Politics is broken
Raul Grijalva sends a letter to EOG, OXY and Devon that demonstrates everything that's wrong with it
On March 18, Raul Grijalva sent invitations to the CEO’s of Oxy, EOG and Devon to testify to the Committee on Natural Resources April 5th. Per Mr. Grijalva’s release on the subject
The hearing will examine the fossil fuel industry’s failure to help stabilize American gasoline prices, which have skyrocketed in the weeks following Vladimir Putin’s brutal and deadly attack on Ukraine.
He states that “EOG bragged that 2021 was record setting with $2.7 billion in cash returns to shareholders; Devon boasted over $1.8 billion in dividend payouts and related a commitment to “double down on share repurchases”; and Oxy stated their intentions to prioritize $3 billion in stock buybacks and increase dividends in 2022.”
I’d love to put those numbers in perspective. EOG has assets of $38.2 billion. Devon has assets of of $20 billion. Oxy has assets of $75 billion. Returning $7.5 billion of capital on $133+ billion in assets isn’t really that good, is it? After all, Google returned $50 billion to shareholders in 2021. For goodness sakes, Apple, Microsoft, Meta, Oracle and Google bought back $66.7 billion of shares in the 3rd quarter of 2021 alone. It is striking to me that politicians don’t realize that companies are “borrowing” the money from their shareholders with the primary objective being giving them back a whole bunch more of it. I don’t think politics has the same goal, but I’m no politician.
Curious at Mr. Grijalva’s commanding grasp of profitability, capital markets and the allocation of capital, I looked up his CV. He attended the University of Arizona and received a degree in sociology. After graduating, he ran for a school board seat in 1972 (losing) and then ran again in 1974 (elected) where he served until 1986. In 1987, he became the Assistant Dean for Hispanic Student affairs at his alma mater and was a member of the Pima County Board of Supervisors from 1989 to 2002 before resigning to run for Congress. He won his Congressional seat in 2015 and currently sits as the Chair of the Natural Resources Committee. His net worth in 2018 was $235,010 at the age of 74. Perhaps it is why he is so passionate about seniors issues and less informed about business ones.
Seniors should not have to spend their retirement days in poverty. That’s why I am opposed to any attempts to cut or privatize Social Security. We need to strengthen it, not start hacking away at one of the fundamental agreements between our government and the American people.
We need to fight back against attempts to privatize Social Security that would put the fate of millions of Americans’ retirements in the hands of Wall Street, who has already proved that they cannot be trusted. Moreover, we must ensure that the wealthiest Americans pay their fair share into the system by removing the cap on taxable earnings which is currently set at $128,400.
My goal here is not to target Mr. Grijalva for his career choice, lack of business experience or the continued use of inflammatory talking points that are meant only to cater to a largely uneducated base. A base with a median home value of $140,000, median household income of $48,000, and 30% of which hold a bachelor’s degree or higher. The disdain and ignorance with which his letters were written are easily explained by the fundamental need for re-election and are egregious enough to warrant a more pointed response than our favorite CEOs can actually give in testimony. To Mr. Grijalva I write:
Dear Raul,
I recently saw your letters to the CEO’s of EOG, Oxy and Devon summoning them to Washington to testify April 5th. Your frustration is palpable. Your voters are angry and feel the weight of “the energy transition” in their pocketbook. With a median household income of $48,000, it comes as no surprise your constituents feel the impact of $5.00/gal gasoline. So you say to our industry:
I remain concerned that the oil industry is not doing enough to protect American consumers from rising gas prices. Within hours of Putin’s initial attack, the oil industry started pushing out press releases and talking points telling us that the key to ending this crisis is to immediately hand U.S. public lands and waters over to fossil fuel companies and quickly loosen the regulatory strings. We heard nothing about industry’s plan to protect Americans from bearing the cost of Putin’s war at the pump. Instead, the oil industry seeks to protect its $205 billion in profits last year and expand dividends to shareholders.
I invite you to testify before the Committee on Tuesday, April 5th at 1:00 pm EDT so that Members can hear why Americans are paying higher prices at the pump while oil company executives and company shareholders pad their pockets.
I’d like to point out that Oxy, Devon and EOG are producers of oil and gas and are only a very small part of a complex production, transport, refining, and trading supply chain. To say that producers set “prices at the pump” is the same sort of ignorant as accusing Charmin of toilet paper price collusion in 2020. Oil is a global commodity and traders set the price. OPEC+ controls 40 mmbo/d of production while the U.S. contributes a mere 11.6 mmbo/d. U.S. oil and gas producers are price takers, not price makers.
How big is 40 mmbo/d (context matters)? The world consumes 100 mmbo/d of oil and rising. The “rising” part is important because Government sponsored agencies such as the International Energy Agency (IEA) and the United Nations (UN) attempt to avoid the disdain of consumers by attacking supply and hoping consumers won’t connect cause and effect. They call to immediately cease exploration for oil and gas, making clear that climate is the foremost concern. Energy security? Food? Prosperity? Take a seat. Said Antonio Guterres, the UN’s Secretary General:
“the fallout from Russia’s war in Ukraine risks upending global food and energy markets, with major implications for the global climate agenda.
Countries could become so consumed by the immediate fossil fuel supply gap that they neglect or knee-cap policies to cut fossil fuel use. And this is madness: addiction to fossil fuels is mutually assured destruction.
In this backdrop, is it any wonder that the capital markets have significantly reduced investment in and oil and gas companies? This is not hyperbole. The results are clear. After the price crash of 2014 (from $108 - $35) industry took 3 years to restore production, and that was only done by substantially outspending cash flow:
Today, Wall Street has told oil and gas producers that they DO NOT want to see oil and gas producers grow production. They DO NOT want to see oil and gas producers waste cash flow on low return investments. These are lessons from 2008-2014, the last time we saw oil over $100/bbl. This time around, THEY DO want to see significant returns of capital to investors. Rightly or wrongly, capital allocation is done by Wall Street. If you would stop bailing them out when things go badly, perhaps things would go less badly. Bottom line. Washington D.C. has enabled an energy policy crisis and Wall Street has accelerated it so THAT is why oil and gas companies are being financially disciplined. Their goal is not to facilitate bad energy policy, it is to make money in spite of it.
As you point out with regards to social security, you blame and fear Wall Street for unintended consequences. True, Wall Street allocates capital and CEOs listen. Perhaps you can call Larry Fink to testify so that he can explain this important point to you.
You and your peers in Washington must take personal responsibility for your role in creating this crisis. Capital markets aside, Washington continues to signal to oil and gas companies that we will be vilified for our production of oil and gas. Shall we discuss canceling the Keystone pipeline, talking about “windfall profits” and symbolically suspending federal leasing and permitting? Washington has overtly prevented oil and gas companies from doing exactly what you are asking of them. These are issues the Natural Resources Committee could address, you can begin to solve the problem. Instead, you seek to vilify. Repeatedly.
In your release, you helpfully quote $205 billion of profit in 2021. Only including the P,P&E of Shell, Exxon, bp and Chevron, they have $1 trillion in deployed capital. To include the assets of ALL the oil and gas companies, you are talking multi trillion. Elon Musk’s personal net worth of $245 billion exceeds the entire profitability of the oil and gas industry. His company is worth $1 trillion on $18.9 billion of P,P&E. Big numbers with lots of 000’s are neat, but they need context.
COVID led to a breakdown in the global supply chain and economies, exacerbated by the unlimited printing of money in countries around the world. It has led to massive inflation, which is apparent in commodities such as coal, wheat, uranium, lithium, nickel and oil and natural gas are traded on a global scale. While energy is only 5% of the global economy, it is used to mine, to create, to transport and to run our world. As go energy prices, so too goes inflation. This is a key problem. Jerome Powell knows it’s a key problem. And he knows a 1000 bps interest rate hike is the only way to stem it. Good luck surviving that in the mid terms.
Pricing signals in the market are what drive development. As prices drop, as they did in 2020, development dramatically slows. As perceived scarcity increases, the price goes up to encourage more development. But these responses take time. In oil and gas, steel and casing is 6 months back ordered, sand for frac’ing (which the administration opposes while being required in ~100% of HZ development) is in short supply due to labor and trucking shortages. And when Ms. Warren and Mr. Sanders tweet about windfall profits taxes, companies respond… by not investing.
There is a solution, of course. During the lockdowns of 2020, oil demand fell from 100 mmbo/d to 65 mmbo/d for 45 days. Prices fell from a January 2020 high of $63/bbl to a low of -$37/bbl in April. 70% of oil consumption is for transportation of people and goods. If you wish for prices to come down in the short term, the American consumer must restrict their own consumption.
By threatening 3 mmbo/d of Russian oil (3%), the market responded with a 20% ($25/bbl) premium for crude. Imagine what success you could have encouraging consumers to reduce their consumption by 3 mmbo/d, which is roughly 15% of U.S. daily demand? Perhaps instead of oil and gas CEOs, why don’t you invite the American consumer to congress and testify as to why they won’t change their lifestyle? Ask them to give up Walmart, cheap utilities, and quit their job if they can’t work from home. All of these suggestions will be popular, and very effective at solving your “crisis.”
The good news for you? This is a problem that solves itself. The higher prices go, the less consumers use. The less consumers use, the less CO2 emissions they create. And the less CO2 emissions they create using less “stuff” the closer we are to averting the “climate apocalypse” you keep referring to.
Running a business is hard, and you would know that if you hadn’t graduated and immediately entered politics. EARNING a living is very different than TAXING one.
Love and hugs,
DRW
Nice work David. I think it's important that letters of this type are sent. But, its going to be over his head. It's easier to just club us for his base. As you said all he really cares about is being re-elected. He's never made any more money than he is now. Politics is broken. Idiots can vote.
David, you might not be a politician but don’t fret…there is still a chance you are a biologist.