US oil producers are reaping a $200 billion windfall from Ukraine war price hikes

US oil producers have raked in more than $200 billion in profits since Russia’s invasion of Ukraine as they benefit from a period of geopolitical turmoil that has rocked the global energy market and pushed prices higher.

According to an analysis of earnings reports and estimates conducted by S&P Global Commodity Insights for the Financial Times, public oil and gas companies operating in the United States totaled $200.24 billion in net income for the second and third quarters of the year.

The number – which includes supermajors, mid-sized integrated groups and smaller independent shale oil operators – marks the sector’s most profitable six months on record and puts it on track for an unprecedented year.

“Operating cash flow is likely to be record-breaking — or at least very close to it — by the end of the year,” said Hassan Eltorie, S&P’s executive director of upstream equity research.

The bonanza has infuriated the White House as elevated gas prices weigh on Democrat poll numbers ahead of next week’s critical midterm elections.

Net Income by Quarter ($bn) column chart showing US oil producers' earnings bonanza

President Joe Biden this week called the outrageous earnings a “windfall of war” and accused companies of “profiting” from Moscow’s invasion. He said he will ask Congress to hit them with higher taxes unless they invest the money in pumping more oil to drive down prices at the pump.

The Windfall Tax Act is unlikely to pass in Washington. But it has become a reality across the Atlantic: Brussels has introduced a 33 percent “solidarity levy” on excess profits, while London has enacted an additional 25 percent “energy profits levy,” raising the profit tax to 65 percent by the end of 2025. The new British Prime Minister Rishi Sunak is considering raising the levy to 30 percent and extending it until 2028.

The record profits were underpinned by surging free cash flow, a key industry metric defined as cash flow from operations minus capital expenditures. Increased commodity prices have boosted the former; Investors’ insistence on frugality has greatly reduced the latter.

Brent crude, the international oil benchmark, averaged more than $105 a barrel in the second and third quarters — well above the average of about $70/b over the past five years. It peaked at almost $140/b in early March after Russian tanks invaded Ukraine.

Meanwhile, Wall Street, still reeling from a decade of waste and persistent losses, has urged companies to enter a new era of capital discipline — prioritizing shareholder returns over expensive drilling campaigns to drive ever-greater production growth . Investment bank Raymond James estimates that capital spending by the world’s 50 largest producers will be around $300 billion this year, about half what it was in 2013, when prices were last at comparable levels.

“Over the past five years, the industry has gone from ‘drill, baby, drill’ to a focus on what shareholders actually want, which is return of capital,” said Pavel Molchanov, analyst at Raymond James. “Dividends and share buybacks have never been more generous than they are now.”

Big Oil’s newfound discipline contrasts with Big Tech, which has frustrated Wall Street with a perceived failure to rein in investment. Tech stocks have been hit hard in recent weeks after the likes of Google and Meta reported lackluster earnings.

Responding to the prospect of an unexpected tax, Darren Woods, CEO of ExxonMobil, which had its best-ever profitable quarter ever, said his company’s whopping dividend should be viewed as a way “to give some of our profits right back to the American people.”

“We have prioritized stock value creation over the pursuit of volume,” said Rick Muncrief, chief executive of Devon Energy, a large shale drilling company. “And we’ve rewarded our shareholders with market-leading cash returns.”

Additional reporting by Alice Hancock in Brussels and David Sheppard in London

https://www.ft.com/content/0d84255c-84ba-4462-b80a-8593352852e2 US oil producers are reaping a $200 billion windfall from Ukraine war price hikes

Adam Bradshaw

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