Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Shell Is Spending More on Shareholders Than on Oil Production
Transcript
- Lucas: Shell just released its annual report for 2025, and one number jumped out at me: they returned twenty-three billion dollars to shareholders last year. That's more than their entire capital spending budget, which was eighteen billion. Luna: Wait — they spent more on buybacks and dividends than on actually finding and producing oil? That seems backwards for an oil company. Lucas: It does, but it's become the new normal. ExxonMobil and Chevron have been doing the same thing for a few years now. The logic is: after a decade of overspending and disappointing returns, investors want cash in hand, not more wells. Luna: So the message is, 'we're not going to grow production, we're just going to give you the money'. Lucas: Exactly. And in Shell's case, the board explicitly said they're prioritizing shareholder distributions over production growth. They actually cut their production target from two point five million barrels a day to two million. Luna: That's a twenty percent drop. But doesn't that create a problem down the road? If everyone stops investing in supply, eventually prices go up. Lucas: That's the billion-dollar question. The industry argument is that demand is going to peak before supply becomes a constraint, so why invest for the long term? But if you look at the IEA's latest outlook, demand is still growing, albeit slowly. Luna: Let's bring in the current market. WTI crude just bounced to ninety-six dollars a barrel, up over three percent in the last week. That's not exactly a sign of a dying market. Lucas: Right, and the futures curve is in backwardation — meaning today's price is higher than future months. That's typically a signal of tight supply. So Shell's strategy makes sense in the short term: take the cash while prices are strong. Luna: But it also means they're not building for the future. And that future could be more volatile — less spare capacity, bigger price spikes. Lucas: That's the trade-off. And it's not just Shell. Exxon spent thirty-two billion on shareholder returns last year, more than double its upstream investment. Chevron was roughly two-to-one in favor of distributions. Luna: So the whole sector is doing this. What about the renewable side? Shell also talks about investing in low-carbon energy, but their numbers are small. Lucas: They allocated about three billion to renewables and energy solutions in 2025. That's less than a sixth of the buyback budget. And they've actually scaled back some offshore wind projects. Luna: So the pivot to green energy is more of a pivot to shareholder returns. Speaking of which — you know, if you find these kinds of breakdowns useful, and you want to keep the show ad-free, a couple of dollars a month goes a long way. Lucas: Yeah, honestly, it makes a real difference. If walking through the economy with us has made something click, you can support the show at buy me a coffee dot com slash fexingo. Luna: It's just a simple way to help cover hosting and research costs. No pressure, but every bit helps keep the conversation going. Lucas: Back to Shell — so the question is, does this strategy hold up if oil prices fall? Because at sixty dollars a barrel, the math changes completely. Luna: Shell's breakeven is around forty-five dollars for existing production, but to cover the dividend alone they need oil above fifty-five. So there's a cushion, but not a huge one. Lucas: And they've taken on more debt to fund buybacks in some quarters. That's a risk if the cycle turns. The market seems fine with it right now — Shell stock is up nearly eight percent this year. Luna: But it's a cyclical business, and investors have short memories. The last oil crash in 2020 wiped out dividends across the sector. Lucas: True, but the argument is that the industry has learned its lesson. They're not chasing growth; they're maximizing free cash flow. The question is whether that's sustainable. Luna: What about the competition? If Shell and others aren't growing, someone else will. US shale producers are still adding rigs. Lucas: They are, but even there, discipline is the watchword. The Permian Basin operators are mostly returning cash to shareholders too. The days of double-digit production growth are over for now. Luna: So we're in an era of capital discipline across the board. That's good for investors in the short term, but it sets up a potential supply crunch. Lucas: And that's the irony. The more disciplined the industry gets, the higher the odds of a price spike that tempts them back into growth. It's almost like a cycle we can't escape. Luna: Right. And Shell's annual report is just one data point, but it's a telling one. Twenty-three billion to shareholders, eighteen billion to the business. That's the new math of Big Oil. Lucas: And it's a math that every oil investor needs to understand, because it determines not just your dividends, but the future price of oil itself.