Big Oil Takes a Beating, but Its Investors Are Riding High

It has been a terrible several weeks for big oil companies like Exxon Mobil, Chevron and Royal Dutch Shell, which have been rebuked in proxy fights, the courts and a landmark public report, all pressuring them to do much more to stop climate change.

Yet it has also been a glorious stretch for investors in energy, the best-performing sector in the stock market this year.

Prices of energy companies and of oil and gas have been soaring. Much of those increases can be attributed to a surge in demand as the economy recovers from the coronavirus pandemic. But the prospect of long-term energy supply constraints, as companies are forced to respond to climate change, complicates matters enormously.

The bad news for Big Oil

First, consider this odd combination of developments.

The news for fossil fuel companies lately has been relentlessly bleak, a series of defeats in important shareholder votes and in the courts. What’s more, the energy business has been the focus of a landmark International Energy Agency policy report that calls for sharp cutbacks in fossil fuel production.

The various battles are different, and the details are important. But, briefly put, these are most of them: Chevron shareholders voted against management last month, directing the company to cut greenhouse gas emissions. In the Exxon case, shareholders defied the executive suite and voted to install three independent directors with the goal of pushing the energy giant to reduce its carbon footprint. And a court in the Netherlands ruled that Shell must accelerate and cut emissions 45 percent from 2019 levels by 2030. Shell said it would appeal, while environmentalists exulted that the decision set a precedent for concerted legal efforts worldwide.

What these disparate events had in common was that they put major publicly traded companies under mounting pressure to address climate change far more forcefully. In its report, “Net Zero by 2050: A Roadmap for the Global Energy Sector,” the International Energy Agency was explicit in stating what must be done to avert the most catastrophic damage.

It said that governments around the world needed to immediately stop approving the development of new oil and gas fields, and that oil companies needed to scale back production. While the report did not call for the end of the oil business, the agency projected a shrinking industry in a future world with far less extraction, refining and distribution of carbon-based energy products.

In short, the headlines suggested that big oil companies were in deep trouble, and over the long run, that may be true if they don’t change their ways.

Marvelous performance in the markets

But the stock and commodities markets, which appear to be focused on the near term, have been telling a far more upbeat story. Despite a brief downturn, this has been a fabulous time for investments in energy companies as well as for the commodities that have provided the traditional basis for these companies’ existence.

Consider some of the recent performance numbers.

Six of the 10 top performers in the S&P 500 this year are energy companies, led by Marathon Oil, which has nearly doubled in value in 2021 alone. The companies in the energy sector of the S&P 500 have done better than any other broad market slice — gaining nearly 41 percent in 2021, compared with about 12 percent for the overall stock market benchmark.

Propelled by an increase in the price of oil, the stock returns for the big energy companies have been extraordinary, despite the public chastisement. Here are some representative price increases, expressed in percentages, for 2021 through Thursday:

Exxon, 50 percent.

Chevron, 37 percent.

Shell, 25 percent.

Brent crude oil, 41 percent.

The price of crude oil in the United States has risen above $70 a barrel, its highest level in three years. Oil, in turn, has pushed the price of regular gasoline at the pump well above $3 a gallon, an increase of nearly 40 percent for the year, according to AAA.

An upturn and a murkier future

The main short-term reason for the rising price trend for the energy sector is the classic one: a simple imbalance of supply and demand.

“Some of this is just what happens to the energy market when the economy grows after any recession,” said Ed Crooks, vice chairman of energy in the Americas for the research firm Wood Mackenzie.

Demand has skyrocketed as the economy has awakened from its pandemic slumber.

At the same time, the oil supply has been limited by a decline in production during the recession, when people stopped driving and flying and major oil companies lost billions of dollars and began to retrench. Supply has also been tightened by the restraint exercised by the group known as OPEC Plus — made up of the Organization of the Petroleum Exporting Countries and allied producers like Russia. OPEC Plus has already announced that its members are beginning to increase production a bit, which could keep prices from rising much further.

But the longer-term supply-demand situation is much murkier.

At some point, if you accept that the planet is warming — that is, if you accept the verdict of science embedded in the International Energy Agency report — the extraction of large quantities of carbon will have to stop. The public pressure on big oil companies may be a harbinger of fossil fuel production declines. The possibility of constraints on future supply is weighing on the market and may be having a marginal impact on prices, Mr. Crooks said. The oil markets have always been bound up in geopolitics but may become even more so in the next decade.

Companies based in Europe, like Eni, Total and BP, followed by Shell, have been quicker to pivot toward a future of alternative energy and reduced carbon emissions than American companies like Conoco Phillips, Chevron and Exxon, according to a new study by Carbon Tracker, ane independent think tank.

But state-owned oil companies in nations like Saudi Arabia and Russia, and private equity firms that can buy up assets from public companies, are not as responsive to the pressure of environmentalists and could easily make up the slack in supply, as Jason Bordoff, a professor of international and public affairs at Columbia, wrote recently in Foreign Policy.

The prospect for profits, without a carbon tax

Basic economics tells us that as long as demand outstrips supply, prices are likely to rise, spurring further supply increases, until a new equilibrium is reached. That’s why most economists recommend some form of carbon tax or cap-and-trade system, which would depress demand and reduce carbon emissions by raising consumer prices, without providing windfall profits to energy speculators. I’ve made that point in previous columns. But at a national level in the United States, these ideas have not gained traction.

The price of gasoline is still too cheap to spur a voluntary, mass switch to electric vehicles. Without a tax, or some other, more intrusive form of government intervention, the energy price cycle is likely to continue, despite climate change.

For now, at least, investors are reaping big profits while the planet warms.

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