Eli Hartman/Odessa American
A pumpjack operates just outside the Odessa Ector Power Partners natural gas power plant, March 9, 2022, in Odessa, Texas.
Times are good for American oil companies and their investors. Oil prices remain in the triple digits per barrel, off the $140 peak earlier this month, but not by much. Per-gallon prices at the pump, meanwhile, remain stuck near record highs. According to AAA, the national average remains at $4.25 a gallon, just barely off of March 11’s record of $4.33. And while President Biden and various congressional Democrats have begged the industry for help to ease the burden of high prices, oil majors and their Wall Street investors have pushed back against any call to increase drilling, lest it interfere with their profit bonanza.
It’s a far cry from the moment, not even two years ago, when oil futures contracts went negative, and the American oil and gas industry went begging to the federal government for help. Thanks to the CARES Act and a willing Federal Reserve, they found it. The federal government’s largesse set the table for the windfall era in oil and gas that has been ongoing since long before Russia invaded Ukraine, with no controls or oversight that might have tempered the price-gouging that is now rampant. Many oil companies, in fact, are so fresh off of massive multibillion-dollar bailouts that they still haven’t finished spending the free money they got from taxpayers as part of the initial coronavirus response efforts.
Via lobbying efforts, the fossil fuel industry was able to functionally annex one of the Fed’s emergency lending facilities that was established with CARES Act funds, known as the Main Street Lending Program (MSLP), to accommodate its own needs. The MSLP was intended to provide emergency support to small and midsize businesses, regardless of industry. Yet after extensive pressure from the oil and gas industry, fossil fuel allies in Congress and the Trump administration succeeded in getting the Fed to rewrite the program to benefit heavily indebted oil and gas companies that were struggling well before the crisis.
Fossil fuel firms, with help from Sen. Ted Cruz (R-TX) and industry lobbyist Dan Brouillette, who was then Trump’s energy secretary, sought five changes to the program, ranging from the ability to use the public funds to refinance and make interest payments on pre-existing debts, higher leverage limits, a doubling of maximum loan sizes to $300 million, and exemption from both having to maintain payroll and proof they needed the financing due to the coronavirus. They won all five.
By the end of 2020, 46 fossil fuel companies had received Fed-subsidized loans totaling $828 million in just six months under MSLP, with an average loan size nearly double the program’s median loan for all industries. Clean-energy companies, meanwhile, received just nine loans totaling $62 million over the same period. The MSLP implemented no controls on how that money was spent: no restrictions on share buybacks, no limits on executive compensation, and no payroll maintenance requirements.
MSLP was only one small piece of the government’s support. The Secondary Market Corporate Credit Facility (SMCCF), created to purchase the previously issued bonds of corporations on the secondary market, also fueled a historic borrowing bender by oil and gas companies. The Fed purchased these bonds on the open market as a signal to investors that they were sound. Legitimized by that support, oil and gas companies went on to issue more than $100 billion in new debt by the end of 2020. By September 2021, that figure had risen to $183.6 billion.
That program freed up billions of dollars for mergers and acquisitions, and consolidation within the industry. For opportunistic medium- and large-sized firms, the program underwrote their ability to bid on flagging competitors, and to build consolidated blocs in certain markets and oil fields. Over that same period during which oil and gas companies issued nearly $200 billion in bonds, they turned around and spent at least $53 billion on acquisitions, according to Bailout Watch.
These consolidations were obvious immediately. The BigLaw firm White & Case published a report in July 2021 detailing oil and gas mergers entitled “New Heights,” celebrating that deal value had “increased more than eightfold to US$45 billion” and risen in volume by 73 percent year over year.
“We literally saw them use that money for mergers and acquisitions right away. Wilks Brothers, a fracking company, bid on their largest competitor with a bid that was nearly the exact same amount as their MSP loan,” said Christopher Kuveke, a data analyst at BailoutWatch.
The nature of the Fed’s decisions in dealing with oil and gas prove clearly the ways in which it’s a political body.
Oil and gas got one more sweetener in the CARES package. As part of the Bush-era tax cuts, corporations lost their ability to use past losses to offset their tax burden, known officially as Net Operating Loss Carrybacks (NOLs). Their abolition was one of the few “pay-fors” in that tax bill, and one of the only things that the corporate sector didn’t delight in. But CARES unraveled that prohibition, allowing firms to carry back NOLs banked between 2017 and 2021 for five years. The result of that decision was massive tax refunds from the federal government to the oil industry, with the IRS writing checks as high as $1 billion to major firms.
Take Marathon Petroleum, perhaps the poster child for the sweetheart treatment that oil majors got under CARES. Marathon got a $1.1 billion check in the form of a tax refund, thanks to the NOL overhaul. It issued $2.5 billion in new bonds, backstopped in part by the $17.3 million of bonds it sold to the Fed via the SMCCF. Its total direct and indirect benefits thanks to CARES summed to $4.6 billion. And yet, the firm still laid off 1,920 workers nationwide in 2020, while managing to find millions to spend on lobbying.
Defenders of the program say the current oil crunch would have been far worse if not for CARES’s generous bailout provisions. But the capital that oil companies acquired allowed them to concentrate the industry, leading to precisely the unfavorable dynamic we have today. Companies are refusing to add production capacity because the Wall Street investors staking them prefer to extract profits without additional investment. “$100 oil, $150 oil, we’re not going to change our growth rate,” said Scott Sheffield, chief executive of Pioneer Natural Resources, on an investor call in February. The inability to access oil reserves, no matter how high the price soars, is a direct consequence of the Fed’s largesse toward domestic oil interests.
Kuveke, who closely monitored the program, also noted that the companies that received bailout money “weren’t exploration and production companies who were struggling to drill more wells, many of them were midstream and downstream guys who were providing support to the big majors. Many were companies that were not vital to production, that rake in profit hand over fist when times are good and need help when times are bad.”
Those loans were extended with little oversight, meaning that no one at the Fed is following up to see how those resources have been used. And with banks, private equity firms, hedge funds, and institutional investors of all sorts buying up oil and gas stocks and bonds, that means that even pension funds and retirement accounts are now exposed to an industry that, despite its current profitability, looks dreadful in the long term because of climate change. That risk has now spread.
It’s not hard to imagine an alternative scenario. If even some percentage of the huge amount of money dedicated to free loans and bond-buying had been put toward renewables and job retraining, to help facilitate a transition away from fossil fuels that is as necessary and undeniable as it was two years ago, we’d be meaningfully further along in that process. While energy demand was low, there could have been a meaningful expansion in the capacity of the renewables sector. Instead, the calls to double down on fossil fuel infrastructure are getting louder and louder.
And even if that green investment hadn’t happened, the implementation of meaningful standards and oversight might have prevented the merger, buyback, and executive bonus regime that has predominated ever since, and allowed the investor class to wring lavish profits out of the industry at a time when the federal government needs it to help with its diplomatic efforts with Russia.
The nature of the Fed’s decisions in dealing with oil and gas prove clearly the ways in which it’s a political body, and why someone like Sarah Bloom Raskin was such an important nominee for the Federal Reserve Board. Raskin spoke out against the Fed bailout of the industry in 2020, and she wanted financial firms to be mindful of the risk of holding unstable fossil fuel assets during a green transition. Now we have exactly the scenario she warned of: a huge shock leading oil and gas firms to pull out of Russia and strand once-valuable assets. Of course, that’s why the oil and gas industry lobbied so hard to down her nomination.
For now, the federal government has just done a massive favor to the oil and gas sector, which is repaying them by refusing to increase production and insisting that the few environmental regulations that restrain them be repealed. Armed with the money we gave them, they’ve been able to up their influence in Washington with a lobbying blitz. The green-transition process has been deferred and made more expensive, but it remains just as urgent and inevitable as before.
