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IEEFA: Global oil majors are back in the black—but for how long?

November 01, 2021
Tom Sanzillo

Third-quarter earnings reports showed that the global oil majors are back in the black. Two questions remain:  Will they stay that way? And how will their new cash be used?

High oil prices are only sustainable if the economy is in overdrive

The industry model typically looks to price spikes to support new drilling as prices rise. Oil companies put away cash for inevitable price drops and buying new reserves on the cheap. Something is different this time, though. Oil companies are cutting their capital expenditures. They’re reducing debt and paying back more to shareholders. 

The last decade of lost value is a good reason. Investors (and, we suspect, even company management) understand that more drilling and expensive acquisitions are a bad bet. The competition across the enterprise is growing. As greater consensus on low-carbon policies grows stronger, future business cycles will be very different. 

The last decade was also a time of low oil prices. During the height of the pandemic, the industry hit record low prices. A short 18 months ago, prices fell below zero. Today, they’re roughly $80 per barrel

The reasons for the quick rise are worth understanding. The pandemic resulted in reductions in production. The pandemic, now more manageable than a year ago, has resulted in an economic recovery pushing worldwide gross domestic products to the high 5% range. But 2022 GDP is expected to drop, and perhaps oil prices along with it. By 2023 with GDP expected in the high 2% range, more reductions in oil prices requires a cautious outlook for oil and gas management and investors. 

High oil prices are only sustainable if the economy is in overdrive. Otherwise, the benefits to oil and gas investors come at the expense of the rest of the economy. Rising oil prices give rise to political unrest from consumer nations as their economic development plans are stymied by putting domestic profits into the pockets of international oil producers, driving inflation, trade and fiscal deficits, and currency devaluations. Rising prices at the pump are never good politics, and if natural gas prices follow suit, electricity and home heating prices also take a hit. 

Prolonged high oil prices, however, have another impact. Renewable energy, electric vehicles and the variety of industrial moves to decarbonize are incentivized. Even volatility, the short-term problem caused by rising prices, is sufficient to drive calls for more rapid adoption of alternative fuels. With the utility sector moving quickly toward renewable energy, more oil and gas price gyrations are not good news for long-term oil and gas investors.

For decades, the oil and gas industry worked hard to weaken the idea that its investment rationale was tethered to the price of oil. The industry’s playbook was supposed to produce steady profits through periods of growth and decline. Its business was seen as separate from the price of oil. That is no longer the case. 

Competition, geopolitical complexity and climate concerns have clouded the prospects for the industry, even as prices are rising. As prices increased through the first nine months of the year, more institutional investors—including prominent ones such as Harvard University and the Ford Foundation—have joined the line of those divesting from fossil fuels. For those still hanging onto their fossil fuel shares, the May vote by ExxonMobil shareholders in strong opposition to management rocked boardrooms around the globe. 

Fossil fuel companies will be around for a long time. They face an energy transition and that they can join—or they can lose value by keeping their fortunes tied to business practices that drive volatility and rising prices. Making a comeback and coming back all the way are two very different scenarios.  

Tom Sanzillo ( is IEEFA director of financial analysis.


Related items:

IEEFA. Divestment, transition from fossil fuels converging to create renewables opportunity.

IEEFA. Despite strong Q2, ExxonMobil upstream continues to underwhelm.

IEEFA. Energy transition to renewables likely to accelerate over next two to three years.

Tom Sanzillo

Tom Sanzillo is Director of Financial Analysis for IEEFA. He has produced influential studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis, and public and private financial structures. He also examines such areas as community and shareholder activism, institutional investment, public subsidies and Puerto Rico’s energy economics.

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