Oil Is Fashionable Again In The Banking World

Oil prices have rocketed above $90 per barrel, and, with “big oil” companies like ExxonMobil, Chevron and BP reporting huge profits, no one should be surprised that the banking world is eager to provide financing for the sector again. Indeed, as a looming shortage of oil supply on the global market becomes increasingly evident, Reuters reported Monday that even Fatih Birol, head of the UN-affiliated International Energy Agency (IEA), is calling for OPEC+ countries to produce more oil.

Speaking at a conference in Cairo, Birol urged OPEC+ member countries that have failed in recent months to meet their production quotas under that cartel agreement to do more to close that gap. This is the same Fatih Birol, of course, who is a major proponent of the narrative around the “energy transition.” It is the very same Fatih Birol who regularly applauds ESG investor groups for their efforts to deny capital needed by the oil industry to finance new drilling projects. It is the same Fatih Birol whose agency informed the world last May that it needed to stop making all new investments in new oil projects if it is to meet the UN’s goals on climate change.

Of course, Brent crude was selling for $67 per barrel when Birol and the IEA issued that report. It’s amazing what difference a $94 oil price will make in the talking points at the UN.

It’s also amazing what a difference $94 oil will make in the investment decisions and talking points at big banks and investment houses. A new report by anti-oil and gas activist group ShareAction scolds some of the biggest global banks, noting that “Only a handful of banks restrict financing to oil & gas projects and even fewer restrict financing to the companies expanding oil & gas capacity.”

Using that May, 2021 IEA report as its baseline, ShareAction is especially critical of the European banking sector, saying “European banks have financed upstream oil & gas expanders to the tune of over US$400 billion since 2016 – and show no sign of stopping.” That financing comes despite many of those same banks making pledges since 2016 to decarbonize their investment portfolios. ShareAction singles out Barclays, BNP Paribas, Crédit Agricole, Société Générale and HSBC for specific criticism.

Laying out the game plan of the climate change movement, ShareAction warns these banks of severe reputational risk should they continue to finance oil and gas expansion. “As energy companies go to riskier lengths to expand their operations, the stakes become higher. Legal challenges are becoming a popular means to try to stop projects but also put media pressure on companies. This, coupled with the ever-growing divestment movement, mean reputational risks are increasing for banks,” the report says in its executive summary.

What we see here is a clear case of an activist group, ShareAction, acting out in frustration when events in the real world fail to conform to the requirements of the “energy transition” narrative. ShareAction has labored under the illusion that, through intimidation tactics like lawsuits and media pressure, it would be able to prevent profit-making organizations like banks and upstream oil companies from making investments that become increasingly profitable as the price for the commodity rises. It’s an illusion that simply does not take place in the real world.

In the real world, industries respond to high prices resulting from scarcity by investing capital in new projects to resolve the scarcity problem. Banks, also in business to make profits, are happy to provide the financing for those new projects, based on the expectation of a higher rate of return than they can receive by investing “green” projects that ShareAction and Mr. Birol endorse.

Try though it might, the global climate change lobby cannot repeal the profit motive or the immutable law of supply and demand. So long as the world community demands more oil, companies will invest capital in new projects to supply it, and big banks will gladly provide the financing for those projects. This is not real complicated – it’s how the business world has worked forever.