In what amounts to little more than pre-midterm posturing, Joe Biden continues to float the idea of slapping American energy companies with onerous tax burdens if they “refuse” (note the scare quotes) to invest more in production and refining.
Last week, Biden accused US fossil fuel giants of “war profiteering.” “Oil companies’ record profits today are not because of doing something new or innovative,” he chided, from the White House. “Their profits are a windfall of war, a windfall for the brutal conflict that’s ravaging Ukraine and hurting tens of millions of people around the globe.”
On Saturday, he reiterated the message: The oil industry should invest in America or pay higher taxes. The previous day, Biden stumbled into a highly unfortunate gaffe when, while speaking in California, he suggested the US is “going to be shutting [coal] plants down all across America.”
That might be true, and it might be necessary to prevent climatic oblivion, but it’s not the sort of thing you say with four days to go before a midterm election that could see the Senate flip to Republicans depending on the outcome of a hotly-contested race in Pennsylvania, the country’s third-largest coal producer. It’s also not the sort of thing you say if you actually plan to address fossil fuel “profiteering” in the lame duck session. If there’s anything Joe Manchin can’t do, it’s countenance public derision of the coal industry.
In a scathing statement, Manchin called Biden’s remarks “offensive and disgusting.” “Let me be clear, this is something the President has never said to me,” Manchin fumed. “The President owes these incredible workers an immediate and public apology and it is time he learn a lesson that his words matter and have consequences.” (White House Press Secretary Karine Jean-Pierre said Biden’s comments were “twisted to suggest a meaning that was not intended.”)
To put it bluntly: There’s no chance of Biden getting any sort of punitive tax on oil companies through Congress by year-end, let alone once the balance shifts towards Republicans in 2023. Manchin was never going to go for that anyway, and he surely won’t now.
Regular readers are apprised of my position on this. The windfall tax is a bad idea. And Biden’s weekly demonizing of the oil industry is transparently political and hopelessly counterproductive.
Read more: Blame Big Oil
For new readers, I should emphasize that my take as just described is purely based on near-term pragmatism. Over the medium- and long-term, the world has to phase out fossil fuels. Period. If we don’t, future generations won’t have air to breathe or food to eat. The only question is whether that’s your grandchildren or your grandchildren’s grandchildren. Note the emphasis on “your.” I have no children, which means it’s highly unlikely I’ll have any grandchildren. The Republicans among you can trust my alarmist assertions about climate change because I’m as impartial as impartial observers can be on this issue: When the climate reckoning comes, I won’t be around for it, nor will anyone related to me in any biological way, unless I have cousins with children I’m unaware of (I don’t).
That said, we’ve known about this for decades. We waited too long to address it in any serious way, and once we finally got around to it, our approach was panicked and haphazard. We discouraged new investment in infrastructure and physical capacity for traditional energy, and we encouraged investors to pour money into anything with even a loose claim on “ESG” bona fides. An energy crisis came calling, the Saudis don’t want to help and renewables are nowhere near ready to take the baton. So, we had to beg Exxon and Chevron to do something, and when they told us (basically) to pound sand, we got mad and threatened to tax them.
Frankly, it’s a joke, which is why nobody takes it seriously. In fact, Energy Transfer LP co-CEO Marshall McCrea likened it to an SNL sketch last week. “I’ll end on this irony,” McCrea began, before launching into what, for an earnings call anyway, counted as a lengthy, ad hoc monologue:
We have an administration right now that… put in very hostile administrators at FERC and EPA and SEC to attack our industry, and that’s gone on for a while. They’re not allowing new leases, not allowing drilling permits, not allowing or slowing down proof of pipelines. We’ve got an election coming up and we start [tapping] the strategic petroleum reserve. And we come out with approaching countries like Venezuela, and countries like Iran, who just promote terrorism or hate the US to try to get [them] to produce more oil. And then what do we do the last few days? We come out and attack our oil and gas producers and say they’re going to be penalized for not producing more. I mean, my goodness, if this doesn’t seem like a sitcom or a Saturday Night Live skit — it’d be funny if it wasn’t so tragically sad.
That’s the kind of press you don’t want if you’re the White House, because most of what Mackie (as McCrea is known) said is unequivocally true.
Unlike virtually everyone else I’ve ever come across, there’s no -ism or political ideology capable of compelling me to ignore reality or countenance absurdity. So, while I lean unabashedly Progressive on almost all issues (precisely because I believe that’s the political bent that’s most consistent with the evolution of society and thereby with reality), on this particular point, that’s not a viable angle.
Former Bernie Sanders advisor Faiz Shakir said last week that, “For all their ranting and raving on inflation, I haven’t seen any Republicans express the slightest willingness to take on oil companies over their profit-maximizing-price-gouging.” I’ll preemptively ask my Democratic readers to forgive me, but I’m willing to be naive on this point. The combined $31 billion in profits that Exxon and Chevron raked in during the third quarter weren’t primarily the result of any “price gouging.” You can’t just append “profit-maximizing” to “price-gouging” to form a new word or concept. Profit maximization is, generally speaking, what companies do. Price gouging, on the other hand, can be illegal depending on the circumstances. I’m not aware of any evidence that establishes illegality on the part of America’s fossil fuel companies.
In a recent Op-Ed for (and you have to give him credit for seeing an opportunity to flip right-wing populist voters to left-wing populist voters) Fox News, Sanders himself said that,
If you want to know why you are paying $4, $5, $6 for a gallon of gas, you should know that the profits of ExxonMobil, Chevron, BP and Shell skyrocketed by 169% so far this year to $125 billion. These four huge oil companies are spending over $73 billion not to reduce gas prices at the pump but to buy back their own stock and increase dividends to their wealthy stockholders.
That doesn’t hold up. For one thing, buying back stock and paying dividends is easy. Reducing prices at the pump isn’t something anyone can do with the snap of their fingers. Just ask Biden, who’s been snapping his fingers at that particular problem for months, mostly to no avail. The White House takes credit when gas prices fall, but it’s not obvious the long streak of lower pump prices seen over the summer was attributable (let alone solely attributable) to any effort on Washington’s part.
But more to the point, Sanders makes an unfulfilled promise in the first half of the first sentence in the excerpted passage above: He says he’s going to tell you why you’re paying more at the pump. But in the second half of the first sentence, he simply says that oil companies are making more money. That’s not a promise kept, and the only reason it doesn’t stick out is because of the visceral reaction we all have to high gas prices. If someone promised to explain a hypothetical 50% increase in the cost of fudge rounds, you’d want to know more than that Little Debbie raked in record profits last quarter. Depending on her margins, Debbie’s bottom line could be a consequence of higher fudge round prices, but it’s not necessarily the cause of them.
Sanders’s remarks, when taken in conjunction with those of his former advisor, look like an effort to establish price gouging by working backwards. I’m sorry, but that’s disingenuous, at best. If Debbie continues to operate as normal in the face of higher prices for fudge rounds due to an exogenous shock and ends up with higher profits, that’s not price gouging. Price gouging would be if the only cure for the next pandemic turns out to be fudge rounds and Debbie immediately raises the price to $10,000 per eight-count package.
You could argue that because energy is necessary, what’s happening at the world’s supermajors is actually akin to the fudge-rounds-as-a-pandemic-cure scenario. People need oil and gas, they don’t need fudge rounds, so if the price of oil and gas rises to levels we all collectively agree constitutes “too much” and producers continue to pocket the resultant profits (or return them to shareholders), that’s a kind of passive price gouging — price gouging by omission, not commission, if you like.
I’m sure there’s all manner of historical precedent for how governments and regulators think about these issues, and I don’t pretend to be an expert. But what I do know is that actively raising the price of gas and, say, bottled water, at a chain of gas stations you run when an approaching hurricane forces a statewide evacuation isn’t the same thing as sitting back and collecting higher profits because the market-determined price of the products you sell is rising faster than your cost of goods sold. If the latter is illegal, then so is capitalism. (And maybe capitalism should be illegal! But it’s not. And Biden claims to be a proud capitalist. So, that particular ideological debate is irrelevant for this discussion.)
To state the obvious, it’s entirely reasonable for Americans to expect firms won’t engage in flagrantly cruel opportunism. What’s not clear, though, is whether the public has a reasonable expectation that firms should proactively undercut their own bottom lines in the name of beneficence.
I’m most assuredly not a “free hand” fix-all type of guy, but I do know a thing or two about running businesses. It’s simply not the case that management is everywhere and always excited about prices for the goods and services they produce running into the stratosphere. At a certain point, consumers will begin to make substitutions where possible and if that goes on for too long, preferences could change irrevocably. You don’t want that. If companies aren’t taking steps to ameliorate that risk in the face of unsustainable price increases for what they sell, it typically means one of three things: They can’t for some reason, they don’t think prices are high enough yet to force substitution by consumers or they’re on the verge of making an operational mistake in the name of greed.
This article has gone on (far) longer than I anticipated (standard operating procedure in these pages), so I’ll leave it there. I did want to mention, in closing, that the blockbuster numbers put up by oil majors are worth contextualizing via US corporate profits more generally. As Goldman noted, energy margins tripled this year versus pre-pandemic levels, to 15%. “The backdrop of high oil prices and capex discipline has provided an earnings tailwind to energy firms,” the bank’s David Kostin said, in a recent note. “Net margins during the first three quarters of the year equaled 14%, the highest level on record [and] energy EPS has grown from 4% of S&P 500 EPS in 2019 to 11% today.”
Neither party is being realistic about energy. The outcome of a 100 years+ of fossil fuel use and climate indifference and outright denial cannot be fixed because CA has a come-to-Jesus moment. There are more than 200 sovereign nations on earth. The majority of the world’s population will continue to binge fossil fuels including coal, oil, wood, camel dung and anything else that will burn because that’s all they’ve got. The real idiocy is that we in the US the EU allow ourselves to think that we are the deciders for the rest of the world on energy. At present only 64 countries have per-capita national income of at least $10,000 (try to live on that). If the majority of the citizens of the world even have roofs, the vast majority will not be covering them with solar panels. Maybe some countries are burning down their rain forests and that’s probably a bad idea. But … that’s their right. Those are their forests not ours. We destroyed our environment to get rich when we felt like it. We can pivot if we feel like it, though not as quickly as perhaps we would like. What we can’t do is expect everyone else to do the same. And thinking we are all going to go to Mars and terra-form it to meet our longing for a do-over is just delusional.
Excellent commentary. Thank you. The only thing I will add is that we (mankind) can not get to nuclear power fast enough. The implications go beyond energy- and I believe it would set the stage for a more peaceful existence due to de-funding some corrupt, authoritarian regimes.
Oil is not exactly a free market.
OPEC does everything in its power to manipulate the price upwards.
If we accept that we don’t have free markets in oil, but we have managed markets, then why shouldn’t we manage the market ourselves?
The US could purchase long-term oil futures contracts (3 to 6 years out, or even longer), and use that mechanism to ensure investment and higher long-term supplies.
No one is going to sell a contract for oil 3+years in the future. There are too many unknowns to properly price it.
The administration has been managing the markets with SPR releases and attempting to get the Iran to re-enter the JPOCA. It’s kept prices artificially suppressed through the midterms, at the expense of also suppressing production increases. There’s no incentive right now for oil companies to increase production significantly, or at least at the levels the world is going to need in the near term. Oil is getting more expensive to recover. Particularly with the US oil sands, which have sharper decline rates than other more traditional means of oil production.
OPEC killed the “drill baby drill” sentiment during the start of the pandemic and now we’re seeing more capital discipline in oil producers. Even without the OPEC intervention, drilling like crazy got producers a lower return on investment and hostility from the government. It’s going to take $100+ sustained oil price before any significant increase in production will be contemplated.
I’d love to see a plan to get us to a more renewable future but I don’t think anyone has a viable one yet.
I think the climate disaster, when it happens, and it’s already starting to happen, but when it really kicks in, it’s going to be a wake up call to a lot of people.
Since we can’t seem to kick the oil habit (and even if we did, other countries would not), we have to accept that we (as a species) will be using more oil for longer.
That, in turn, means that geoengineering is in our future. We will be putting sulfur dioxide into the atmosphere, to create a perpetual haze, and reflect away perhaps 1% of the sunlight.
Say goodbye to blue skies and say hello to really spectacular sunsets.
If you think it’s not needed, or that it won’t happen, you are delusional. I’m sorry, but the mathematics just don’t add up. If we keep pumping CO2 and methane into the atmosphere, there will be a consequence.
When New York city, and Miami, and Houston, and New Orleans, and San Diego, all are going underwater, you will see a political shift.
It may not happen for 30 years, but it will happen.
There are alternatives to sulfur dioxide. Perhaps arrays of giant mirrors, at the Lagrangian point between the Sun and the earth, could work. But the sulfur dioxide method is the quickest and easiest and thus will be the one that’s used first.
We need alternative energy, at large scale, but we just can’t seem to do it. There is a price to pay.
You would not believe how much water there is in the Greenland ice sheet and in the South pole. When those start to melt (and they already are), holy s***.
Take some time to do your own research. After 4 years of a deep dive into climate change I’ve gone from thinking we had 80 – 100 years to believing we have 5 years or less. Tipping points are being passed. Resources wasted. We’ve squandered the black magic we found in the ground without preparing a replacement. We are out of time.
Gather your loved ones and make the best of this holiday season.
I hope I’m wrong.
The other option, incidentally, is this: “You’re going to give the US Treasury half that profit because I said so, and Congress doesn’t have anything to do with it” just like “You’re not going to buy Twitter because I’ve unilaterally decided that isn’t a good idea,” just like “You’re not going to run for president again because you’ve proven that you’re dangerous.”
More broadly: “I’ve decided, as President of the United States, that we — all of us humans, but particularly Americans — are in a huge mess. Starting today, I’m going to get us out of it one way or another. I suggest you get on board. If not, I’m fully prepared to put you on board, and that goes for everybody from random Joe to Congress to the Supreme Court.”
I hate to suggest that sort of thing, but since America is going down the road to autocracy anyway, and since America’s main strategic rival for the next century is an autocracy, someone might eventually have to step on democracy’s toes to save democracy.
Too many American companies and private citizens have forgotten (or never knew in the first place) how the social contract works. Plainly, trying to cajole them into doing the “right” thing isn’t working, and Congress can’t get anything done for a variety of reasons, not least of which is that a bunch of them are on board with the objectively perilous path I talked about last week in “Burning City On A Hill.”
How many times is Biden going to ask companies, lawmakers and voters to do the right thing? How many more prime time beg-and-plead-a-thons are we going to have to listen to? He’s tried (and tried and tried) to restore a semblance of sanity and it isn’t working.
America may need a brief period of rule-by-left-wing-demagogue to prevent an experiment in far-right-wing authoritarianism. I realize that about a third of the voting public (and maybe even some of my readers) think they want to give the former president one more shot and let him rule by what may as well be dictatorial decree. But I can promise you that won’t go well.
The tie in with this article is that the current president is struggling to reconcile his long-standing predisposition to compromise and centrist politics with the realities of a country on the brink. That tension manifests in weak-willed suggestions (e.g., Please don’t vote for crazy candidates even though I know my saying this is going to just encourage you to do so) and empty threats (e.g., Please help with gas prices or I’ll tax you even though everyone knows it’ll never pass).
If you’re the President of the United States, and you honestly think there’s an existential energy crisis, you’re not asking, you’re telling. Similarly (and paradoxically), if you’re the President of the United States and you honestly believe that “government of the people, by the people, for the people” is about to “perish from the earth,” you’re not asking, you’re telling.
If Biden doesn’t internalize that latter point, he may be remembered as the country’s last democratic president (with a small “d”).
If you brought back Abraham Lincoln, spent a week filling him in on everything that’s happened since he left us (and teaching him how to use an iPhone, obviously), I can tell you exactly what he’d do first thing once he was up to speed. Hint: One guy would be jailed immediately, dozens of current lawmakers would be out of a job that same day and the nation would be put on notice (in eloquent terms, I’m sure) that additional attempts to usurp the country’s system governance aren’t advisable.
Sorry, Mr White, but this is the road to ruin. The world is littered with s***hole countries run by tyrants claiming – even believing – that only they have the keys to their countries’ salvations. Look in any direction but north; the list is long.
Washington demonstrated his trust in our constitution when he stepped down after two terms.
And if Lincoln were here, he would prosecute Trump’s failed treason “with malice toward none, with charity for all.”
Our two strongest leaders, in spite of the colossal challenges they faced, trusted in our nation and in our system of government, over and above the importance of any strongman.
We must, too. It isn’t different this time.
“Human nature will not change. In any future great national trial, compared with the men of this, we shall have as weak and as strong, as silly and as wise, as bad and as good.”
It sounds like you understand this, but just in case: Around half the electorate is predisposed to voting away the country’s system of governance, an irony they surely don’t appreciate. And some state legislatures are in the process of putting in place a “fail safe” or sorts such that if those voters are unsuccessful in voting away democracy, the state legislatures can do it anyway. We all see this. And nobody is prepared to do anything about it. We’re apparently prepared to stand by and watch one man commandeer the country in the name of due process, and so on. I saw an analyst today describe (implicitly) the threat to democracy in America as “hysterical.” No amount of evidence is sufficient for some people. Not even riots in the Capitol. If he runs again, he will win one way or another absent an equally brazen, countervailing force on the other side of the political spectrum. I don’t know when we’re going to admit this, but the truth is, America needs an intervention. If we don’t get one, Trump will return to power and rule as an autocrat. If that happens, and he’s allowed free rein, I wish you folks the best. I really do. Because I know what I’m going to be doing: Writing dry, markets-only, macro commentary. I understand how to thrive and survive in an autocracy. I hope the rest of you do.
I can already hear the reader replies to that latter remark: “That’s so sad to hear, you should be a voice for the resistance!” and so on. In real autocracies, being a voice for the resistance is a good way to lose your voice box. I make the point here not to be alarmist, but to emphasize that this situation is very, very dire. And for any readers who might be Trump supporters, note that it’s not about Donald Trump, the citizen. As I’ve repeatedly emphasized here over the years, I don’t care one little bit about citizen Donald Trump, his buildings, his businesses, his accounting fraud or anything else he does, anymore than I care about Joe the plumber. The problem is that our institutions were exposed as paper tigers during his presidency. So, even if it’s not Trump, it’ll be somebody else. The tragic irony is that, in my (educated) opinion, someone needs to step in and do a few undemocratic things in order to save our democratic system.
Amen and amen. Abraham Lincoln, where are you?
Biden’s recent energy comments remind me of desperation plays in the playbook hailmary’s, it also reminds me that their opposition can lie worse by far without being called out by their own for it. Meanwhile they the right are manifesting something; autocracy. They have the energy, the momentum, and the guns to make a go at it. They know what they are doing in that vein, just like despite denials they know that climate change is on the wind like the first few cold gusts of a bluenorther. The functionality of the world is unwinding fast for mankind and they are getting while the getting is good so to speak. What a great victory for them, ruling us into hell.
Thanks for the piece H.
Unfortunately, I expect you to be here for the climate rekoning
I despise the oil majors for their efforts to hide science, but agree this whole dem strategy is pathetic. Be the Abe Lincoln, focus on solving the problems.
H 2024
The Republican party needs to have the guts to say “no” to Trump.
I did see Ken Griffin is financially supporting DeSantis and has said “absolutely No” to Trump.
The Republican party might not have the guts to do what needs to be done based upon morality, however, when funding drys up- hopefully, RNC will do the right thing. It’s all about the money.
In my opinion there is a snowball chance in hell that the RNC will do the right thing. First they would have to re-program morality back into their donating electorate. Believe it or not democracy as we knew is terminal.
I am thinking that during the interregnum between fossil fuel and green energy, we may have a period of energy scarcity due to the decline in existing fossil fuel output and the lead time and payback periods of new fossil and green projects.
Suppose a new large fossil fuel project – say, a deepwater field – takes 10 years lead time to first oil and then 10 years to pay back, then the company needs 20 years’ visibility (to 2042) on oil demand and price. As of 2022, how many oil companies have sufficient confidence to start new projects? Looking at the projections for ever-lower green energy costs and ever-higher fossil fuel costs (include regulation in “cost”), probably fewer and fewer. Suppose a new green energy project similarly takes 10 years and 10 years. Even if enough green energy companies have sufficient confidence to start those projects (which may not be true), there could still be a 10 year “gap” during which new green energy production is unable to fully offset fossil fuel production declines. These are hypothetical numbers. I’d be interested if anyone has good analyses with real numbers.
Thank you H man, very insightful article. The US as we know it will not exist if Trump or Desantis wins in 2024. But to be fair the Democrats are the only ones to blame for the policies they implemented. The first issue is, I am not a lawyer I do know a little about the law. What I saw on a Jan 6th was such a clear cut case of insurrection I can’t understand why Trump has not been put in jail.
Second, we do an energy policy. You can’t get rid of oil and natural gas without a replacement. Solar is a good substitute and it would replace 60-70% of the energy needs but it can’t replace oil and gas. So to replace oil and gas permanently you have to have nuclear. They did try and push Solar but they increased the credit from 22% – 30%. I got Solar estimates and a system would cost 35K for 10Mw. If the government was serious they would be paying 100% like they do with electricity and give at least 80%-100% for mini-split systems to heat and cool the house. And require new construction to install these systems. But I know we are not serious.
Which of course is the problem politically, no one wants nuclear in their back yard and because of the water needs you can only put them where close to a large water supply.
The technology for SMRs (small modular reactors) is advancing. The amount of water required for cooling SMRs is significantly less than nuclear reactors of yesterday. The technology is also working on using molten salts as coolant.
Bill Gates, through his company- TerraPower, along with funding from the US government, is building an SMR in Wyoming. Not surprising- behind schedule and over budget, but this SMR will be able to provide a baseload of 350 megawatts. It takes about 1,000 megawatts to power a mid-size city and approximately 1,000 gigawatts to power the US.
I have a list of companies in this industry that I would like to invest in at some point.