In a direct address to the oil & gas industry Tuesday, President Biden said, "to the oil and gas companies ... it's no time for profiteering or price gouging." Hours later, Senator Warren made an appearance on MSNBC saying, "I'm co-sponsoring a bill on windfall profits tax. We get it, supply and demand, prices go up, but profit margins should not go up, that's just oil companies gouging." The Senator followed up her appearance with a Tweet saying "Big oil companies are making higher profits off Putin's war."
"Big oil" is a broad term, that likely carries a slightly different meaning for investors, consumers and Senator Warren, but presume the Senator was referring to upstream production. The Senator has spoken at length about the untenable situation whereby "big ag" has consolidated 85% of the meat processing market into four companies. Last quarter, America's largest oil producer, Exxon (NYSE:XOM), sold 2.4mb/d of oil into a global market of ~100mb/d. Upstream oil production is objectively a fragmented market with no pricing power. If "big oil" could corner the upstream market, it would be challenging to explain oil prices falling below zero in 2020.
Giving the Senator the benefit of the doubt, presume she was referring to the refining and retail marketing segments of "big oil." Here too, Marathon (NYSE:MPC), the largest oil refiner in the US, sold ~2.9mboe/d into a ~20.0mboe/d market last quarter. However, refining margins have risen substantially and are relatively unimpacted by war in Russia, perhaps raising eyebrows in Washington.
The weekly Department of Energy reports show that over the past two years, oil refiners reduced US refining capacity by ~1mb/d. Marathon (MPC) shut down the Dickinson and Martinez refineries to convert them to policy-incentivized bio-fuel processors. Phillips (NYSE:PSX) announced similar plans for the company's Rodeo refinery. Holly (NYSE:HFC) did the same with the Cheyenne refinery. Delek (NYSE:DK) and CVR Energy (NYSE:CVI) have also invested heavily in bio-refining. Now that demand for oil products has returned to pre-pandemic levels, inventories are hitting historic low levels, and margins are rising.
Policy measures from Washington are likely to have important implications for investors. A windfall tax on upstream production could further cement E&P's capital allocation plans, and reduce any newfound willingness to accelerate production growth in coming years. Lifting medium term oil price expectations, to the benefit of non-US producers like Canadian Natural (NYSE:CNQ), Petrobras (NYSE:PBR) and others.
To the extent levies are brought against "windfall" refining profits, refiners will no-doubt see a negative impact to share prices. If taxes are increased for gasoline retailers, high-multiple companies like Murphy USA (NYSE:MUSA) and Casey's (NASDAQ:CASY) could see share price pressure. It's yet to be made clear if Washington will return the windfall proceeds to consumers, in hopes of offsetting higher prices at the pump, as Japan has done.