Big Profits For Big Oil From The High Price Environment Of 2022

ExxonMobil
XOM
became the second U.S. major integrated oil company to report record high profits during 2022 on Tuesday, announcing it had earned $55 billion for the calendar year. Exxon’s announcement came on the heels of Chevron’s
CVX
announced 2022 profit of more than $35 billion, also a company record.

“The hard work and commitment of our people enabled us to deliver industry-leading operating and financial results and shareholder returns in 2022,” ExxonMobil CEO Darren Woods said in the company’s release. “While our results clearly benefited from a favorable market, the counter-cyclical investments we made before and during the pandemic provided the energy and products people needed as economies began recovering and supplies became tight. We leaned in when others leaned out.”

That last point is one that shouldn’t be ignored. While international majors like BP and Shell are executing plans to reach net-zero by 2050 goals largely by cutting their equity oil production, both ExxonMobil and Chevron continue to invest billions in the finding and production of more crude in light of continued rising global demand for oil.

Exxon, for example, increased its oil production from Guyana and its Permian Basin operations by 30% year-over-year, and anticipates another big boost in those numbers during 2023. As I noted in a recent story, the company is in the late stages of completing the largest U.S. refinery expansion since 2012 at its Beaumont Refinery, and it has invested over $8 billion in its U.S. downstream segment since 2017. As a result of these investments, Exxon experienced record refining throughput for 2022, a year during which the refining business as a whole struggled to meet rising domestic consumer demand.

In its own release on January 27, Chevron noted that its 2022 capital investments “increased by more than 75 percent from 2021, and annual U.S. production increased to 1.2 million barrels of oil equivalent per day, led by 16 percent growth in Permian Basin unconventional production.” The company also pointed to its plans to expand processing capacity at its Pasadena refinery and the approval of its major new Ballymore exploration project in the Gulf of Mexico, among other big investments in U.S. and international production of oil.

Both companies also emphasized major new investments in carbon capture and other carbon reduction strategies designed to help them meet their own net-zero goals. These investments, like the investments focused more on renewable energy projects at BP and Shell, require billions in capital. That capital is accumulated by making profits during periods of high commodity prices, like 2022 and probably 2023.

Rystad Energy and Wood MacKenzie both issued studies last year pointing out that the world has experienced an enormous structural shortage of investment in the finding of new oil reserves since 2014, a shortage measured in the hundreds of billions of dollars. That lack of adequate investment will almost certainly cause supply shortages in the near future if global demand continues to rise, as seems almost certain. There’s no time like the present for companies like ExxonMobil, Chevron and others to start making up the difference.

As policymakers in Washington, D.C. are no doubt scurrying to be the first to introduce legislative proposals for a new “windfall” tax on these profits, it is important to note that the high profit year of 2022 follows in the heels of big down years in 2020-21, thanks mainly to the bust caused by the COVID-19 pandemic. It is also fair to remember that the domestic oil and gas industry has suffered through 3 significant busts in just the last decade, during which hundreds of companies were forced to declare bankruptcy.

No one in the nation’s capital suggested that congress enact a “catastrophic losses rebate” measure during those oil industry busts, similar to the bailouts for U.S. automakers and other domestic employers that took place in the midst of the Great Recession in 2009-10. Big Oil has always been an easy target for political demagoguery, but not a sympathetic applicant for political largesse.

No one questions that the high commodity price year of 2022 resulted in a significant injection of profits and capital into the domestic U.S. oil and gas industry. Given the pent-up need for that capital injection after years of boom and bust and under-investment, congress should think twice before trying to take a bite out of that apple with a new windfall profits tax.