It’s Not Tax Threats Crimping Oil: Elements by David Fickling

Hello and welcome to Elements, our daily energy and commodities newsletter. On a day when BP Plc posted its second-highest quarterly profit on record, Bloomberg Opinion’s David Fickling looks at oil companies’ output plans and argues that US warnings of extra taxes are unlikely to have much of an impact. If you haven’t yet signed up to get Elements directly into your inbox, you can do that here.

Today’s Take: Beware Declining Demand

US President Joe Biden’s much-anticipated speech on Monday about imposing windfall taxes on oil companies contained plenty of shock and dismay about recent earnings that he termed “war profiteering.” Yet there was precious little detail about what, exactly, the government is going to do about it.

The fine print is probably irrelevant, given that legislation on the matter would be dead on arrival in Congress, as my colleague Liam Denning wrote yesterday. Still, the underlying question — why current record earnings are leading to a wave of buybacks, rather than production increases — remains pertinent.

Taxation, or the threat of taxation, isn’t enough to explain it. For all the warnings that a reboot of the 1980 US oil windfall tax would cut rather than boost output, it’s unlikely that anything like that model is contemplated now. That tax was a direct excise levy on production, whose effects on deterring investment were straightforward and predictable. An income tax on “excess” profits, on the other hand, is most likely to lead to a boon for accountants who can minimize taxable earnings, with no real impact on short-term output.

A better explanation focuses on expenditure and demand. Oil and gas sector costs surveyed by the Dallas Fed sat close to record-highs in September. Shares in Schlumberger NV, one of the major beneficiaries of upstream spending, hit a four-year high last week. High diesel prices aren’t just a driver of oil production — when they increase the cost of powering up your equipment, they can inhibit it, too.

The bigger issue is demand. With the Federal Reserve raising rates, any additional supply may be going into a market facing declining appetite for crude. That’s an immediate concern for the sort of near-term production that’s likely to come out of the US shale patch. In the illiquid far end of the forward curve, too, the longest-dated 10-year contracts have lately been trading at a discount of more than $10 to four-year futures. Backwardation in near-dated futures is easily explained by the upward pull of spot prices, but that far off, it looks more like structural demand weakness.

If oil producers are spending their money buying back their shares rather than increasing output, perhaps we should trust their judgment. Right now, that’s probably the best way for them to deploy their cash.

--David Fickling, Bloomberg Opinion

Chart of the Day

Worried about oil prices? It’s not just black gold that’s running short — the green stuff is in trouble, too. Drought across the Mediterranean has pushed olive oil prices up 50% over the past year, to record levels not far below €5,000 ($4,966) a ton. European output this season will be 25% lower than in 2021, the European Commission reported last month. Spain’s Andalusia region may harvest its second-smallest crop ever. Rising energy prices are also increasing processing costs, with Greek millers seeking subsidies to cope. European consumption may fall 9% as a result and Italy’s industry is warning of a truly dystopian scenario — empty shelves in the extra virgin aisle.

Today’s Top Stories

BP Plc posted its second-highest quarterly profit on record and announced a further $2.5 billion of share buybacks, while Saudi Aramco also reported stellar earnings after Russia’s invasion of Ukraine pushed up energy prices.

Europe is set for a mild November, with long-range outlooks from forecasters Maxar Technologies LLC and Marex showing no cold spells for the month. That will ease pressure on natural-gas storage as the region’s energy crunch restricts supplies ahead of winter.

Top banks are reinforcing their metals divisions to cash in on the volatility that’s lifted trading profits. Bank of America Corp. and Morgan Stanley have hired for their metals units, while Deutsche Bank AG is weighing a return to the business it abandoned just under a decade ago.

Oil could rise to $100 a barrel again on severe Russian supply losses once the European Union tightens sanctions next month, according to the International Energy Forum. “The physical markets are very tight,” IEF Secretary-General Joe McMonigle told Bloomberg TV at the Adipec conference in Abu Dhabi. Meanwhile, “the paper markets are pricing in bad economic news and a bad recession.”

Central banks bought a record amount of gold last quarter as they diversified foreign-currency reserves, with a large chunk of the purchases coming from as-yet unknown buyers. Almost 400 tons were scooped up by the banks in the period, more than quadruple the amount a year earlier, according to the World Gold Council.

Best of the Rest

• If you thought having an OPEC for oil caused a lot of headaches, Indonesia is thinking about establishing a similar organization for key battery metals such as nickel, cobalt and manganese, the country’s Investment Minister Bahlil Lahadalia told the Financial Times.

• Such noises are clearly troubling for major consumers: In a separate piece, the same paper reports that Tesla Inc. held talks on solving its battery supply problems by taking a stake of up to 20% in Glencore Plc — the world’s biggest supplier of seaborne coal, among other things.

• The Bureau of Investigative Journalism takes a look at some of the “green bonds” underwritten by HSBC Holdings Plc, and asks what the bank’s “sustainable finance” really pays for.

To contact the author of this story:
David Fickling at dfickling@bloomberg.net

To contact the editor responsible for this story:
Amanda Jordan at ajordan11@bloomberg.net

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