So, are we ready to drill yet?
In 2021 Apple had a 26% net profit margin and an effective tax rate of only 13%, while the oil industry had an average profit margin of 8.9% and an effective tax rate of 26.9%. Yet Congress “investigates” price gouging every time gas prices go up.
Capital Thinking • Issue #1080 • View online
Oil production is a difficult, risky business even under favorable regulatory regimes. For instance, here is a chart of cumulative bankruptcy filings of exploration and production (E&P) companies for 2015-2021:
The Congress That Berated Oil Companies for Producing Oil Is Now Berating Them for Not Producing Oil
Scott Buchanan | Economist Writing Every Day:
A few companies go bust every year, but there are some years like 2015-2016 and 2019-2020 when a lot of companies go bust.
That happens when the oil industry collectively has overproduced and driven the price of oil below the effective cost of production. Even the mighty ExxonMobil ran deep in the red in 2020, losing an eye-watering 22.4 billion dollars.
With all that in mind, shareholders since 2020 have been pressuring companies to show “financial discipline”, which means “drill less”.
Beyond these basic business realities, there is a whole new set of pressures to inhibit petroleum production.
Environmental activists have pushed banks to withhold funding from petroleum companies, to strangle further oil production.
It was big news in 2020 when activists, alarmed by ExxonMobil’s plans to actually (gasp) increase its oil production, successfully elected several alternative members to the board of directors with the specific goal of curtailing further drilling.
There have been attacks on the oil industry on the political front, as well.
Joe Biden ran on a platform of banning drilling on public lands, and one item he checked off his to-do list on his first day in office was to issue an executive order killing a pipeline that would have facilitated imports of oil from the abundant reserves in Canada.
One of his nominees for a top financial regulatory post remarked regarding oil producers that “we want them to go bankrupt if we want to tackle climate change”.
All these are the sorts of things that make execs less willing to commit capital for expensive drilling programs that may take years to pay back. (The counter-claim by the administration that the U.S. oil industry is just sitting on thousands of unused oil leases is a red herring).
There is only a finite amount of oil in the ground, so it makes sense to move with all deliberate speed toward renewable and nuclear energy (which emits little or no CO2).
However, our European friends who have installed lots of solar panels and windmills have discovered that the sun does not shine at night (!) and the wind does not always blow strongly (!!) , and so during their energy transition they need to maintain an adequate supply of fossil fuel power in order to keep the lights on.
They elected to let their own oil and gas production dwindle, and rely instead on gas and oil purchased from Russia.
We warned back in September that this European policy would give Russia leverage for harassing Ukraine, but apparently not enough EU leaders read this blog.
Anyway, even back in the fall of 2021, Russia had restricted natural gas deliveries to Europe, causing sky-high prices there for gas and power.
Scott Buchanan
Feature photo credit: Photo by WORKSITE Ltd. on Unsplash