Putin has given oil a new lease of life – we’d be mad not to take advantage
Jeremy Warner
5 min read
Putin
It's a cliche, I know, but “stick to your knitting” has long been the best piece of advice you can give to the chief executive who, bored with the dreary old business of doing what he's good at, dreams of taking his company into exciting and politically favoured pastures new.
Don't do it. Stay with the company's core purpose. Focus on the top and bottom line, not the blue yonder. Leave the supposedly sunlit uplands of the future for others to harvest, if they can.
It's a lesson that both Shell and BP are being forced to learn the hard way after seeing their share prices badly underperform those of their peers in the US, ExxonMobil and Chevron, in recent years.
The difference? BP and Shell have seen the light and put the full force of their balance sheets behind today's politically driven energy transition. Exxon and Chevron, on the other hand, have largely eschewed the renewables dream and stuck to what they know best – dirty old oil.
With Putin's war, the pay back has been off the scale. We said you'd need us again one day, says Exxon's chief Executive, Darren Woods, and it seems like we were right.
Despite the ascendancy of the environmental, social and governance (ESG) agenda among those who call the shots in Britain's largest companies (institutional investors), in the end it's the money that counts, and the markets took one look at BP's seeingly damascene conversion last week back to the cause of fully exploiting its oil and gas reserves, and started popping the champagne corks.
Since the announcement that the company is scaling back planned cuts in its oil output, the shares have surged 16 percent. This must have come as quite a shock to the chief executive, Bernard Looney. He genuinely believed he was doing the right thing in reorienting the company towards renewables and other forms of climate change mitigation, but…surprise…it turns out that there is still a lot of money to be made out of hydrocarbons; the alternatives, by contrast, are struggling to make any return at all.
Looney's pivot is a major embarrassment, given where he has focused his efforts to date, and it is not yet clear he can survive it. This way, we'll generate even more money for investment in the energy transition, he argues.
In truth, he'd be better advised to stick to the cash cow that is oil and gas, pay out the proceeds to investors in dividends and buybacks, and leave the markets to decide how best the spoils are invested.
In saying this, I make no comment on the rights and wrongs of emission reduction targets, but note only that traditional forms of energy generation have been given a new lease of life by Putin's invasion of Ukraine, and that the reality is that these industries still quite plainly have a lot longer to run yet before they are consigned to the dustbin of history.
From a commercial perspective, it is madness for the likes of BP and Shell to surrender their market positions to Exxon, Chevron, and the potentates of the Middle East, Russia and China in pursuit of the holy grail of a carbon-free future. The oil industry's unexpected rebirth is meanwhile giving rise to another form of embarrassment – an embarrassment of riches.
High prices have brought forth record profits. Nevermind if the presumed wages of sin are being ploughed back into renewables or not, high profits have generated their own form of condemnation. Nor is it just the oil majors reaping huge rewards from the changed dynamics of our times.
This week and next, it is the turn of the major UK banks to report surging, multi-billion pound levels of profit. As interest rates rise, the net margin between deposit and lending rates rise with them.
Bernard Looney - Daniel Leal-Olivas/AFP
All of a sudden, the banking sector finds itself awash with profit. The capital famine that followed the financial crisis of a decade ago, forcing governments to step in to prevent the system from collapsing, has turned into days of plenty. Just as everyone else is having their living standards squeezed to destruction by rising interest rates and energy prices, the banks have got excess capital coming out of their ears.
Every accounting trick in the book will be marshalled to keep reported profits as low as possible, including rising bad debt provisions as recessionary forces take hold, but there is only so much the auditors – and the taxman – will allow. There must also be a limit to the capital that can be paid out in dividends and buybacks.
Still, it does at least mean the taxpayer must now be quite close to getting back the money spent bailing out the banking sector a decade ago.
NatWest Group will no doubt again be devoting some of its gains to buying back more stock from the Government, which still has a legacy stake in the bank of 45 percent. It won't be at anything like the price the Government paid for the shares, but once the banking levy and the interest earned on loans and guarantees is taken into account, the direct cost to the public purse of the banking meltdown must by now have virtually paid for itself.
In any case, the sector's renewed profitability will no doubt draw horrified condemnation from all the usual quarters. It shouldn't, because with a looming recession and legacy IT systems now decades out of date that urgently need renewing, banks will need all the capital they can get.
As it is, bank share prices are still nowhere near recognising the banking sector's new found state of financial health. Once bitten, twice shy.
The economy is in desperate need of decent rates of return to fund investment and growth, yet the tragedy is that profit is once more becoming a dirty word. When will the outrageous ignorance of public opinion ever learn?
