Investors Get $128 Billion Handout as Fossil Fuel Doubts Rise

The oil demand is rising quickly throughout the world, and some of the smartest minds in the field predict that in a few months, crude will cost $100 per barrel, but American producers are playing the short game and trying to give investors as much money as they can.

‍

Due to a combination of global supply interruptions, such as Russia's conflict in Ukraine, and increasing pressure from Wall Street to prioritize profits above exploring undiscovered petroleum reserves, US oil company shareholders enjoyed a windfall of $128 billion in 2022. Once rewarded for making huge, long-term energy investments, oil executives are now under pressure to provide funding to investors who are growing more and more persuaded that the end of the fossil fuel age is near.

‍

According to calculations, US drillers spent more money last year on dividends and share buybacks than on capital projects for the first time in at least ten years. The $128 billion in total dividends spread over 26 firms is likewise the highest amount since at least 2012, and it occurred during the same year that US President Joe Biden unsuccessfully urged the industry to increase production and lower skyrocketing gasoline costs. Denying the US government's direct requests may have never been more profitable for Big Oil.

‍

According to John Arnold, a millionaire philanthropist, and former commodities trader, "the investing community is suspicious of what assets and energy prices will be" during an interview in Houston. "They would like to have the cash from dividends and buybacks to put into other investments. The firms won't remain in charge for very long if they don't comply with what the investing community is pushing them to do.

‍

The rise in oil buybacks is contributing to a larger US corporate spending binge that saw share repurchase announcements more than treble to $132 billion in January 2023, the greatest amount ever to start a year. Chevron Inc. contributed more than half of that sum on its own with an unrestricted promise of $75 billion. The White House retaliated by claiming that increasing the energy supply would be a better use of the money. Later this year, a 1% US tax on buybacks goes into effect.

‍

According to Evercore ISI, global investment in new oil and gas supplies is already projected to fall $140 billion short of what is required to keep up with demand this year, while crude supplies are expected to grow at such a slow rate that the difference between consumption and output is projected to fall to just 350,000 barrels per day next year from 630,000 in 2023.

‍

— Billionaire John Arnold: "The firms have to listen to what the investing community is urging them to do otherwise they're not going to be in charge for very long."

‍

The top US oil firms' management teams reiterated their commitment to the investor-returns maxim when they released their fourth-quarter results this week, and the 36% decline in domestic oil prices since mid-summer has only strengthened those sentiments. All executives now say that paying dividends and buying back shares comes before producing more petroleum to appease customers who are upset about increasing pump costs. In a few months, when Chinese demand picks up and global gasoline consumption reaches an all-time high, this may become an issue.

‍

Five years ago, there would have been very large annual growth in the oil supply, but that is not the case now, according to Arnold. One of the bull stories for oil is that the US-based supply expansion has finally come to an end.

‍

Not simply because it is the world's largest oil producer, the US is essential to the supply of petroleum across the world. Because its shale resources may be used considerably more quickly than conventional reservoirs, the industry is ideally positioned to react to price increases. Yet as buybacks and dividends are consuming an increasing amount of cash flow, shale is no longer the world's best-kept secret in the oil system.

‍

According to statistics provided by Trade Algo, shale experts reinvested barely 35% of their cash flow in drilling and other activities targeted at increasing supply in the last weeks of 2022, down from more than 100% in the period between 2011 and 2017. Exxon Mobil Corp. and Chevron are actively scaling up buybacks while restricting capital spending to levels lower than those before Covid, showing a similar pattern among the majors.

‍

This conduct is being driven by investors, as seen by the direct messages that have been given to domestic manufacturers during the last two weeks. With the release of higher-than-anticipated 2023 budgets, EOG Resources Inc., ConocoPhillips, and Devon Energy Corp. had their shares fall; however, Diamondback Energy Inc., Permian Resources Corp., and Civitas Resources Inc. saw their shares rise as they managed their expenditure.

‍

Oil explorers must contend with rising costs, declining well productivity, and dwindling portfolios of excellent drilling sites in addition to shareholder demands for revenue. Two well-known producers, Chevron, and Pioneer Natural Resources Co. have changed their drilling schedules in response to weaker-than-expected good results. According to Janette Marx, CEO of Airswift, one of the largest oil recruiters in the world, labor prices are also growing.

‍

The Energy Information Administration predicts that the US will produce 12.5 million barrels of oil per day this year, an increase of barely 5% from last. The organization predicts that the expansion will only reach 1.3% the following year. Although the US is increasing production faster than most of the rest of the world, this is a significant change from the heyday of shale oil in the previous decade, when the US was adding more than 1 million barrels of daily output annually, competing with OPEC and affecting global prices.

‍

Dan Yergin, a Pulitzer Prize-winning oil historian and vice chairman of S&P Global, said during an interview that demand will be the main factor influencing prices this year rather than supply-side entities like the US shale sector or OPEC.

‍

In a figurative sense, Yergin stated, "Jerome Powell and Xi Jinping will set oil prices," alluding to the Federal Reserve's course of rate hikes and China's post-pandemic recovery. According to S&P Global, the daily oil demand will increase to an all-time high of 102 million barrels.

‍

US President Joe Biden has fewer weapons at his disposal to mitigate the hit to consumers as the case for higher oil prices grows. In an effort to lower gasoline prices when they spiked in 2022, the president has already withdrawn 180 million barrels from the Strategic Petroleum Reserve. If she follows Biden's example and criticizes the sector for paying too much back to investors at the CERAWeek by S&P Global event in Houston beginning March 6, Jennifer Granholm is sure to receive a cold response. The business model is "here to stay," according to Dan Pickering, a chief investment officer of Pickering Energy Partners. The US will eventually need to increase production because the market will want it, according to Pickering. "That's likely the point when investor mood turns toward growth. The wisest course of action seems to be to refund funds till then.

‍