US Democrats face dilemma over drilling

Welcome back to Energy Source.

Big Oil is still in the spotlight — and not just because of the deluge of profits the supermajors have announced in recent days. Shell reported profits of almost $39.9bn this morning — the highest in its 115-year history, as Tom Wilson explains. But, as Tom also reports, Europe’s largest oil and gas company now also faces a new lawsuit from residents of a polluted community in the Niger Delta.

Meanwhile, US Democrats are angry again too, as Myles reports below.

We’re still devoting a lot of reporting energy to the Inflation Reduction Act (IRA), with plenty of stories to come here and on FT.com. Please continue to get in touch with tips. In the meantime, Amanda wraps up the latest, below. And Data Drill today is on US petroleum demand, which is soft. Is it a hint of recession? Is electrification starting to make a difference? I’d welcome views on that too.

If you’re at the Nape conference in Houston, find Justin, who will buy you a drink: justin.jacobs@ft.com.

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The problem with Democrats’ Big Oil bashing

Big Oil’s bumper profits were back in the spotlight yesterday as senior Democrats lined up to blast companies for “lining their pockets” while American motorists suffered at the pump.

Those profits have indeed been enormous: ExxonMobil and Chevron both reported record annual earnings in recent days. Combined they took in a whopping $92bn in 2022 — easily eclipsing the previous peak of $71bn in 2012.

So it is perhaps no wonder that a windfall tax on excess profits is back on the agenda. And a host of senior Democrats — including Senator Ed Markey of Massachusetts and Representative Ro Khanna of California — did not mince their words as they gathered outside Congress at an event organised by Stop the Oil Profiteering, an NGO.

“We know truthfully how much money they made by gouging consumers. We’re working to try to take that back with a clawback provision on excess profits,” said Sheldon Whitehouse, a Democratic senator from Rhode Island, who has put forward legislation on the subject.

There is merit in the idea of a windfall tax: London and Brussels have both implemented their own versions (though Exxon is suing the EU to try to stop the plan there).

But there are a host of inherent tensions at the heart of the Democratic demands.

The first and most glaring is that many of those gathered have been vocal in opposing the expansion of drilling and other fossil fuel developments, but they’re simultaneously asking companies to drill more to temper prices.

“If the industry had wanted to, they could have used all of those excess profits in order to keep the price of gasoline at the pump low,” said Markey. “Instead, they took it as an excuse to tip consumers upside down at the pump every single day of 2022.”

This is along the same lines of President Joe Biden’s complaints last year, when he berated oil companies for paying out beefy dividends instead of drilling more wells.

Yet, as recently as June, Markey wrote to Deb Haaland, secretary of the interior, to voice his opposition to the sale of new offshore drilling leases.

The “more oil vs less oil” Democratic dilemma was on full display separately yesterday as the Biden administration came under fire for moving a controversial Alaskan drilling project — ConocoPhillips’ Willow — closer to approval.

The “price gouging” allegations also jar with the Biden administration’s boasts that it has successfully brought down prices at the pump through its record releases from the Strategic Petroleum Reserve.

US petrol prices have fallen more than 30 per cent since their summer peak — and are among the cheapest in the developed world. But Senator Jeff Merkley of Washington said yesterday that “petro-profiteering is crushing Americans at the pump”. Which is it? Are oil prices now too high because the companies are gouging customers? Or are they lower because Biden drove them down?

So what explains yesterday’s outburst?

Democrats are opening a clear battle line for later. Already, Biden and other senior party figures are claiming Republican moves to impose a new national sales tax (instead of an income tax) would raise fuel costs.

“We’re for taxing big oil companies and putting their money back in the pockets of ordinary Americans,” said Khanna. “They’re for taxing working Americans who are hurting today because of the price at the pump.”

Or, as Markey put it: “This is a moment where we have to stand up and we have to fight. The Republican party obviously is the GOP — and that GOP stands for gas and oil party.” (Myles McCormick)

The ‘biggest transition’ of a lifetime

The global race to win clean energy projects continues to heat up. Yesterday, the EU unveiled its plan to rival the $370bn in green subsidies included in Biden’s signature legislation.

Meanwhile, the US is looking inward. State agencies are rolling out flashy incentives to attract clean-tech executives, who are speeding up plans to enter or expand in the US.

EU joins US in subsidies arms race

After weeks of complaining about the US’s sweeping climate bill, Brussels is now armed with its own subsidies plan, including proposals to speed up permitting, loosen state aid rules until 2025 and provide at least €250bn in grants to clean-tech industries.

Companies cheered the announcement but warned additional measures would be needed to rival the IRA.

Meyer Burger, a Swiss solar manufacturer, said it would consider additional module plants in the EU following yesterday’s proposals but called for support for operational costs. SolarPower Europe, the industry trade group, is pushing for the EU to relax state aid until 2030 to be more aligned with the IRA’s timeline.

The EU, China, Japan and of course the US are all now offering chunky subsidies to accelerate their green economies. Poorer countries will be left behind, warn some analysts.

“What we’re seeing both from the US and from the EU is an effort to try to ensure that the industrial development that flows from climate mitigation brings about economic benefits for the US and the EU,” said Nicolas Lockhart, an international trade lawyer at Sidley Austin. “For me, it does raise a lot of questions about the fairness of the terms of trade.” 

US states roll out the red carpet 

A billion-dollar investment deal used to come around once a year in the US. Now, they’re being announced about once or twice a month, thanks in large part to the IRA and the need to move clean energy supply chains from China.

“This is the biggest transition you will see in your lifetime because the amount of money involved is just huge,” said Andrés Gluski, chief executive of AES. In December, AES announced a $4bn project with Air Products to build a green hydrogen plant in Texas, a project Gluski said would be difficult without the IRA.

The market shift has ramped up competition among states to win and secure clean energy projects. Ohio has about 20-25 sites cleared for investors and plans to add another 10 to its inventory. Kentucky is planning on upgrading 40-45 sites in the coming months with its $200mn grant programme for land preparation.

“We are marketing the energy transition,” said Bob Harvey, president of the Greater Houston Partnership. Harvey and Houston Mayor Sylvester Turner embarked on a trade mission to Tokyo in October to recruit companies.

States are also issuing competitive incentives on top of federal subsidies. Illinois’ state legislature voted last month to expand its EV manufacturing state tax credit to include renewables. Last year, Georgia awarded Hyundai the largest auto incentive package ever recorded, with more than $1.8bn in subsidies for its $5.5bn EV plant. The South Korean carmaker announced an additional $4-5bn investment in the state with battery company SK On, following passage last year of the IRA.

“Illinois is looking to get really aggressive in this space,” said Chris Setti, board member of the Illinois Economic Development Association. “The governor, the state legislature, the local economic development folks have all kind of pinpointed this industry as one we want to target.” (Amanda Chu)

Data Drill

US petroleum demand looks weak. This is good news if it means the economy is growing while burning less of the fossil fuel. (And this is partly true, according to Rhodium Group: the US economy is becoming less carbon-intensive, even while emissions continue to rise.) But it’s bad news if it’s a sign of impending economic recession.

Here’s one chart below, which gives a sense of what’s going on. It’s based on the Energy Information Administration’s weekly calculation of “product supplied” — a decent, if sometimes imperfect, proxy for consumer demand. The hit as a result of the pandemic is obvious, but petrol (gasoline, for American readers) is now in a steady drift back down. Propane demand has been hit hard by the warm winter too.

Here’s another chart, which zooms in a bit on petrol on its own. Looks ropey.

So Americans must be driving less, right? Nope. They’re still clocking up the miles. Or at least they were until November, which is the endpoint for the chart below, based on the most recent total of vehicle miles driven and recorded by the Department of Transportation. So what’s going on? Are the forces of fuel economy and electrification starting to weigh on petrol demand? Or is the more recent product supplied data pointing to a recession that will turn up later in the mileage numbers? Or something else? Let me know: derek.brower@ft.com.

Power Points