The Oil Price Signal of 2023-2024

The Gist: The industry is now able to achieve its long-term average return on capital of 10% at oil prices in the $70-$90 per barrel range, a significant shift from just a few years ago.

Before we begin, I have a quick question/request. Could you recommend some podcasts you enjoy in the oil & gas, commodity, energy, or macroecspace? I'm planning to contact them to propose myself as a guest in order to grow the Crude Chronicles. Let me know your thoughts!

OK, onto our regularly schedule programming.

Chevron CEO, Mike Wirth said it best in a Bloomberg interview, “Through the cycle, it’s an industry that generates 10%-ish returns on capital employed, which is I think, by the standards of many other industries, a pretty modest return.” (HERE - 3:50 mark).

He is not wrong, in fact he is spot on.

The long term average return on capital employed for Chevron, formerly known as Standard Oil of California is in fact 10.8%.

The same applies to its competition, like Occidental, with a long term average of 10%.

The average for ConocoPhillips and its predecessors, dating back to 1927, is just slightly below the 10% mark, but still close enough.

ExxonMobil’s long-term average stands at 13%, largely driven by its outstanding performance during the 2000s cycle.

Global oil demand once grew at double-digit rates, then slowed to high single-digit growth. Today, demand grows in the 1-3% range.

Despite this shift, the "10% rule" has consistently applied—sometimes returns are above, sometimes below—but oil companies have typically achieved a 10% return "through the cycle."

What does change, however, is the price of oil required to generate that 10% return.

Below is the market cap-weighted return on capital employed for integrated oil companies since 1917.