How Big Oil is thriving under Biden

Many voters think of President Biden as a green energy champion who wants to put fossil fuels out of business. But if you look at the financial performance of oil and natural gas companies under Biden’s presidency, you might think he’s their biggest booster.

Energy has been the best-performing sector during much of Biden’s presidency, which is now fueling a mega-merger consolidation sweep among some of the world’s biggest energy companies. ExxonMobil announced plans to buy driller Pioneer Natural Resources for $64 billion on Oct. 11, prompting Chevron to bid $53 billion for Hess on Oct. 23. More deals are possible as huge energy firms hustle to lock in premier drilling sites as the point of “peak oil”—maximum global demand for the commodity, followed by a gradual decline — comes into view, perhaps within the next decade.

The Exxon and Chevron deals are both all-stock transactions. That’s possible because shares of America’s two largest energy firms have soared during the past two years, giving the acquirers plenty of headroom for big purchases without having to tap cash or borrow.

Big Oil has been thriving, of course, at the same time Biden is overseeing the biggest green energy push in American history. The 2022 Inflation Reduction Act Biden signed includes green energy incentives that could total more than $1 trillion. Private sector firms are applying for those incentives at three times the rate budgeters expected last year. One consequence is a boom in the construction of factories for electric vehicle components and other green energy gear.

This might sound like a set of schizophrenic developments in the US energy sector, with a jacked-up fossil fuel industry threatening Biden’s green energy push (or vice versa). But it’s not. Big Oil is enjoying a heyday now in part because it’s rebounding from lean times. And while Biden clearly favors renewables over carbon, he has also learned that ample stocks of fossil fuels will be needed for years to keep consumer energy costs down and prevent voters from revolting.

It's conventional wisdom that oil and gas firms are always rolling in money. But not really. In fact, as the following chart shows, energy sector returns have lagged many other sectors since 2010. During the last 10 years, energy was the worst-performing sector half the time, in terms of stock performance among the 11 major industries represented in the S&P 500 stock index.

Many Americans think gasoline and other energy prices were lower under President Trump than they’ve been under Biden. That’s mostly true — but not because of anything Trump or Biden did. One big reason prices were low from about 2014 through 2020 is that energy firms were overproducing and sacrificing profits as a result. As the shale drilling revolution got underway, many energy firms put profits aside as they invested aggressively in new facilities, in order to gain market share. The assumption was that profits would follow, eventually. As a result, energy investors willing to endure tiny profits or even losses basically subsidized the low cost of gasoline and other forms of energy for consumers.

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COVID upended that equation. Oil prices plunged so deeply in 2020 that they briefly turned negative. Energy sector stocks in the S&P 500 lost 37% that year, while the broader index gained 16%, for an underperformance of 53 percentage points. Hundreds of energy firms went bankrupt and the mighty Exxon lost a staggering $22.4 billion.

That washout changed the whole industry. Investors and lenders began to demand short-term returns instead of tolerating losses in exchange for growth. Oil prices climbed off the floor as the global economy recovered from COVID. Then came Russia’s invasion of Ukraine in February 2022, which added a fear premium to oil prices for much of the year.

All of that made the energy sector the top performer among all 11 S&P sectors in 2021 and 2022. Last year was a particular blowout, with energy stocks turning in a 59% gain, compared with a 19% loss for the S&P — an outperformance of 78 percentage points. Exxon and Chevron each logged their biggest profits ever in 2022, and the share price of each hit a new record high in 2023. The two firms’ financial performance so far in 2023 is close to last year’s record pace, which is why each can make a $60 billion acquisition as easily as some companies buy staplers or toner.

It's ironic that the biggest oil companies are going gangbusters under Biden, who promised to “end fossil fuel” as a presidential candidate in 2019 and killed the Keystone XL oil pipeline on his first day in office as a sign of his fidelity with environmentalists. But it’s not really surprising. Biden’s energy moves so far could crimp future supply, but they’ve had barely any impact on real-time operations, which are now far more influenced by investor demand for quick returns and by global market dynamics.

As Biden now knows, even an aggressive push for renewables leaves the US and global economies heavily dependent on fossil fuels for transportation, power, and heat. Automakers have been selling record numbers of electric vehicles that burn no gasoline. Yet gas prices hit $5 per gallon last year, their highest level ever in the US, as tight oil supplies and the Russia fear premium pushed oil prices well over $120 per barrel. Biden now clearly realizes his reelection odds depend on affordable carbon energy, and his administration is pursuing several ways of making sure oil remains plentiful in 2024.

One of those sources is domestic. US oil production is likely to hit record highs during the next several months, and not because of any policy Biden has rolled out. It’s simply profitable for American energy firms to produce more oil with prices where they are, at around $90 per barrel. So they’ll produce more. You probably won’t hear Biden bragging about that, since it would undermine the solidarity he seeks with green-energy backers. But a healthy oil and gas industry can be good for the country, too, even if politicians don’t want to admit it.

Rick Newman is a senior columnist for Yahoo Finance. Follow him on Twitter at @rickjnewman.

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