The future the Biden admin has in mind for the oil industry is not designed to encourage investment in or by the oil sector.
The New York Times:
President Biden threatened on Monday to seek a new windfall profits tax on major oil and gas companies unless they ramp up production to curb the price of gasoline at the pump, an escalation of his battle with the energy industry just a week before the midterm elections.
The president lashed out against the giant firms as several of them reported the latest surge in profits, which he called an “outrageous” bonanza stemming from Russia’s war on Ukraine. He warned them to use the money to expand oil supplies or return it to consumers in the form of price reductions.
“If they don’t, they’re going to pay a higher tax on their excess profits and face other restrictions,” Mr. Biden told reporters at the White House. “My team will work with Congress to look at these options that are available to us and others. It’s time for these companies to stop war profiteering, meet their responsibilities to this country, give the American people a break and still do very well.”
In a piece for Capital Matters, Dominic Pino has demonstrated how the “logic” behind the president’s threats (beyond, I suppose, grabbing some votes in the midterms) rests on conspiracy theories rather than anything more substantial.
Moreover, such language is likely to mean that oil companies will be less, rather than more, inclined to invest in oil production in future. 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.
Lest we forget (and the oil companies have not), there was a presidential candidate called Biden who had this to say in 2019:
“But, kiddo, I want you to just take a look, OK? You don’t have to agree, but I want you to look in my eyes. I guarantee you, I guarantee you we are going to end fossil fuel and I am not going to cooperate with them, OK?”
Well, the higher price that Americans are now paying at the gas pump owes something to the memory of that promise and, of course, the direct and indirect onslaught on fossil-fuel companies by the Biden administration, regulators, like-minded governments elsewhere, and their proxies in the investment community, who, through ESG, are putting climate policy ahead of investment return.
That has had consequences. In a piece for Capital Matters, Russ Greene cited research showing that ESG raised the cost of capital by out-of-favor sectors such as oil and gas, mining, steel, and so on by an estimated 15 percentage points.
The higher their cost of capital, the less that industries in those sectors will invest. Comments such as those just made by Biden will increase the perception of political risk surrounding the oil and gas sector. That, in turn, will increase the cost of any capital oil and gas companies may want to raise from investors or, no less crucially, how they price their own decisions whether to invest in a project or not. If those companies see increased political risk, they will hike the rate of return for which they are looking before investing. That expected rate of return has to “price in” that higher risk.
The profits being made by Big Oil at the moment, like, incidentally, the losses that it suffered in 2020, were, ultimately, the product of earlier investment decisions. But investing now looks to the future, not the past. And the future that the Biden administration and other Western climate policymakers have in mind for the oil industry is not designed to encourage investment in or by the oil sector, but the reverse.
Meanwhile, from the Daily Telegraph (October 27):
Net zero restrictions on oil drilling are tightening Saudi Arabia’s grip over the global market for crude and will deepen tensions with the West, the International Energy Agency (IEA) has warned.
Green rules which limit new oil fields mean that the Saudi-led Opec cartel will come to control 52pc of the market, the agency said, compared to just over a third now.
Good times.