Digest: The Truth About Big Oil’s “Obscene” Profits

Welcome to your weekly digest…my breakdown of the things we’re thinking about and talking about in the Global Intelligence world. 

First up this week, the truth about Big Oil’s record earnings. 

Big Oil had a bumper year in 2022. This week, Exxon reported a record $55.7 billion annual profit for last year, topping its previous highest total of $45 billion in 2008. Just over a week ago, Chevron announced a record $36.5 billion profit for 2022 and a $75 billion stock buyback program. Meanwhile, over in Europe, Shell also reported a record $40 billion profit for last year.  

The backlash to these profits was predictable. The liberal-leaning U.K. newspaper The Guardian used the word “obscene” in its headline about Shell’s 2022 earnings, while the White House was defensive about Big Oil’s massive profits, blaming the companies for a failure to boost supply. 

But here’s the reality of what’s happening… 

The very politicians who don’t want Big Oil companies to make “obscene” profits are the very ones causing these massive returns. 

Global oil and natural gas demand has rebounded since the pandemic, but supply hasn’t. Companies shut down a lot of production and exploration during COVID, over fears that it might take years for the global economy to recover. And oil and gas production is not something that can be turned on and off like a light switch.  

Finding wells, estimating reserves, getting permits and licensing from state and federal authorities, pulling the oil out of the ground, refining the oil… This all takes years. 

And the key point: Global leaders have been actively telling companies not to do it! 

In the rush to achieve a green economy, politicians have been pushing energy companies to transition to renewables, while stressing that old fuels like oil and gas will soon be obsolete. And companies have been listening.  

Today, U.S. oil production remains about 900,000 barrels a day below the pre-pandemic peak. (That’s double the amount that Russia’s exports have fallen since the invasion of Ukraine.) 

But trucks and ships and airplanes can’t run on batteries and solar panels, not yet at least. Which means we still need oil.  

We are now stuck in a situation where oil demand is very strong while supplies are tight…which is keeping prices high…which means oil companies are making huge profits. 

And the situation is not going to improve. World governments are sticking to their green transition policies, so exploration companies are hesitant to open their wallets and look for more supplies. 

As Bloomberg reported, “Across the board, the biggest oil explorers are focused on funneling record profits back to shareholders while keeping a check on spending.” 

So, political leaders have created a massive, artificial shortage of energy, and are now surprised that energy suppliers are making record profits. 

This is not going to end well. 

Now, don’t get me wrong. A green economy and a clean environment are noble ideals. We should work toward them. 

But the cold hard facts on the ground are that the world runs on oil and gas. Ignoring that reality will not make it any less true. In fact, the amount of new supply coming online is so low that we are sleepwalking into a massive energy crisis.  

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Next up…big pressure on housing prices. 

Banking giant ING reported this week that housing prices are falling in every major city in the U.S. 

West Coast housing markets are seeing the biggest drops, with prices in San Francisco down nearly 12% between May and November, Seattle down 9%, San Diego down 7% and Los Angeles down 6%.  

And prices are expected to fall further in most major U.S. markets since higher interest rates are making mortgages unaffordable for many 

Over the past year, the monthly mortgage payment for the typical $380,000 home loan rose from $1,600 per month to nearly $2,500. And that’s before the latest 0.25 percentage point hike in interest rates that the Federal Reserve announced last week. 

The house price-to-income ratio is now well above 5X, much higher than where it was at the peak of the 2006 housing bubble. 

Unsurprisingly mortgage applications for home purchases halved last year because of the dramatic rise in mortgage costs. 

This cannot continue.  

The Fed’s latest hike of 0.25% was already smaller than many analysts expected, as concerns grow about the economy. I’m betting we get one or two more small hikes like this and then the Fed calls off its pointless campaign to tackle inflation (most of which originates from outside the U.S.). 

If the Fed doesn’t change course, it’s going to sink the housing market and the wider economy.   

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Finally, your new crypto-based driver’s license. 

As a crypto advocate, one of the questions I get most often is “But what’s the point of crypto? What does it DO?” 

Here’s an answer… 

The California Department of Motor Vehicles has announced that it’s partnering with the blockchain Tezos to move car titles on to the crypto network. 

The digitization of car titles on a blockchain network will make the records more secure, and it will also significantly streamline title transfer between owners. Car owners will also be able to store their car title in a digital wallet, in the same way that NFTs are stored today. 

This is exactly what I’ve been saying for more than a year: titles and government IDs are going to be entirely a blockchain affair at some point soon. 

Government will want this because crypto networks are basically unhackable and they’re decentralized, which means the networks are more resilient. 

Meanwhile, we as consumers and citizens will be able to store our passports, Social Security numbers, car titles, property titles, and tradable assets like stocks all in a single digital wallet on our smartphone that is permanent linked to us. This is the future. 

That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, reach out through the contact form on the Global Intelligence website. 

Enjoy the rest of your Sunday.