Energy producers in the west have found themselves in the political crosshairs after a rally in oil (USO) and gas (UNG) prices hit consumer pocketbooks. In the US, Congress quickly called the CEOs of several energy producers to testify in "gouged at the gas station" hearings. Calls for windfall profit taxes have been heard on both sides of the Atlantic. While little focus has been put on creating a stabile political environment to encourage the investments needed to solve an emergent energy shortage.
During Q1, BP (BP) walked away from investments in Russia, leading to a $20b loss. Shell (SHEL) did the same. Yet Labour leader Ed Miliband stated, "the Government's case whole case against the windfall tax has now been exposed as a sham .. their windfall profits are going mostly into share buybacks .. the Government has run out of excuses." In the US, calls for windfall taxes have been paired with legislation to sue OPEC.
Boris Johnson met with BP (BP) and Shell (SHEL) this week. Indicating, "our message to them, and what is very, very clear .. this is a moment where we need you as a country to invest massively." Addressing the windfall tax question in the press, Johnson said, "what the country needs is a government that will take a big decision about how to fix our energy sector, and you don't do that simply by clobbering the companies that we need to make investments in our domestic energy."
The worst-case scenario for consumers, and an increasingly likely scenario, is that energy supply shortages remain unsolvable by legislators or central bankers. A near decade of reduced investment in the sector was followed by pandemic-related uncertainty that severely slashed oil and gas investment. Supply chain challenges now appear to be slowing the supply response to higher prices. Compounding the challenges, US and EU leaders are looking to remove the world's largest producer of energy, Russia, from global energy markets.
US production is going the wrong way, and Q2 guidance shows no indication of an inflection higher. Whether legislators choose to work with, or in opposition to, the oil and gas industry remains unclear. However, the sooner the political climate stabilizes, the sooner energy companies can plan for the future and invest accordingly. A fact that Boris Johnson appears to understand very well.