its expectations, seeing 2024 demand for oil grow by 1.2 million bpd.
With OPEC+ keeping a lid on production and U.S. production remaining largely flat on 2023, if the EIA is correct, a tightening of the supply situation is only a matter of time. Indeed, some are predicting that already.
Natural resource-focused investors Goehring and Rozencwajg recently released their latest market outlook, in which they warned that the oil market may already be in a structural deficit, to manifest later this year.
They also noted a change in the methodology that the EIA uses to estimate oil production, which may well have led to a serious overestimation of production growth.
The discrepancy between actual and reported production, Goehring and Rozencwajg said, could be so significant that the EIA may be estimating growth where there’s a production decline.
So, on the one hand, some pretty important assumptions are being made about demand, namely, that it will grow more slowly this year than it did last year.
This assumption is based on another one, by the way, and this is the assumption that EV sales will rise as strongly as they did last year, when they failed to make a dent in oil demand growth, and kill some oil demand.
On the other hand, there is the assumption that U.S. drillers will keep drilling like they did last year. What would motivate such a development is unclear, besides the expectation that Europe will take in even more U.S. crude this year than it already is.
This is a much safer assumption than the one about demand, by the way. And yet, there are indications from the U.S. oil industry that there will be no pumping at will this year. There will be more production discipline.
Predicting oil prices accurately, even over the shortest of periods, is as safe as flipping a coin. With the number of variables at play at any moment, accurate predictions are usually little more than a fluke, especially when perceptions play such an outsized role in price movements.
One thing is for sure, though. There may be surprises this year in oil.
lrina Slav
Slav writes for Oilprice.com.