Big oil companies spring profits as easily as Wall Street springs affection for their stocks. At the White House, a different feeling prevails. President Joe Biden has threatened to impose a windfall tax on big oil companies unless they increase production.
ExxonMobil’s latest payment plan will do little to defuse tensions. The US oil producer intends to expand its share buyback program for the second time this year. It will spend $50 billion from this year to 2024. That’s an 11% annual increase from the current program — a program that was only announced in April.
Biden’s case for a windfall tax – variants of which are already in place in the EU and the UK – may seem straightforward. In the wake of Russia’s invasion of Ukraine, soaring oil prices have allowed integrated oil companies to take advantage of powerless consumers. Exxon is expected to post record net profit of $59.4 billion this year.
Still, Big Oil has good reason to resist the pressure to rush into new drilling projects and focus on shareholder returns. The boom-and-bust nature of the energy industry means high oil prices come and go. Oil majors like Exxon lost tens of billions of dollars in 2020 when oil prices crashed during the coronavirus pandemic. Many small producers have gone bankrupt.
The increase in share buybacks will appease investors who may oppose Exxon’s plans to increase capital spending as crude prices retreat. Exxon expects to spend between $23 billion and $25 billion on energy projects next year, up from about $22 billion this year.
The company may well hope that the steady decline in gas prices will help distract politicians. The national average cost of a gallon of regular unleaded gasoline, currently $3.33, according to AAA, is down 12% from a month ago and one-third lower than a record 5, $02 in June.
Even if crude prices remain stable from today, the possibility of another embarrassing largesse will fade next year. Other calls for windfall taxes should fade at the same time.
Our popular newsletter for premium subscribers is published twice a week. On Wednesday, we analyze a hot topic from a global financial center. On Friday, we dissect the main themes of the week. Please register here.
