The oil and gas industry has never been more profitable than in 2022. ExxonMobil, BP, Chevron, Shell and ConocoPhillips reported combined hauls totaling more than $177 billion.
Interpreting these large sums becomes more complicated. Environmentalists say they show wartime industry price gouging, taking advantage of Russia’s invasion of Ukraine a year ago. Oil executives say it shows the business’s fundamental strategy is working: “acting while transforming,” as CEO Bernard Looney put it on BP’s earnings call.
The profits have managed to erase the recent memory of the oil industry pandemic of 2020 when, after nearly a decade of lower prices from the fracking boom, oil and gas prices fell as much of World and domestic travel stopped. Banks suddenly scrutinized loans for new drilling projects. And the oil industry leaned heavily on the Trump administration for taxpayer bailouts and Covid relief.
The industry learned some lessons. Companies today are more focused on paying down debt and returning value to shareholders than they have been in the last decade, resulting in $109 billion in share buybacks that benefit the biggest investors. And, in general, the industry is less focused on expanding and exploring new drilling, preferring to keep costs down.
But while the industry hasn’t forgotten all the lessons of recent years, the biggest companies have neglected the most important ones. Big profits also give a company an opportunity to indicate where it sees growth by reinvesting in the business. And for more than a century, future growth has always meant more drilling, not a transition to renewables.
This is no longer possible, at least not if the world makes any effort to address climate change. The International Energy Agency said emphatically in May 2020 that the world now has all the proven and probable oil reserves it needs if it has any hope of meeting global climate goals of limiting warming to less than 2 degrees Celsius. If this were actually implemented as a policy, the industry would not invest any of its massive profits into scaling new fossil fuels.
But the industry is doing the exact opposite, moving away from so-called climate spending to push its core business: greenhouse gases.
Big Oil’s record profits mask the real problems ahead
The energy industry used to be inseparable from economic growth, as it dominated 28% of the total stock market in the 1980s. It fell to a new low of 2 percent in 2020 as travel ground to a halt. Even today, it’s only a slightly larger share of the total market.
The numbers tell the longest story of shrinking oil’s footprint on the economy. It is a fundamental part of climate policy to separate economic growth from fossil fuels. More than 30 countries have figured out how to do this, reducing carbon emissions while still growing the economy. This includes the US, where global carbon dioxide production is still below 2019 levels. Renewables now account for a larger share of power generation than coal. And transport (planes, trains and cars) was once again the sector that most polluted the climate.
Looking ahead, the oil industry faces unprecedented competition across all of its major profit sectors. Electric vehicles are a small but fast-growing source of competition for the sector, and more households are moving away from oil and gas in favor of energy-efficient electric heat pumps. And gas to power faces viable competition from cheaper wind and solar.
The oil industry, however, is not really acknowledging the reality that the world will need less of its products sooner or later. “Their normal plans are facing competition they’ve never seen before,” said Tom Sanzillo, director of financial analysis at the Institute for Energy Economics and Financial Analysis (IEEFA). “They have no justification in advance.”
The party won’t last forever
Some experts think the party is already over. “They needed very high prices to get out of trouble, and very high prices are unsustainable,” Sanzillo said. “No one expects these benefits to continue.”
Sanzillo points to some recent signs that the market is already cooling again for Big Oil. As of the last few months, prices have stabilized and fallen slightly, and oil has once again underperformed the broader market.
In Europe, countries have also tried to claw back some of those benefits for taxpayers who suffer from higher prices. The EU added a new rate on top of profits that are above the 20 percent average of the previous three years. While the Biden administration has adopted its own version of a windfall tax, the idea is a nonstarter in a divided Congress, which would have to approve any changes to the tax code. Another idea the Biden administration has floated includes raising taxes on stock buybacks.
These policies won’t really hurt oil and gas in the long run. What will hurt it is increased competition from renewables and a renewed focus on energy efficiency to reduce energy costs.
Companies could be preparing for that future. They’re doing a lot to advertise it: Chevron’s home page at the time of writing promotes “renewable natural gas.” But in practice, they have invested little in renewable energy that can seriously compete with fossil fuels, because it hurts their core business. Industry has typically spent just 1 percent of its capital spending on low-carbon investments, a broad category that includes carbon capture and storage meant to benefit fossil fuel growth. It rose to 5 percent in 2022, before corporations publicly backed out of their renewable commitments.
ExxonMobil stands out as an extreme example after the company posted its biggest year of profits at $56 billion. Asked about the competition on the company’s recent shareholder call, CEO Darren Woods said Exxon “has been very focused on leaning in when others are leaning in.” Which way do they lean? More of the same. “Continue to make the products that society needs today and do it with a very diversified product list, so think about chemicals, fuels and lubricants. And at the same time invest in producing low-emission fuels to cope to the demand for low carbon emissions”.
Other companies are reducing their limited climate commitments to double down on fossil fuels. BP officially cut its emissions pledges, initially expected to reach emissions by 35 to 40 percent by the end of the decade, to just 20 to 30 percent. Shell plans to keep its investments in renewable energy, carbon offsets, carbon capture and biofuels at $3.5 billion, less than half of what the company spends in oil and gas exploration and extraction. CEO Wael Sawan says the company’s gas business “continues to grow in a world that desperately needs natural gas right now, and I think for a long time.”
The few investments the oil industry is making for climate change “are not what people think they are,” said Jamie Henn, director of the advocacy group Fossil Fuel Free Media. “Low-carbon investments” by Exxon, BP and others often mean making oil operations more efficient, such as adjusting existing processes to burn less fossil fuel or using carbon capture and storage for “enhanced recovery of oil”. The goal of both approaches is to reduce emissions just by burning more fossil fuels.
Even the marketing budgets of Big Oil’s climate campaigns can be larger than the projects themselves. Working with a PR firm, Shell paid $57,000 for a company to make biofuel from coffee waste and received over 1,100 articles of media coverage, all for powering a single London bus for a year. Environmentalists accuse Shell of spending little more than 1% of its capital expenditure on low-carbon energy sources such as wind and solar.
Henn said the recent changes in climate change serve as further evidence that “these companies are not serious about a clean energy transition. It’s mostly marketing and greenwashing, strategies that have gotten a little commitment here and then a promise empty there. They don’t add up.”
