President Joe Biden proposed a quadrupling of the federal tax on stock buybacks during his State of the Union Address, specifically accusing the oil industry of hoarding earnings to buy back stock.
Days later, in another speech, the President doubled down and said stock buybacks in our industry were coming at the expense of investments in U.S. refining. In addition to being patently false, both speeches, once again, revealed a broad misunderstanding — from the biggest bully pulpit in the world — of liquid fuel markets and laws of supply and demand.
Refinery earnings are a function of global supply and demand. Over the last year, demand for gasoline and diesel essentially returned to pre-pandemic levels, while both crude oil production and total global refining capacity have been slower to recover — though both are expected to reach pre-pandemic marks this calendar year. As a result of the temporary mismatch, global refined product supplies got tighter and prices and earnings have both reflected the tension.
The supply/demand balance is dynamic and subject to a lot of outside influence, particularly from geopolitical events, which is why earnings in commodities-based industries tend to be cyclical and can vary significantly from year to year. As you’ll remember, not long ago, U.S. refineries faced negative earnings in the height of pandemic-related shutdowns.
Refiners don’t set growth and investment strategies based on momentary high returns. New refining projects can take decades to pay off (building a new process unit at a refinery, for example, can cost billions and, once operational, can take 15 to 20 years to pay for itself). Refiners take the long view when reinvesting earnings, considering how supply and demand for refined products are projected to evolve — and also the policy environment they are going to be operating under, which, given the President’s latest comments about refineries, could easily be characterized as “inhospitable.”
Even still, refineries do invest significantly here at home — which the President seems to have missed. ExxonMobil recently spent approximately $2 billion on a major refinery expansion in Beaumont, Texas, to enable the processing of more light sweet Permian crude. In addition to expanding its Diamond Green Diesel joint venture, Valero is on schedule to start a new coker and sulfur recovery unit in Port Arthur, Texas, which will increase its capacity for processing heavy crude oil. Phillips 66 and Marathon Petroleum are furthering their investments into advanced renewable fuels here in the U.S., building out renewable diesel and sustainable aviation fuel production capacity that is going to be critical for heavy transportation industries seeking to reduce the carbon intensity of their operations. And beyond these headline projects, every refinery turnaround is a significant reinvestment in safe, efficient domestic fuel production.
Refinery earnings are spent in other ways too. Refiners use earnings to pay down debt, some of which was taken on during the pandemic; they provide shareholders — which include retirees, public employees, service workers and anyone with a 401k or mutual fund — with a return on investment in the form of direct dividend payments; they also have the option to “buy back” shares of stock, which increases the value of remaining shares held by all shareholders. Any publicly traded company, regardless of industry, chooses from the same menu of options when deciding how to put their earnings to work. Where buybacks are concerned, companies like UPS, Walmart, VISA, Alphabet, Apple and Johnson & Johnson are just a few that have announced buyback programs collectively worth billions.
Increasing taxes on liquid fuel producers at a time when the market needs more supply would be nothing short of counterproductive. American refiners lead the world in fuel production and ran full-out for most of 2022 to meet the needs of a supply-strapped global market. In doing so, our industry manufactured more liquid fuels and products than any other country and, when the world needed us most, did more to bring better balance to the market. U.S. policymakers, especially our President, should be proud of this.
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