The economic recovery from the COVID-19 pandemic and Russia’s invasion of Ukraine sent oil prices skyrocketing this year, bringing extremely high profits to energy companies.
In recent weeks, companies including ExxonMobil, Chevron, Shell and BP reported billions of dollars in 2022 profits, many of which broke records.
The announcements spurred political backlash, including from the White House, as Democrats seek to draw a contrast between the pay the companies receive and the economic struggles of ordinary Americans.
“You may have noticed that Big Oil just reported record profits. Last year, they made $200 billion in the midst of a global energy crisis. It’s outrageous,” President Biden said Tuesday night during the State of the Union address to Congress.
“They invested too little of that profit to increase domestic production and keep gas prices down. Instead, they used those record profits to buy back their own stock, rewarding their CEOs and shareholders,” he continued. “Corporations ought to do the right thing. That’s why I propose that we quadruple the tax on corporate stock buybacks to encourage long-term investments instead.”
Market analysts say the profits, caused by high energy prices, were the result of forces in the commodities market rather than a price set by an individual firm.
“Oil, natural gas and all the refined products … are commodities that trade on exchanges, and the market sets the price for those products, oil companies don’t,” said John Thieroff, vice president and senior credit officer at Moody’s Investors Service.
Even so, “companies’ decision to cut back on growth spending and to do things that might have led to increased supply, those things do have an impact on prices.”
Last week, ExxonMobil reported a record profit of $55.7 billion and Chevron reported a profit of $35.5 billion. This week, Shell reported $39.9 billion, BP reported $27.7 billion and French oil major TotalEnergies reported $36.2 billion in profits.
Claudio Galimberti, senior vice president of analysis at Rystad Energy, said that oil and gas sold at a premium because of investor fears, rather than actual disruption to supply, following Russia’s invasion of Ukraine.
As investors feared what would happen when Russia — the world’s third-largest oil producer and second-largest gas producer — declared war on a key Western partner and spurred international backlash, they worried that there could be a supply disruption. Prices then skyrocketed, reaching north of $100 per barrel in spring of 2022.
“It was the story of perceived risk … more than real actual disruption,” Galimberti said. “There’s going to be a lot of people trying to buy, specifically if there is a perception that the market is going to be tight.”
Antoine Halff, the former chief oil analyst at the International Energy Agency and lead industry economist at the U.S. Energy Information Administration, also pointed to a lack of investment in new production during the pandemic. Energy prices fell sharply in 2020 as fewer people traveled, pushing oil and gas companies to scale back production and investment in wells that may not yield profits with prices still low.
“Demand has been recovering from the lows of 2020 and supply has been hampered by the lack of investment and by disciplined by from the large producers,” he said, saying that those producers include both Saudi Arabia and U.S. players.
Yet the high-profit announcements are getting backlash in Washington, particularly from the White House, as Democrats renew longstanding tensions with the oil industry.
“The only thing stopping Big Oil from increasing production is their decision to pay shareholders billions instead of reinvesting profits,” Biden tweeted last week in response to the announcement of Exxon Mobil’s profits.
“I’m doing my part to lower prices, it’s time Big Oil did theirs,” he said.
During his State of the Union address, Biden used the industry as an example for why taxes need to be raised on corporate stock buybacks — when corporations buy shares of their own stock to raise the price and enrich shareholders.
Galimberti, with Rystad Energy, raised concerns in particular about large corporate stock buybacks, saying that not investing in new production could raise prices.
“What we need right now is … investment in oil and gas production,” he said. “If that doesn’t occur, that is a recipe for very much higher oil prices down the line.”
Biden proposed boosting the tax on corporate stock buybacks in his Tuesday address, but the plan will likely fall flat in a GOP-controlled House.
Other Democrats have also criticized the earnings. Senate Majority Leader Charles Schumer (D-N.Y.) in a tweet last week called the companies’ actions “repugnant.”
“What’d they do with the cash? Lower gas prices? Pay workers better? Bulk up clean energy investments? No,” he wrote. “They jacked up gas prices and rewarded shareholders with stock buybacks. It’s nothing short of repugnant.”
On Wednesday, Sens. Tammy Duckworth (D-Ill.), Richard Blumenthal (D-Conn.) and Patty Murray (D-Wash.) said they would reintroduce legislation that would make it illegal to sell gasoline at excessive prices during a crisis that impacts the market.
“Oil companies charging sky-high prices during times of national hardship must be held accountable,” Blumenthal said in a statement. “Our legislation will give the [Federal Trade Commission] and state officials the tools needed to prevent working families from subsidizing these giants’ record profits.”
The profits reports also renewed some calls for a windfall profits tax from the left.
All of those efforts, however, face little prospect of making it through House Republicans or winning the support necessary to overcome a Senate GOP filibuster.
In a Tuesday tweet, Sen. Marco Rubio (R-Fla.) said Biden “savaged big oil for not reinvesting profits before he puts them out of business in 10 years.”
While Biden drilled into the industry, he tacitly acknowledged how he would be depending on their output to keep energy prices low.
“We’re still going to need oil and gas for a while,” Biden said Tuesday night, drawing laughter and applause from Republican lawmakers.