Big Oil CEOs face a paradox: record profits, murkier choices
Major oil companies have been pulling in huge profits since the Strait of Hormuz was constricted by conflict. But the bonanza tells only part of the story. For the chief executives running those companies, every profitable day is now accompanied by more difficult questions about how long the windfall will last and what the business should look like when it fades.
Corporate leaders are facing challenges from every direction. Some are shared across the industry, while others are unique to their own assets, projects and political exposure. The result is that long-term planning has become harder, not easier, at the exact moment cash flows are hitting records.
Waco economist Ray Perryman and Odessa oilman Kirk Edwards say the leaders of the world’s largest oil companies are earning every dollar.
A wider set of variables
Perryman said the biggest long-term challenge for oil companies is balancing the need to produce oil and natural gas profitably today while preparing for an uncertain energy landscape in the decades ahead.
“The planning process is certainly complicated by geopolitical tensions but also by the ongoing energy transition to lower-carbon options that must occur while recognizing that fossil fuels produced and used in a cleaner manner will be needed in increasing quantities in the future,” he said.
The current crisis in the Middle East is one example of how quickly the calculus can change.
“The current situation in the Middle East is obviously generating short-term profits and incentivizing immediate production increases that are achievable within existing footprints, but it is simultaneously adding to uncertainty regarding future global supply conditions,” Perryman said.
Companies are being forced to decide how much to invest in drilling programs and replacement supplies while also weighing options such as carbon capture, hydrogen, biofuels and broader electrification. Costs for equipment are rising, regulatory policy is subject to sudden swings, and executives know that political conditions in a given country can shift with little notice.
“The bottom line is that companies need to keep supplying affordable and reliable energy, generating returns and preparing for future exigencies,” he said.
Perryman also noted that demand for energy is expected to keep growing, driven by manufacturing expansion, rising living standards in developing economies, and the rapid growth of energy-intensive data centers tied to artificial intelligence. He said the industry will ultimately need to produce more of everything, with greater emphasis on environmental performance.
“There are technologies available and arising to accomplish this aim, but timing and intensity are highly uncertain,” Perryman said. “When major energy firms plan over the long-term horizon, which they absolutely must do to sustain profitability and even viability, they are currently dealing with variables that were far less important a few decades ago like electrification, LNG, new green fuels and technologies, AI and climate concerns.”
He added that unforeseen variables are almost certain to appear.
“Moreover, there will no doubt be other variables that arise which are completely unknown at present,” he said. “The process will be characterized by new challenges, but the essential nature of energy will always provide opportunities for success.”
Good fortune isn’t the same as good policy
Edwards, an Odessa-based oilman, said there is no serious question that major oil companies and most producers outside the Persian Gulf are making more money than they expected when they put together their budgets a year ago.
“But it is important to understand why,” he said. “The oil companies did not decide to attack Iran. They did not decide how the war would be prosecuted and they certainly did not decide that Iran would retaliate against its neighbors and severely restrict traffic through the Strait of Hormuz.”
Those geopolitical decisions lie outside the control of ExxonMobil, Chevron, Shell, BP or any other producer. What the companies had in place were producing assets that became far more valuable the moment global supply routes were threatened.
“If you are producing a barrel in the Permian Basin, Guyana, Brazil or another region that can reach the world market without passing through Hormuz, that barrel has suddenly become substantially more valuable,” Edwards said. “That is not profiteering. That is simply how a global commodity market works when supply becomes threatened.”
He said the refining side is even more striking because the concern is no longer just about raw barrels. The market is increasingly worried about whether enough gasoline, diesel and jet fuel can be manufactured and delivered where needed. That has pushed refining margins to extraordinary levels, and the integrated majors that own both production and refining assets are collecting enormous returns.
Still, Edwards said he would be reluctant to fault them. If people want to criticize something, they should look at the decisions that produced the crisis, not at a company that happened to own an oil well or refinery that became more valuable because of it.
“Ironically these higher profits do not necessarily make the CEO’s job easier,” he said. “They may actually make long-term planning harder.”
The next decision is the hard one
Edwards said an executive today has to decide whether $90 or $100 oil is a new investment environment or a temporary geopolitical premium that could disappear quickly if the Strait of Hormuz fully reopened or a peace agreement took hold.
That distinction is central when the projects under consideration may require billions of dollars and 10 or 20 years to recover the investment.
“Do you authorize another deepwater development? Do you build another LNG facility? Do you sanction a multibillion-dollar refinery expansion? Do you increase drilling in the Permian or do you return the excess cash to shareholders and wait until there is greater visibility?” Edwards asked.
He said those choices become especially difficult when a CEO knows that today’s $90 oil could become $70 oil quickly if geopolitical conditions changed. And in a world where geopolitical risk is inseparable from energy economics, a company with assets in 20 or 30 countries has to account for wars, sanctions, tariffs, shipping lanes, changing fiscal terms, pipeline security, currency risk and environmental regulation all at once.
“At any given time the CEO is thinking about wars, sanctions, tariffs, shipping lanes, governments changing fiscal terms, pipeline security, currency risk, environmental regulation and whether an asset that is economically attractive today could become politically inaccessible tomorrow,” Edwards said.
There is also the problem of resource replacement. An oil company can generate spectacular earnings for several years by limiting investment, but output eventually declines. Finding the next Guyana or building the next generation of major projects takes enormous amounts of capital and years of work.
That has created perhaps the most fundamental strategic tension in the industry.
“Shareholders have rewarded capital discipline and returns rather than production growth,” Edwards said. “At the same time the world continues consuming enormous quantities of oil and natural gas and it expects the industry to have replacement supplies available when they are needed. Those two objectives do not always fit comfortably together and almost anything can go wrong along the way.”
Governments can change, wars can start, pipelines can be attacked, tanker routes can close, refineries can fail, and permitting delays can add years to a project. Costs can escalate sharply, host governments can demand larger shares, and oil can fall $25 a barrel between the day an approval is granted and the day production begins.
The current Hormuz situation is a clear illustration of the strange business these companies are in. The majors are generating exceptional cash flow because of something they had no control over, but the same geopolitical instability is making the next allocation of capital more difficult.
“The CEOs’ challenge is not figuring out how much money the company can make at today’s oil price,” Edwards said. “It is deciding what the world is going to look like five, 10 and 20 years from now. And right now that may be harder to predict than at almost any point in recent memory.”