Chevron chief executive Mike Wirth pushed back on claims by President Joe Biden that Big Oil’s record profits are being made on the back of the war in Ukraine and at the expense of the American people.
The industry’s highest-ever cash haul should not be viewed in isolation because only three years ago it was “losing billions of dollars as prices plummeted,” Wirth said in an episode of “The David Rubenstein Show: Peer-to-Peer Conversations” on Bloomberg Television. “Through the cycle, it’s an industry that generates 10%-ish returns on capital employed, which is I think, by the standards of many other industries, a pretty modest return.”
The 10 top-performing stocks in the S&P 500 Index last year were energy companies, with traditional oil and gas producers dominating the list, despite a chorus of investors, political leaders and civil society groups calling for a transition to clean energy. Chevron, the second-largest US oil company, is on course to report $37 billion in profit for 2022, 40% higher than its previous record set in 2011, according to data compiled by Bloomberg. The stock gained 53% last year, compared with a 19% drop in the overall index.
Biden spent much of last year criticizing the domestic oil industry and in October accused it of reaping a “windfall of war.” Democratic allies accused the industry of gouging consumers as gasoline prices reached a record high in 2022. “I disagree with that characterization,” Wirth said, adding that the price of oil and gas are set by the market, not producers.
“As prices get high and it gets less affordable, you find people that are upset,” Wirth said. “And part of that is because we really haven’t necessarily been able to find the right balance” between energy affordability, energy security, and protecting the environment. “We need to have a balanced approach to energy.”
His comments pick up on a growing frustration in the oil and gas industry that politicians, investors and consumers have focused too much on forcing large companies to reduce their carbon emissions while taking affordable and reliable energy for granted. As gasoline prices soared to a nationwide average of $5 a gallon last summer, Wirth found himself spending far more time than expected in Washington D.C. explaining the unintended consequences of policies being considered by the Biden administration.
“I do have to go to Washington,” Wirth said. “They’re detailed discussions. And we need to help regulators understand the potential consequences of some of the things they consider.”
Wirth was born in Los Alamos, New Mexico, where his father worked in the National Laboratory. He studied chemical engineering at the University of Colorado in Boulder before joining Standard Oil of California, which became Chevron, as a design engineer. His first roles were in projects that never saw the light of day: oil shale before fracking took off, a facility in California to bring oil from offshore that was sold at a huge loss, and a project in Africa that never happened because of a civil war, he said.
“I began by specializing in spectacularly unsuccessful projects,” he said. “And at some point, I said, “This doesn’t look like a great career path.”
Wirth subsequently moved into Chevron’s marketing business and progressed through the ranks to lead the company’s refining division and eventually taking over the top job from John Watson in 2018. Wirth lives just a few miles from Watson and his two other CEO predecessors and the group gets together for lunch “regularly,” he said.
“They’ve lived through wars, the fall of the Soviet Union, terrorist attacks, financial crises. They’ve seen oil markets go through gyrations. They’ve dealt with geopolitical surprises. And so their advice is really valuable. During COVID, the first thing I did was call each one of them and say, “What lessons did you learn during the crises you faced?”
Can the industry afford a windfall profits tax?
A windfall profits tax is not going to encourage more supply. It’s not likely to reduce prices; in fact, it could do quite the opposite. President Carter tried a windfall profits tax in 1980. It was rescinded several years later, had collected a lot less revenue than was expected, and didn’t result in more investment. So normally, if you want less of something, you tend to put more taxes on it. If we want more energy production, we want more supply to bring prices down, putting taxes on energy production’s probably not a good idea.
Why do you think it is that people love energy but they don’t love energy companies?
We’re a big company. The numbers are big. Sometimes big isn’t popular, big energy, big government, big tech.
We need to have a balanced approach to energy. And that means we have to focus on affordability, because affordable energy is really essential for economic prosperity. Reliable supply for national security, because energy security and national security are linked. And then protecting the environment. And I think as prices get high and it gets less affordable, you find people that are upset. Part of that is because we really haven’t necessarily been able to find the right balance among those three.
What are you doing, for example, to transition yourself a bit to be a renewable company?
We’re focused on leveraging our strengths to deliver lower carbon energy to a growing world. We’re reducing the emissions associated with oil and gas that the world needs today, needs very, very desperately. And at the same time, we’re building inherently lower carbon energy businesses for tomorrow. So things like renewable fuels, hydrogen, carbon capture and storage, geothermal are all technologies we’re investing in.
Is the war in Ukraine why oil companies are making big profits?
The war and the associated actions have definitely had an impact on energy markets. But if you step back and look at the the broader context, in 2020 we saw demand collapse with the pandemic when the world really locked down. Companies in our industry had to shut in wells and stop producing because there was no place to store the oil that wasn’t needed by the market. So investment levels came down. As the economy recovered, post the pandemic, we got vaccines, demand returned. The industry’s been struggling to keep up with the rate of growth, once again.
Are you resuming production in Venezuela?
We’re the last U.S. company that has any presence there. The sanctions were somewhat relieved but at the margin for a period of six months that will allow certain activities, primarily some crude, to flow from Venezuela to the U.S., which isn’t happening today. Gulf Coast refineries were actually designed to run the crude that comes out of Venezuela. So we’ll see some oil flow to the U.S. We’ll get a little bit of cash. We’re owed some money for loans and things that we’ve made over the years down there. So this is a first step to potentially be followed by others.
There’s a perception that when oil prices come down, gasoline prices don’t come down as fast. Is there any truth to that?
Independent businessmen will look at what they believe their future resupply costs to be. And if they think it might be higher, they tend to hold their street prices until they’re sure that their next load of fuel might be a lower cost to them, and then you start to see the prices come down.
When the President says ‘energy companies are gouging the American people’ I assume you don’t like it but you probably just accept it?
I disagree with that characterization. I don’t think it’s accurate. We’re an industry of price takers, not price makers. These are global commodity markets and prices go up, prices come down. Just two years ago, we were losing billions of dollars as prices plummeted. And so, through the cycle, it’s an industry that generates kinda 10%-ish returns on capital employed, which is, I think, by the standards of many other industries, a pretty modest return.