Exxon Mobil and Chevron, the two biggest American oil companies, have reported modest earnings growth as they manage their business in the face of sagging prices for oil and natural gas. Despite the higher prices for crude and fuels through much of last year, Exxon and Chevron have been cautious about investing more to raise production. Demand for gasoline, diesel, and other fuels, however, have increased as the world economy emerged from the pandemic slowdown in 2020 and 2021. The slowing performance came after record earnings in 2022 in the wake of Russia’s invasion of Ukraine, which sent fossil fuel prices soaring through much of the year. By the end of 2022, declining demand for fuels in Europe and Asia helped lower prices. Refineries have continued to perform well, helping both Exxon and Chevron boost their revenues. The price of oil has dropped below $80 a barrel, after a jump to over $120 last June. Prices firmed up a bit after the Organization of the Petroleum Exporting Countries (OPEC), along with Russia and their allies, agreed last April to cut crude production by 1.2 million barrels a day through the end of the year.
Exxon reported a first-quarter profit of $11.4 billion, compared with $5.95 billion for the same period last year. But the results represented a significant drop from the $12.8 billion earned in the fourth quarter of 2022. Chevron did slightly better, with a profit of nearly $6.6 billion in the first quarter, an improvement over the $6.3 billion earned in the first quarter of 2022 and $6.4 billion in the fourth quarter of 2022. Russian oil and gas exports have not declined nearly as much as experts predicted after European countries started buying less of it. That’s because China, India, and other developing countries are buying more Russian oil and gas.
Global prices for liquefied natural gas have slumped by 45% from the beginning of the year. In the United States, regular gasoline prices have dropped by roughly 12% and diesel prices by 14% over the last 12 months, according to the AAA motor club. Global demand for oil and liquefied natural gas are still increasing, but slowly. The drop in fossil fuel prices is partly the result of unseasonably warm weather in the Northern Hemisphere and particularly Europe this past winter, which reduced demand for natural gas and heating oil.
Fears that a global economic slowdown will reduce manufacturing activity have convinced many traders that prices will continue to slide. There are other reasons gasoline demand might be weak in the coming years. The International Energy Agency this week forecast that globally, one in five new cars sold this year will be electric, compared with 2% four years ago. The organization said sales of battery-powered vehicles would accelerate through the decade in China, the United States, and Europe.
While both Exxon and Chevron have increased production in the Permian Basin, which straddles Texas and New Mexico, they have placed a greater emphasis on returning cash to shareholders by raising dividends and share buybacks. The upshot is that Exxon’s spending has leaned toward buybacks and dividends lately. Exxon Mobil gave back $19.7 billion to investors on share buybacks and dividends in the first quarter of 2020, up from $7.7 billion a year earlier. Chevron announced in February that it was returning 33% to 35% of its free cash flow to shareholders through dividends and buybacks.
The outlook for the energy sector is mixed. The COVID-19 pandemic hit the energy industry particularly hard, as businesses that rely on oil and gas were forced to curtail activities or shut down altogether. Prices for fossil fuels plummeted, as global demand fell. But now that vaccine rollouts are ramping up and people are returning to work and travel, oil and gas demand is beginning to pick up. Moreover, the transition to renewable energy is still in its early stages, and traditional energy sources still account for the lion’s share of global energy consumption.
The oil and gas industry’s fortunes are also linked to those of the global economy. If the global economy recovers strongly and expands in the years ahead, demand for oil and gas is likely to increase. By contrast, if economic growth is sluggish, demand for energy is likely to lag. The COVID-19 pandemic had a profound effect on global economic growth, as lockdowns and restrictions imposed to contain the virus curtailed business activity and demand for goods and services. But as vaccinations continue to roll out around the world, economies are beginning to recover.
In the United States, for example, the economy is expected to grow by more than 6% this year, according to the Federal Reserve. That would be the strongest growth in decades. The European Union, which was hit hard by the pandemic last year, is also expected to rebound this year, with growth projections between 4% and 5%. China’s economy, which was the first to emerge from the pandemic, is expected to continue growing strongly, although concerns about trade tensions and debt could still weigh on its growth prospects.
Climate change is another key issue affecting the energy industry. The transition to renewable energy is gathering momentum, and many governments are implementing policies to encourage the development of renewable energy sources. At the same time, demand for fossil fuels is likely to remain robust for some time, particularly in developing countries. This means that traditional energy companies will need to navigate a changing landscape as they seek to adapt to the new reality.
Exxon and Chevron, for their part, appear to be positioning themselves for the future by emphasizing returns to shareholders rather than investing heavily in new production. This strategy has helped to protect their bottom lines in the face of falling oil and gas prices. However, it remains to be seen whether the strategy will be sustainable in the long term, particularly if demand for fossil fuels continues to decline in the years ahead. Ultimately, the energy industry faces a complex and evolving set of challenges that will require strategic thinking and nimble decision-making.
