Profits Are Not the Problem for Oil Companies | National Review

Profits Are Not the Problem for Oil Companies | National Review

Sen. Elizabeth Warren (D-MA) questions Deputy Treasury Secretary nominee Adewale Adeyemo during his Senate Finance Committee nomination hearing, on Capitol Hill, February 23, 2021. (Greg Nash/Pool via Reuters)

Senator Elizabeth Warren has an idea:

If she had opened the Wall Street Journal yesterday, she would have read the following:

Leaders of the fracking companies that helped make the U.S. the world’s top oil producer say they are responding to calls by the Biden administration and others to increase production after oil prices this week topped $130 a barrel and gasoline prices surged, threatening to dent the broader economy.

But the executives say that some investors, who felt burned after shale drillers gave priority to expansion over profits last decade and lost billions, are still concerned that the companies might spend too much if they return to rapid growth.

They also say that a flight of capital from the fossil-fuel industry in recent years has left U.S. oil patches without enough fracking equipment to bring a ton of new wells online, and that a resurgence of go-go drilling would deplete companies’ most valuable drilling locations. [emphasis added]

That’s right, oil companies are having a hard time attracting investors now because they were perceived to have supplied too much oil and made too low profits over the last ten years.

Most of America’s oil drilling is actually done by relatively small, independent firms, not by Big Oil. From the Independent Petroleum Association of America:

The U.S. Internal Revenue Code section 613A(d) defines an independent producer as a producer who does not have more than $5 million in retail sales of oil and gas in a year or who does not refine more than an average of 75,000 barrels per day of crude oil during a given year. There are about 9,000 independent oil and natural gas producers in the United States. These companies operate in 33 states and the offshore and employ an average of just 12 people.

Independent producers develop 91 percent of the wells in the United States – producing 83 percent of America’s oil and 90 percent of America’s natural gas.

These are not fat cats who should have their profits confiscated by the federal government.

Profits operate as a signal to investors, saying, “Send your money over here.” As these oil companies increased production even when oil prices were relatively low, they didn’t make huge profits. Now that oil prices have gone through the roof, profits will go up, which is great news for them because they desperately need more capital to produce more oil.

The Journal explains:

Small but instrumental players [are] short of the financing they need to repair fracking equipment sidelined during the start of the pandemic, or invest in building drill bits, drilling rigs and blowout preventers.

Chris Wright, chief executive of Liberty Oilfield Services Inc., one of the largest U.S. hydraulic fracturing companies, said the nation’s fleet of available, working fracking equipment is almost fully deployed already.

“A lot of equipment has been retired, a lot of equipment is past its useful life,” Mr. Wright said.

He added his company estimated the U.S. oil industry is only going to add about 15 more fracking fleets to the 235 that were operating in key basins by this summer. “The market goes from tight to quite tight,” he said.

What the federal government needs to do is let the price signals in the market work to attract new capital investment to these oil companies so they can buy the equipment they need. Taxing away their “windfall profits” would keep them starved for capital and unable to increase production.

Senator Warren’s idea is not only misguided, it would actually do the opposite of what she wants. Capital-poor oil-drilling firms will remain capital-poor if their profits are taken by the government — and capital-poor firms are not going to increase oil supply.

Dominic Pino is a William F. Buckley Fellow in Political Journalism at National Review Institute.

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About the Author

Tony Beasley
Tony Beasley writes for the Local News, US and the World Section of ANH.