No surprises
Energy prices and their rise have been the talk of thee coming for some time so it’s hardly a shock that suppliers are earning more than usual in times of war and scarcity, but the sheer level of profits being enjoyed by oil companies has led to ramifications beyond the fiscal.
Global energy giants including Exxon Mobil and Chevron Corp posted another round of huge quarterly profits, benefiting from surging natural gas and fuel prices that have boosted inflation around the world and led to fresh calls to further tax the sector.
Four of the five largest global oil companies have now reported results, combining for nearly $50 billion in net income, lifted by tight global markets and disruption following Moscow’s invasion of Ukraine.
Profits or profiteering?
The sheer size of the profits has revived calls from politicians and consumer groups to impose more taxes on the companies to raise funds to offset the hit to households, businesses and the wider economy from higher energy costs.
They have also criticized big oil companies for not doing enough to raise production to offset rising fuel and heating costs, according to Reuters.
However, Chevron’s Chief Financial Officer, Pierre Breber, warned in an interview with Reuters that “taxing production will just reduce it.”
The company reported its second-highest profit of $11.2 billion. However, the company’s global production is down so far this year from a year ago, and other U.S. oil companies signaled that output in the top-producing U.S. shale region is waning already.
The political dimension
The US President, Joe Biden, who earlier this year said Exxon was making “more money than God”, told oil companies this month that they were not doing enough to bring down energy costs.
Shell reported a quarterly profit of $9.45 billion and raised its dividend by 15% recently too, and Biden said the company was misusing its profits.
In the UK, the Rishi Sunak government has also hinted it could explore extending a windfall tax on oil and gas firms.
“These are excessive profits, and they have to be treated in the appropriate way when it comes to taxation,” said the climate change minister, Alok Sharma.
The effect to investors
Shares of the five major oil companies have all posted a total return of at least 29% this year. Exxon leads the way with an 86% increase, while the broad-market S&P 500’s total return is minus-19% on the year, according to Refinitiv Eikon data.
European governments have scrambled to fill gas storage after Russia cut off most of its natural gas exports to the continent, its primary customer.
Our take
It seems hardly controversial to say the oil industry is in strong health, but there are ethical considerations as articulated by politicians and consumer groups.
Hints at greater taxation and regulation on the oil industry could have effects that go beyond the environmental, and could affect bottom lines. And also future thinking.
On a coldly financial level, profits and revenues are up, but eventually the longer term dependency on oil and gas will be challenged and that is also a thought for the smart investor to consider.