The administration’s efforts to ‘encourage’ oil companies to increase production are continuing in their heavy-handed way.
The Biden administration’s efforts to “encourage” oil companies to increase production are continuing in their heavy-handed way.
Before it was threats of “windfall” tax increases (for the effect they are likely to have, please see here). Now it’s the suggestion that failure to increase production of a product demonized by the White House is, uh, unpatriotic.
The Financial Times (December 11):
The White House’s chief energy adviser has described as “un-American” the refusal of US shale investors to ramp up drilling, even as Moscow’s invasion of Ukraine causes havoc on global oil and gas markets.
US oil groups have been under pressure from Wall Street to funnel record profits back to investors this year, despite repeated calls by president Joe Biden to pump more oil to help tame rampant inflation.
“I think that the idea that financiers would tell companies in the United States not to increase production and to buy back shares and increase dividends when the profits are at all-time highs is outrageous,” said Amos Hochstein, Biden’s international energy envoy. “It is not only un-American, it is so unfair to the American public.
“You want to pay dividends, pay dividends. You want to pay shareholders, pay shareholders. You want to get bonuses, do that, too. You could do all of that and still invest more. We are asking you to increase production and seize the moment.”
The problem here is two-fold.
The first is that the attitude displayed by the administration is hardly likely, except perhaps in the case of projects designed to generate a quick return, to encourage investment in the sector.
As I wrote at the time of Biden’s “windfall” threat:
With limited exceptions, oil production is not something that can be increased at the flick of a switch. Rather, increased production is typically the result of decisions by oil companies to put sometimes large amounts of capital to work in the expectation of making an attractive return. For the most part, that return will not be generated overnight but will depend on both oil prices and the political environment (something that includes tax policy) being favorable for a certain amount of time. How the oil price will move is, of course, a matter of debate. One forecaster will say this, one forecaster will say that. But, as Biden’s comments remind us, there can be little debate that under the current administration, the political and regulatory environment is unfriendly to oil companies, and, in all probability, will deteriorate further.
But there’s something else: Are those large investors (“financiers,” as Hochstein describes them) who attack investment in increased oil and gas production on ESG grounds, either directly (in companies in which they have taken positions) or indirectly (by not investing in the oil and gas sector in the first place), also “un-American”?
Hochstein is, however, right when he points out this:
[F]urther turmoil in global energy was likely, especially in Europe’s gas market, as the stand-off between Putin and the west deepened, Hochstein said.
While an “unprecedented” effort by the US and other liquefied natural gas exporters had left Europe adequately stocked with the fuel for this winter, the loss of Russian pipeline imports would mean repeating the effort “winter by winter”, Hochstein warned.
Extra global LNG supplies would not arrive until plants being built in the US and Qatar came online later this decade, meaning “the mountain to climb [to build] gas stockpiles for next year is much higher”.
“We are really preparing and living from an energy perspective, in Europe and beyond, in a hand to mouth, step by step [way],” Hochstein said.
But then the mixed message returns:
The longer-term solution was not to invest in more natural gas supply but to cut consumption of fossil fuels themselves, argued Hochstein, a former LNG executive.
“We have to peak the demand [for hydrocarbons] and then shrink it from there,” Hochstein said.
The Biden adviser’s comments will spark a reaction in the US shale sector, which has complained about mixed signals from a White House that has called for more fossil fuel output while also talking of cutting demand and speeding up a shift away from oil and gas.
But Hochstein denied any contradiction, saying the US could “do two things at the very same time, ensuring we have enough [oil] supply for a strong global economy, while accelerating the energy transition”.
Investors or executives in oil and gas companies will note Hochstein’s view that the “longer-term” solution is not to invest in increased supply, but to reduce consumption in fossil fuels and to “peak” demand for hydrocarbons. And then they will put their capital elsewhere. At a time when the administration, its regulatory proxies, and ESG-driven investors are continuing their assault on fossil fuels, references to the longer term will provide no reassurance at all.