Last week, oil companies reported record profits for the third quarter. This was as expected, because the average price of oil in Q3 was $91.43 per barrel. Even though prices have dropped from the first half of 2022, this price is still significantly higher than the average for the last 7 years. To demonstrate the level of Q3 prices, the last time the year average price of oil was above $68 per barrel was in 2014, when the average price was $93.17 per barrel.
The American majors all reported large increases in profits. For example, Exxon Mobil (NYSE:XOM) earned $19.7 billion in the third quarter, Chevron (NYSE:CVX) reported earnings of $11.2 billion, and Hess (NYSE:HES) reported $515 million. The following Monday, President Biden admonished the oil industry for these profits, calling them “a windfall of war” and criticizing them for failing to lower the cost of petroleum products for consumers. He called on Congress to pass windfall tax legislation to penalize oil companies.
It is very unlikely that such legislation will even be introduced and even more unlikely that Congress would vote in favor of it. Additional taxes on oil-producing companies would likely result in higher prices for consumers as the companies would pass the extra costs down the line. Most likely, Biden’s call for a windfall tax was just political posturing designed to show American voters that the administration is trying to lower their energy costs right before an election.
Even though President Biden is not up for reelection, there are many consequential elections for representatives, senators, and governors that will be decided on Nov. 8, and the President wants candidates from the Democrat party to win. Traders will know that it was all political smoke if talk about imposing additional taxes on oil companies dies down after Nov. 8. It’s unlikely that anyone in the industry will react seriously to Biden’s recent statements until they see if they continue after the election next week. If he does continue to talk about windfall taxes after the election, then producers will take measures to prepare.
One additional issue traders should watch is the amount of money oil companies are putting into their capital expenditures. The Biden administration did call on oil companies to increase their investment in new oil and gas production in the U.S. Oil companies (with the exception of Aramco (TADAWUL:2222)) significantly decreased their capex spending when prices were low in recent years. They have started to increase spending in this area with the higher prices, but even companies are not planning to increase capex spending much.
A recent survey of U.S. oil company executives showed that U.S. upstream investments are only projected to grow 29% this year to $108 billion. This pace is much slower than these companies’ cash flow gains. The Biden administration might try to incentivize companies to allocate more of their profits to capex, which could result in higher production and more oil supply in the future. However, such action would be contrary to the White House’s environmental policies. Again, traders need to wait until after next week’s elections to see what has been only political rhetoric and what is really government policy.