Oil companies are not spending windfall climate profits

AAs consumers grapple with high fuel prices and politicians scramble to overturn them, oil companies are not making any sudden moves. Indeed, after years of low fuel prices, they are now experiencing a financial recovery, as evidenced by lucrative first-quarter earnings reports released in late April and early May.

Oil prices started to climb in late 2021 due to supply constraints, but then accelerated after Russia invaded Ukraine in February. For Chevron, the result was $6.3 billion in profit last quarter, up from $1.4 billion a year ago. For Exxon Mobil, profits more than doubled over the same period, to $5.5 billion. The numbers were also positive for European companies, even among those hit by severed ties with their Russian investments. TotalEnergies, a French company, brought in almost $5 billion, a 48% increase on last year, while British companies Shell (at $9 billion) and BP (at $6.2 billion dollars) are reaching levels of profit they haven’t seen in about a decade.

For the most part, the big oil companies aren’t going to pour those billions of dollars into climate mitigation investments like carbon capture technologies. They also did not signal any immediate intention to boost oil production, despite pleas from heads of state to do so. Their inaction has prompted the United States and European countries, which are under pressure to keep fuel affordable, to release oil reserves and replace Russian crude oil and liquid natural gas from other sources. Despite these government efforts, oil prices have remained above $100 a barrel, supporting an influx of money to fossil fuel companies which are passing it on to shareholders and investors in the form of increased dividends and share buyback initiatives that drive up the value of company shares.

An analysis of the the wall street journal found that the nine largest US oil producers spent 54% more on share buybacks and dividends in the first quarter than they invested in new oil developments. Similarly, a recent report covering the 20 largest US oil companies published by environmental organization Friends Of The Earth and consumer watchdog organizations Public Citizen and Bailout Watch, totaled $56 billion in new oil takeover approvals. shares in the roughly seven months since last October, compared to $11 billion reported in the previous nine months.

“The industry is effectively turning humanitarian disaster and pain at the pump into comebacks on Wall Street,” says Lukas Ross, program manager at Friends Of The Earth and co-author of the report. “Exploiting the war in Ukraine is a desperate game by these companies to save their reputation with investors.”

Mark Finley, a global oil and energy researcher at Rice University’s Baker Institute for Public Policy, who was previously an economist at BP, characterizes the situation differently. He says it would not be wise for oil companies to immediately invest their quarterly profits given the current geopolitical instability. Since crude oil is a global commodity and individual oil companies do not set the price, executives must make business decisions based on what they can control and hedge against what they cannot. Investments could take years to bear fruit and there is no incentive to change course in times of crisis.

“These companies think in decades,” says Finley. “None of these companies are going to jump in with both feet on a quarter or two of data and say, we’re completely changing everything.”

Indeed, industry executives have fresh memories of how things can go very wrong very quickly. A supply glut from a fracking boom under the Obama and Trump administrations has driven prices down. When the pandemic hit and demand ground to a halt, companies posted record losses and felt enormous pressure to pay down debt, reduce investments and ensure shareholders would receive dividends. This has resulted in a limited expansion of clean oil and energy initiatives; a report by the International Energy Agency last summer estimated that about 1% of capital investment by the oil and gas industry was going into clean energy investments in 2020, and that figure was on the way to dipping. reach only 4% in 2021.

Even in light of recent earnings, oil companies are still largely practicing the so-called “capital discipline” strategies they implemented during their most difficult times, but Ross expects the industry to position itself to capitalize on the political environment to ensure its long-term relevance. In particular, he points to the American Petroleum Institute’s call for accelerated fossil fuel infrastructure permits and more natural gas exports, which President Biden later accepted.

“The oil and gas industry, in addition to trying to seize this moment for whatever profit it can make, is trying to lock in another generation of extraction emissions,” he says.

Finley also thinks businesses will benefit from politicians looking for ways to stabilize the energy market, although he doesn’t think that will necessarily come at the expense of a broader shift to green energy.

“We used the words ‘energy transition’, and in our mind we jumped to the end state. We thought that if we don’t use fossil fuels in a future world, we don’t need to invest in fossil fuels,” he says. “But you need a functioning energy system that provides secure, affordable, and reliable energy every moment between now and that end state. And the reality is, today that means fossil fuels. We could actually come out of this crisis with more investment in oil and gas, and more focused on a transition.

It may sound counterintuitive, but it’s clear politicians are both angry at the industry’s blockbuster quarterly earnings, even as they recognize the world’s dependence on the products it sells. Consider that in recent weeks, members of the US Congress have quizzed oil executives on prices at the gas pump while President Joe Biden backed more drilling leases on federal lands, reversing a promise campaign of 2020. At the same time across the Atlantic, European leaders were considering imposing a “windfall tax” on oil companies for their recent fortunes while British Prime Minister Boris Johnson called for more drilling in the North Sea.

Dieter Helm, a professor of economic policy at the University of Oxford who has written several books on the world’s dependence on fossil fuels, argues that policy changes linked to the short-term profits of wartime industry are not likely to make or break the net zero of 2050 climate goals. Plus, fixating on them loses sight of the much bigger picture.

He points out that Western oil companies are only part of the industry; national oil companies like Saudi Aramco control more than half of the world’s oil and gas production, but they haven’t been under the same pressure to decarbonize as their free-market counterparts. Furthermore, trends that will occur in advanced economies could be overshadowed by developing countries that turn to fossil fuels as their economies and populations grow. And finally, he says, there has been no concerted effort to stop the destruction of soils, forests and water sources that naturally sequester carbon dioxide.

“It’s a tragedy, but it’s the reality of what’s really happening, as opposed to this story – which I wish was true but it isn’t – that we’re all in this together on a net zero transition and we’re gonna break climate change in 28 years,” he says. “There’s no path we’re on right now that looks like this.”

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