High Oil Prices Mean Bigger Payouts for Investors, Not More Drilling
Crude is up sharply during the Iran war, and Western producers are pocketing the difference for investors and a rainy day.
Up First from NPR · Oil Earnings, Binance Heist, A MAHA UpdateOil companies in the United States and Europe are flush right now. Exxon doubled its earnings compared with a year earlier, Shell nearly doubled its earnings for its second best quarter ever, and Chevron's earnings rose 180%. A barrel of Brent crude, the global benchmark price for oil, is trading around $113, up from about $70 before the war in Iran began.
The war limited how much oil comes out of the Middle East, while demand for heating, driving, and trucking goods stayed about the same. That lifts prices everywhere. Dan Pickering, an energy analyst, said "The majors are able to sell their barrels that they produce in the U.S. or Latin America or Europe for much higher prices" and "The Middle East's loss is generally the gain of oil and gas companies in U.S. and Europe."
A good chunk of that extra cash is going to shareholders through dividends, which are regular cash payments to stockholders, and stock buybacks, in which a company buys its own shares and tends to push up the value of the remaining shares. The companies are not spending a lot on new drilling projects. The reason is that oil is a cyclical industry, with prices that rise and fall. Executives prefer to hold on to cash when times are good to protect themselves when times turn bad.
Exxon chief executive Darren Woods said the company's answer is maximizing production to keep prices down. Chevron chief executive Mike Wirth said, "What we can do is what we can control, and that's help consumers get as much as they possibly can out of our systems." Leaders at the oil majors cited a massive supply shock, including both the Iran war and Ukraine's strikes on Russian refineries.
That is why lower prices are not in sight. Wael Sawan, the chief executive of Shell, said six months ago he thought high prices were temporary. Now he says, "We are seeing that inventory levels are being drawn down very quickly, and it's going to take quite some time to be able to refill that inventory." That means prices are unlikely to ease before those stockpiles are rebuilt.
Questions people ask
What is the difference between a dividend and a stock buyback?
A dividend is a cash payment a company sends its shareholders, usually every quarter. A buyback is when a company uses cash to buy its own stock on the market, which reduces the number of shares and often lifts the price of the shares that remain. Both are ways to reward investors without building anything new.
Why do U.S. companies benefit from a war in the Middle East?
Brent crude is oil pumped from fields in the North Sea, and its price is used around the world as a reference point. Even oil produced in Texas or Latin America tends to be priced off Brent. So when conflict threatens Middle East supply, the price rises for almost every barrel sold.
Why don't high prices lead companies to drill more wells?
New oil projects can take years to permit, drill, and connect, and they are expensive to abandon if prices fall. In a cyclical business, executives worry that prices will drop before new wells pay off. Returning cash and building a cushion looks safer than betting the boom will last.