Oil companies have been up and down about investing more of their profits in green energy. Having made promises to do just that, recently they have backed off.

The reason for the change of heart is simple. They make a lot more money investing in oil than they do in renewables.

According to Dan Pickering, the chief investment officer at Pickering Energy Partners, producing U.S. oil and gas at current prices can expect a rate of return on projects of 20-50 percent. He compares this to the 5-10 per cent you can expect from wind and solar.

Shareholders demand profit … or else. Consider BP for instance. It persisted longer than most on the virtuous path and paid the price. From January 2020 to December 2022, its stock price dropped by 10 percent while companies staying with oil saw their stocks jump: up 46 percent for Chevron, 57 percent for ExxonMobil. BP got the message. Early this year, it announced it was investing less in renewables and more in oil and gas.

Of the $800 billion the oil companies spend each year, about 2.5 percent goes to green power. According to the International Energy Agency, they would have to spend half by 2030 to meet global climate targets. They have a long, long way to go.

But the demand for oil is immense and rising. Fossil fuels power the global economy, and as long as they do, prices and profits will remain high.

Despite the high profits and the need to reduce greenhouse gasses, we continue to heavily subsidize fossil fuels. A report by the International Monetary Fund found that direct monetary subsidies alone have risen from $500 billion in 2020 to $1.3 trillion in 2022. Adding in implicit subsidies, for such items as undercharging for environmental costs, the total subsidies ballooned to $7 trillion.

At the United Nations Climate Change Conference (COP28) in December, the world’s nations agreed to phase out inefficient fossil fuel subsidies. “Inefficient” wasn’t defined.

But the major subsidy that has created boundless oil wealth is rarely identified as such. I refer to the OPEC cartel’s ability to manipulate the price of oil. In the 1970s, the members of the Organization of Petroleum Exporting Countries realized that they had a near monopoly on oil and could therefore jerk the price around by simply turning the taps on and off. When the epiphany hit and they acted on it, the price of oil shot from three to 30 dollars a barrel overnight. OPEC members became filthy rich (as did hangers-on like Alberta).

Most of my fellow Albertans believe in the virtue of the free market, so the fact that the oil market is in fact the antithesis of a free market—a monopoly—and a government monopoly at that, isn’t discussed in polite society. A family secret so-to-speak. Government interference in the marketplace is generally frowned upon.

In a truly free market the price of a product approaches what the most efficient producer can make it for plus a modest profit. Saudi Arabia can produce a barrel of oil for about $3-5 per barrel, so with the world oil price running at over $70 per barrel you get an idea of the magnitude of profit derived from what we might call the OPEC advantage—a subsidy in all but name.

Renewables, unfortunately, don’t have an equivalent, putting them at a considerable disadvantage when it comes to attracting investment. Nonetheless, they carry less risk and are now more than competitive with fossil fuels.

And there is lots of interest. In fact, there is now more money invested annually in renewables than in fossil fuels. You can make money, just not as nearly much as in oil and gas. Consequently little of that investment is coming from the oil giants.

Considering the benefits of clean energy—reduced air pollution and CO2 emissions—and the costs of fossil fuels that don’t show up in market prices, government action to reduce the OPEC advantage enjoyed by oil companies would be thoroughly justified. Level the playing field, so to speak.

More carbon taxes, anyone?

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