Home ›› 14 Jun 2022 ›› World Biz
US oil producers profiting from sky-high prices are doling out billions to shareholders and building cash reserves, a strategy irking lawmakers and voters struggling with record fuel prices while winning over Wall Street.
Soaring fuel prices have boosted inflation to a 40-year record and are expected to drive up US gasoline by more than a dollar to $6 a gallon by August. That prospect has some officials arguing the industry's focus on returns is benefiting a few at the expense of consumers.
The tradeoff between rising payouts for just a single quarter and more spending on production has deprived the market of nearly half a million barrels of new oil daily, based on Reuters' estimates of potential output if half of existing investor payouts flowed to new oil and gas drilling.
Earnings from major US shale, which accounts for two-thirds of US oil output, could hit $90 billion this year, up from $37 billion in 2021, according to consultancy BTU Analytics, a FactSet Company. Its estimate covers only 32 publicly traded oil and gas producers.
Executives are facing calls in Washington for windfall levies, which could cut into energy profits. A group of more than 30 lawmakers recently urged a Congressional vote on a new oil tax.
US President Joe Biden on Friday slammed oil companies, saying they are intentionally holding off drilling more to pump up oil and share prices.
"They're buying back their own stock, which should be taxed, quite frankly," Biden said.
Executives and investors have argued that fuel prices are set by the market and retailers, not producers. Materials and labor shortages have limited how fast they can ramp up output, and to spend a lot more on new drilling would erode capital efficiency and lead investors to exit.
Though analysts and oil executives do not expect a windfall tax to pass here, Britain recently imposed a 25per cent oil profit tax to offset consumer energy bills, giving hope to some US lawmakers proposing the tax. And resistance to the tax may shrink as fuel prices soar and corporate earnings follow.
"If the conservative government in the U.K. can support a windfall tax, we should be able to pass" a US equivalent, said Representative Ro Khanna, Democrat of California, and a co-sponsor of the tax proposal.
The goal is to raise $45 billion a year with proceeds funding payments to consumers.
But a windfall tax would kill the incentive to drill more, said oil executives, and take away some of the earnings that fund new technology advances that led to the US shale revolution which turned the United States into the world's top producer. It would also lessen oil firms' ability to raise outside financing.
"This is a terrible idea," said Mike Oestmann, chief executive of shale producer Tall City Exploration. "If you want less of something, or some behavior, or some industry, tax it more heavily."
Motivating windfall tax advocates is the idea that US energy companies are holding off production to maintain high prices and earnings. Companies returned some $9.51 billion to investors in the first quarter, according to energy consultancy Wood Mackenzie.
If oil producers had spent half of the $9.51 billion on new drilling, it would fund some 660 new shale wells, according to Reuters analysis using energy tech firm Enverus' average costs of $7.14 million per shale well last year.
Output varies per basin but on average, a new well can deliver some 672 bpd of oil, according to BTU Analytics. Based on the additional wells and the average new shale-oil output, production could be boosted some 450,000 bpd.
