The week of February 6, 2023: Oil’s future, ESG, industrial policy, tax, and much, much more.
The week of February 6, 2023: Oil’s future, ESG, industrial policy, tax, and much, much more.
C andidate Biden: “I guarantee you we’re going to end fossil fuels.”
President Biden speaking (off-script) at the State of the Union: “We’re still going to need oil and gas for a while.”
How long is “a while”? “At least another decade,” explained the president, generating some laughter from the GOP ranks, after which he added a bit of emphasis: “and beyond that.”
I’m old enough to remember when all the talk was of oil fields becoming “stranded assets.” The president’s encounter with reality has been bruising enough for him now to admit that he needs oil companies to keep pumping for, well, a while. On the other hand:
Biden blasted oil companies for their record profits: “Last year they made $200 billion in the midst of a global energy crisis. I think it’s outrageous.” And he assailed them for using that money to buy back stock — “rewarding their CEOs and shareholders” — instead of plowing it into new drilling to increase crude production and “keep gas prices down.”
The disdainful way in which Biden referred to the companies rewarding their shareholders is a reminder of the candidate Biden who referred to shareholder primacy as a “farce.” But the president still has to deal with another awkward reality: Shareholders are not going to invest in a company without — pass the smelling salts — the prospect of a decent return. The higher the risk, the greater the prospective return they will demand. Oil-company profits are variable, to say the least (in 2020, the supermajors reported combined losses of $76 billion). What’s more, the perceived risk associated with fossil-fuel companies is increased further when powerful political forces turn against them. If increased production is Biden’s aim, talk of windfall taxes is counterproductive.
Bloomberg:
Biden said oil executives he’d pressed on the issue told him bluntly: “We’re afraid you’re going to shut down all of the oil wells and all the oil refineries anyway, so why should we invest in them?”
Good question. Refineries, in particular, cost billions and take time to build, and are subject to heavy regulatory scrutiny. A temporary, not-entirely-credible safe haven is not going to cut it. In June, Chevron CEO Mike Wirth (I wrote a bit about him in a Capital Letter last year) said that he didn’t expect that another refinery would be built in this country. No new refineries have been built here since the 1970s (with the exception of a small refinery in North Dakota, which came online in 2020).
In an effort to “encourage” companies (and specifically oil companies, although the increased tax would not only apply to them) to invest more in their business, the president would like to see a quadrupling of the 1 percent tax recently introduced on share buybacks. If passed, the most likely corporate response will be to put more emphasis on dividend payouts as a way of returning capital to shareholders. It will not convince many companies to look afresh at projects they had already rejected. Even proposing such a measure is yet another demonstration to the oil companies of the unfavorable way in which they are viewed by the Democrats, and, as referred to before, is self-defeating.
Meanwhile, BP is also recognizing that oil and gas might have more life in them than was once assumed. Earlier promises of a reduction in its oil-and-gas output by 40 percent by the end of the decade have been replaced by a reduction of 25 percent.
Javier Blas, writing for Bloomberg:
Borrowing from language that ExxonMobil Corp. used last week, [BP CEO Bernard] Looney explained his new vision on a Bloomberg TV interview: “We have to invest in today’s energy system, and the reality is that today’s energy system is predominantly an oil and gas system. And that needs investment.”
For now, the energy “transition” remains a bit of a misnomer: Renewables are an addition to the system, with consumption of oil, natural gas and coal at a record high in 2023. At some point, fossil fuel demand would start to fall on an absolute basis, but the world’s energy system isn’t quite there yet.
Well no.
Blas adds:
The promise to pump more oil and gas is likely to attract fossil fuel shareholders, particularly from the US. BP shares surged more than 7.5%, the largest one-day jump in more than two years. Investors loved the strategy shift.
This is despite the frequent refrain that investors want companies to either exit fossil fuels or reduce their exposure to them. Well, some do, and some don’t, while for others the decision will be a matter of their view on the market on any given day.
BP has not, however, given up on supposedly more climate-friendly investments (wait until the end):
A key plank of the revised strategy is a stronger focus on green investments close to BP’s heart, such as bioenergy, hydrogen and charging points for electric vehicles, which return 15%, rather than wind and solar, which return 6%-8%. Note that the company considers growing its convenience retail unit as part of its “transition” business, so in BP-speak, ordering a cup of coffee at one of its gas stations helps to save the planet.
The genteel climate fundamentalists (and apostles of stakeholder capitalism) at the Financial Times are none too impressed by BP’s approach.
But they are fairer than the president:
There is nothing intrinsically wrong with the supermajors’ super profits; their fortunes sway with boom and bust cycles just like any industry.
However:
What is more problematic is how they actually plan to spend them.
The word “problematic” is often a harbinger of nonsense, and sure enough:
Record earnings come at a potentially opportune moment. Governments are reshaping policy agendas to meet climate change goals, and fossil fuel demand is expected to peak this decade, according to the International Energy Agency. Big Oil can — and should — capitalise by recycling its bounties into transforming their business models for the green transition and supporting national net zero targets. Recent earnings reports, however, suggest oil firms may be squandering this opportunity.
Well, no. The job of BP’s management is to manage for shareholder return, not to support net-zero targets. That would be the case even if those net-zero targets made sense or were achievable. But they don’t and they aren’t.
Even if a green transition were going to replace oil at the pace the FT would like, oil companies would do better to return more capital to shareholders, and direct new investment in ways designed to maximize the cash return on their existing business. That said, BP is investing in greener businesses, but it is encouraging to see its focus is on shareholder return (electric-vehicle charging points and so on), rather than lower-return businesses such as solar or wind.
To be fair to the FT, it gets windfall taxes right:
Further windfall taxes will not help either. Arbitrary retrospective taxes risk creating uncertainty over future capex plans, affecting both fossil fuel and green projects. A managed phaseout of carbon is key. Oil and gas is still important while clean electricity infrastructure, renewables and storage ramp up . . .
But then:
Energy security should, however, not be used as an excuse to slow down on green initiatives. The best way to support energy supply in the long run is by focusing on renewable power sources and decarbonization.
We’ll see. For now, renewables are clearly not ready for the primetime role they have been handed. And then there’s the little matter of the space they take up. The battle over that will not be a short one.
Dave Merrill, writing for Bloomberg (March 29, 2021):
To fulfill [Biden’s] vision of an emission-free grid by 2035, the U.S. needs to increase its carbon-free capacity by at least 150%. Expanding wind and solar by 10% annually until 2030 would require a chunk of land equal to the state of South Dakota, according to Princeton University estimates and an analysis by Bloomberg News. By 2050, when Biden wants the entire economy to be carbon free, the U.S. would need up to four additional South Dakotas to develop enough clean power to run all the electric vehicles, factories and more.
There is a good reason why the FT believes that part of the key to the transition will be “ensuring planning regulations do not hinder renewable projects.”
Certainly, more money should be spent on improving battery-storage capability, which is key to resolving solar and wind’s intermittency problem (the sun doesn’t always shine, and the wind doesn’t always blow), but there is no reason why that should be a particular area of expertise for oil companies. The same can be said of the contribution they have to offer when it comes to the expansion of nuclear power, an essential complement (if low greenhouse-gas emissions are the goal) to greater reliance on renewables.
The FT concludes that:
Disincentivising fossil fuel focus over the medium term and broadening carbon pricing mechanisms are also important sticks. And ultimately, Big Oil chief executives and their shareholders need to wake up fast to the existential risk of leaning too heavily on the declining petroleum economy.
Passing over the alleged need for “sticks,” let’s look at that last sentence, which contains a false presumption — that of the need for a company to remain in existence forever. If the world will be moving away from fossil fuels at the pace that the FT appears to assume (it won’t), it may well be that, as mentioned above, the best approach for oil companies is to earn what they can from their existing business and, when that is no longer sufficiently profitable, shut up shop. There is no compelling reason for them to chase some sort of immortality. Capitalism is about the efficient allocation of capital, not the preservation of a particular corporate entity.
As for the retreat from oil, Javier Blas has a few things to say about that. The article is behind a paywall, but his introduction gives a good idea of what follows:
For years, energy experts modeling the impact of 2050 net zero targets on oil demand had the advantage that the deadline, and the incremental steps to getting there, were a long way off. If time proved their scenarios wrong, they’d be long forgotten anyway.
But now, those first intermediate waymarks are around the corner, and they look increasingly farfetched.
For example:
In just two years’ time, BP’s Net Zero scenario sees oil demand 4 million barrels a day lower than it is now. That would mean removing the equivalent of Germany’s entire consumption in 2024 and repeating that feat again the following year.
Every oil forecast I’ve seen shows demand rising in 2023, and the few 2024 projections already published — including one from the US government — see growth continuing.
Meanwhile, as a reminder of the pressures facing oil companies (via Reuters):
A group of European institutional investors is backing a novel London lawsuit against energy giant Shell’s board over alleged climate mismanagement in a case that could have far-reaching implications for how companies tackle emissions.
ClientEarth, an environmental law charity turned activist Shell investor, said it had filed a High Court claim on Wednesday, alleging Shell’s 11 directors have failed to manage the “material and foreseeable” risks posed to the company by climate change – and that they are breaking company law.
Is it surprising that oil companies are not investing as much as Joe Biden would like?
National Review Institute Ideas Summit
We will be holding an ideas summit in Washington, D.C., on March 30–31.
Topic: The Sources of American Strength
Participants include:
Ryan T. Anderson, David L. Bahnsen, Louis Brown, Senator Tom Cotton, Allen C. Guelzo, Pano Kanelos, Megyn Kelly, Terry & Matt Kibbe, Bjørn Lomborg, Jessica Melugin, Douglas Murray, Vivek Ramaswamy, Ian Rowe, Carrie Severino, Elise Westhoff, Rich Lowry, and National Review writers.
More details here.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and NRI trustee David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 105th episode, David is joined for the third time by Jerry Bowyer, who is an economist, thought leader, activist, strategist, and friend, as they talk through the best antidote shareholders have to the ESG frenzy of today. Retreatism is held in disdain, surrender is deemed a moral failure of duty, and engagement is considered in a thoughtful and tactful manner.
No Free Lunch
David has also launched a new six-part digital video series, No Free Lunch, here on NationalReview.com. In it, we bring the debate over free markets back to “first things” — emphatically arguing that only by beginning our study of economics with the human person can we obtain a properly ordered vision for a market economy.
The series began with a discussion with Fr. Robert Sirico of the Acton Institute. Later guests include Larry Kudlow, Dennis Prager, Hunter Baker, Ryan Anderson, Doug Wilson, and Ted Cruz.
Yes, the six-part series now has seven parts.
Enjoy.
The Capital Matters week that was . . .
The Debt Ceiling
The U.S. has been engaging in heated debt-limit battles for decades, and, far from sowing economic chaos, such battles have been one of the few things that have helped rein in deficits. While a temporary delay in payments would be unambiguously bad, it would not be the end of the global economy. The greater threats to the economy are the proposals to ignore the debt limit and the ever-growing burden of federal debt itself.
‘Big Government’ Conservatism
Every such imagined alternative to Reagan Republicanism consists of empowering the government to subsidize activities the would-be “fearless leader” wants, taxing the alternatives to desired behavior or outright outlawing them.
There is nothing new about a new way to wield state power. And nothing American about it either.
Such efforts, however well-intended, will always be outbid and displaced by left-of-center subsidies, taxes, regulations, and laws. Amateur abusers of state power will quickly be crushed by those who have created and wielded power in the U.S. since 1932 — it would be like watching the Washington Generals face the Harlem Globetrotters . . .
Regulation
Following Joe Biden’s guidance and acting on the mistaken presumption that economic competition is something to be artificially manufactured by government, the Federal Trade Commission (FTC) last month proposed a ban on non-compete clauses, which are employment agreements that stipulate that workers leaving a firm cannot form their own competing company or join a rival company within a certain time frame.
The FTC claims the ban would increase competition and raise wages. But in reality, a ban on non-compete clauses would have the same effect as any other labor regulation: By dictating to workers how they must compete, and thus perversely limiting workers’ options, such regulations reduce wages rather than raising them . . .
Over the last couple of months alone, the Biden administration has issued and proposed a slew of burdensome regulations, including ones on shareholder voting, methane gas, heavy-duty engine emissions, ESG retirement accounts, fine-particulate air quality, light-bulb efficiency, climate-impact disclosures, waters of the U.S., hydrofluorocarbons, independent contractors, and “healthy” food labeling.
That list is just a recent sampling from a presidency that still has nearly two more years left, and it doesn’t include most of the regulations issued in the first two years.
The biggest victims of this regulatory onslaught are small businesses . . .
Industrial Policy
Having a government official educated at Harvard, Oxford, and Yale spearhead an effort to use “transformational” subsidies to engineer a “better” economic outcome, which is what the CHIPS Act does, is exactly the kind of thing that impresses the people at Davos. That’s who they are. Those are the kind of people they admire. They believe they can do that sort of thing well, if only governments would give them the chance.
Left-wing governments have been more likely to give them that chance, on issues such as the environment or income inequality. But if right-wing governments give them that chance, on issues such as trade or manufacturing, they’ll still take it.
Energy
One of the reasons that policy-makers in the EU (and its sad-sack British clone) have been able to get large swaths of overly ambitious (a kind description) climate policy approved is that the day when the effect of those policies will be felt has generally been too far away for most voters to be concerned (although protests by Dutch farmers and the gilets jaunes in France are indications of what could well lie ahead). The energy crunch that has followed Russia’s invasion of Ukraine has, however, effectively accelerated that timetable . . .
The Economy
In my first guide to stagflation, I argued that the Fed would have to wallop the economy to slow down wage growth. But, if our workforce has truly bifurcated into inelastic workers who either work no matter what or stay home no matter what, then firms will be able to pay lower wages (in real terms) as demand declines without fearing that their workers will quit.
It may be that firms are beginning to figure that out, and, if they are, a softer landing than any of us expected might be possible.
AI
The concept of the division of labor is not new (think of Adam Smith’s discussion of the pin factory), but it’s a reminder of why we should celebrate, rather than fear, the maturing of AI as a pointer to what we will yet achieve.
Adam Smith saw how one man working alone could produce maybe — maybe — one pin per day, but several working together could produce tens of thousands. Imagine now what is essentially the same phenomenon but alongside, for want of a better phrase, automated thought, and the automation of it in concert with ours.
Intelligence multiplied and combined. The future is bright.
‘Buy American’
As a CRS report on the domestic-purchasing requirements in the infrastructure law points out, “Barring import competition for a broader range of procurement funded by federal grants also has the potential to increase the market power of domestic producers in industries that are already highly concentrated, possibly leading to higher project costs.”
Last night, Biden looked the American people in the eye and promised to spend their money poorly, and he was applauded for it. Domestic-content requirements are hardly new, and in many respects, he is merely continuing Trump administration policy. But by promising to double down on past mistakes and exacerbate them, Biden is ensuring taxpayers get less for their money — and special-interest groups that lobby for government protection get more for theirs.
Electric Vehicles
There was some tough talk about China from President Biden during the State of the Union. Good.
But the president will have to choose between standing up to China and pursuing his climate agenda, at least as it currently stands. That’s the case in quite a few areas, not least the replacement of traditional cars with electric vehicles (EVs), a switch that may not only allow China to establish the kind of presence in global auto markets that it has never managed to achieve before but also, because of the dominant position that China has already established in the EV supply chain, leave Western EV manufacturers dangerously dependent on Beijing’s approval. That’s one reason billions in taxpayer dollars will be spent in the effort to establish an EV battery-manufacturing sector in the U.S. and the E.U. But even that does not solve the problem of what goes into the EV’s battery, where the supply chain is currently dominated by China . . .
Taxation
It shouldn’t be a surprise that the architects of a new “wealth tax” have hatched yet another scheme to transfer money from those who’ve worked for it to those who didn’t.
What does bear noting, however, is who is supporting the effort: teachers’ unions . . .
Is it too much to ask the IRS to clarify what people will be taxed on?
Twenty-two states sent residents tax rebates of some kind last year. Do those rebates increase your federal income-tax liability? The IRS isn’t sure.
The Pandemic
In testimony to the House Ways and Means Committee yesterday, Department of Labor inspector general Larry Turner estimated that at least $191 billion of pandemic-era unemployment benefits were improperly paid, with “a significant portion” of that amount attributable to fraud.
About $888 billion in total federal and state unemployment benefits were paid during the pandemic, Turner said. His office estimates that 21.52 percent of benefits could have been improperly paid. His analysis suggests that $191 billion is the low end of the estimate, and the improper-payment rate was likely higher than 21.52 percent . . .
India
The group of businesses owned by India’s richest man has been accused of “the largest con in corporate history” by a U.S. activist short-selling firm. The conglomerate denies the charges as “nothing but a lie.” What does it mean for the Indian economy, and the world?
ESG
ESG is an expression of the interests, power, and ideological goals of what National Review co-founder James Burnham famously called the “managerial elite” — a class that came to power alongside the large-scale bureaucratization of the American political system, economy, and broader society at the turn of the 20th century. Where the bourgeois elites of the old ruling class got their power from local family firms and entrepreneurial capitalism, the managerial elite gets its power from the operation of mass bureaucracies. Where the bourgeois elites of old were individualistic and capitalist, the managerial elite is collectivist and technocratic.
Politicized finance — and the government’s role in it — is going to be a bigger issue than ever in 2023, and both institutional and individual retail investors could be in for some major surprises. Legislative proposals at the federal level will be taking aim at environmental, social, and governance (ESG) investing policies, in a backlash that has only accelerated since a year ago.
Advocates advertise ESG as simply a smarter, more holistic, and more sustainable way to invest, but more and more people on the right have caught on and are beginning to understand that in practice, ESG functions to smuggle progressive policy goals into ostensibly nonpolitical corporate decisions . . .
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Please note that there will not be a Capital Letter next week owing to travel plans (for real this time).