Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / How Shell Oil Profits Fund Giant Share Buybacks
Transcript
- Lucas: Shell announced another multi billion dollar share buyback this week — three point five billion dollars, to be precise — and the market cheered. Shares are up about two and a half percent in the last five days, even as the broader S&P 500 had a rough week. Luna: Three point five billion. That's not pocket change. And it's not a one-off either — Shell's been running these buyback programs for quarters now. Lucas: Exactly. This is the kind of cash return that makes income-focused investors love Big Oil. But it also raises a question that doesn't get asked enough in the middle of a rally: what is Shell not spending that money on? Luna: You mean the energy transition. The renewables build-out. If they're sending three and a half billion back to shareholders in one quarter, that's three and a half billion not going into wind, solar, hydrogen, whatever. Lucas: Right. And Shell is not alone. Exxon and BP have both ramped up buybacks in 2026. The logic from the C-suite is straightforward: we generate enormous free cash flow at current oil prices — WTI crude is around seventy-nine dollars a barrel, Brent at eighty-one sixty — and the most tax-efficient way to return that to owners is buybacks. Luna: Plus, with interest rates still elevated — the ten-year Treasury is around four point three percent — the opportunity cost of holding cash is real. Why not reduce the share count and boost earnings per share? Lucas: That's the bullish case. And it's hard to argue with when you look at the stock performance. Shell is up something like fifteen percent year-to-date. But the bear case is that these companies are slowly eating their own seed corn. Luna: Eating the seed corn — meaning they're not planting for the next harvest. They're relying on oil prices staying high, and on existing fields continuing to produce, rather than investing in what comes next. Lucas: Precisely. And the timing is interesting, because clean energy stocks have been under pressure. The iShares Global Clean Energy ETF, ticker i c l n, is down about one percent over the past five days. Enphase Energy, ticker e n p h, down over three percent. First Solar down almost four percent. Luna: So while Shell is buying back stock, the renewable sector is getting hammered. That divergence — oil company profits soaring, clean energy struggling — it's been the dominant narrative all year. Lucas: And it's not just Shell. Look at the numbers across the industry. Exxon Mobil, ticker X-O-M, up two point four percent in the last five days. Chevron, C-V-X, up two point five. The XLE energy sector ETF is up one and a half percent. Meanwhile, the clean energy ETF ICLN is in the red. Luna: But is that a fair comparison? I mean, Shell and Exxon are generating billions in cash flow. A lot of the clean energy companies are still pre-profit or growing revenue but not earnings. Investors might just be rationally allocating capital. Lucas: It is rational in a high-interest-rate environment. When the risk-free rate is over four percent, you demand higher returns from risky assets. And many renewable projects have long payback periods. So the cost of capital hurts them more. Luna: So Shell's buyback is a signal that management thinks their own stock is the best investment available. But is that because the stock is cheap, or because they don't have enough high-return projects to spend on? Lucas: That's the key question. And the answer might be a bit of both. Shell's price to earnings ratio is around twelve — that's not expensive. But also, the returns on new oil and gas projects are uncertain. The world is still moving toward electrification, even if the pace has slowed. Luna: And there's political risk. The regulatory landscape for fossil fuels could shift dramatically depending on the next election cycle. Maybe Shell figures: better to return cash now than bet on a policy environment that might turn hostile. Lucas: Yeah, that's a real consideration. But let's look at what Shell actually said in their announcement. They cited strong operational performance and cash generation. They didn't say they're giving up on renewables. In fact, they reaffirmed their commitment to becoming a net-zero emissions energy business by 2050. Luna: But talk is cheap. The proof is in the capital allocation. If Shell is spending three point five billion on buybacks in one quarter, how much are they spending on low-carbon energy? You can look it up — it's a fraction of that. Lucas: It is. And that's the tension. For investors who believe the energy transition is inevitable, Shell's buyback strategy looks like a slow-motion mistake. For investors who think oil and gas will be dominant for decades longer, it's just smart capital return. Luna: And for the average listener who might hold an energy ETF or a mutual fund, they're probably benefiting from these buybacks. Higher EPS, higher dividends. But they should also ask: what am I not getting? Lucas: That's a really good way to frame it. And it ties into something we talk about on this show all the time — the real economics of energy. Not just the price per barrel, but how companies actually deploy capital. Luna: Speaking of the real economics, I want to shift gears slightly. Lucas, we get a lot of listener questions about how we keep this show going without advertising. And I think it's worth a quick mention because it's relevant to the whole idea of value creation versus value extraction. Lucas: It is. Look, we deliberately don't run ads on Fexingo Business. No sponsors, no baked-in commercials. The reason is simple: we want the conversation to be about the topic, not about selling you something. And if you've found yourself walking through the economy with us and feeling like something clicked — that's the goal. Luna: Yeah, and listener support is what keeps it ad-free. If that model resonates with you, there's a link — buy me a coffee dot com slash fexingo. No pressure, just an option. It's how we keep the show independent. Lucas: Exactly. And it's a small way to say 'this adds value for me.' We appreciate everyone who listens, whether you contribute or not. Now, back to Shell and the buyback question — because there's another layer here. Luna: What's that? Lucas: The timing relative to earnings season. Shell reports second-quarter earnings in about two weeks. This buyback announcement is essentially a pre-earnings signal: we have confidence in our numbers. But it also sets expectations. If they miss, the buyback might be seen as a distraction. Luna: So the buyback is both a financial move and a narrative move. It tells the market 'we're strong' before the actual numbers come out. Lucas: Right. And if you look at history, companies that announce big buybacks right before earnings tend to beat estimates more often than not. It's a subtle form of guidance. Luna: Let's talk about the competitive landscape. How are Shell's peers handling this? Exxon announced a similar-sized buyback last month. BP has been more cautious. Lucas: BP is actually an interesting contrast. They've been more aggressive on renewables investment relative to their size, and their buyback has been smaller. The market has rewarded them less. Their stock is up but not as much as Shell or Exxon. Luna: So the market is essentially voting for buybacks over reinvestment. That's a powerful signal to management teams across the industry. Lucas: It is. And it creates a feedback loop. If Shell's stock rises on the buyback news, other CEOs see that and think 'we should do the same.' It can become a race to return capital rather than a race to build the energy system of the future. Luna: But isn't that the market working efficiently? If the best use of capital is buybacks, companies should do buybacks. Lucas: In theory, yes. But the market can be short-sighted. The energy transition is a multi-decade project. Quarterly buyback boosts can come at the expense of long-term positioning. The question is whether Shell's shareholders are being compensated for that risk. Luna: And the answer might be different for a pension fund with a thirty-year horizon versus a hedge fund with a six-month horizon. Lucas: Exactly. So the buyback debate really comes down to time horizon. And that's why we're covering it here — because it's not just about Shell. It's about how the entire energy sector is allocating capital in a world of high oil prices, high interest rates, and uncertain climate policy. Luna: And what about the consumer? With gasoline at three eighty-five a gallon nationally, up from three seventy-eight a couple of weeks ago, higher oil prices are feeding through to the pump. Are Shell's buybacks making that worse? Lucas: Indirectly, maybe. If Shell isn't investing as much in new production, supply growth is slower, which supports higher prices. But honestly, the effect is tiny. The bigger drivers are OPEC+ decisions and global demand. Luna: Fair. So where does this leave us? Shell's buyback is a rational financial decision in the current environment, but it also highlights a strategic tension that isn't going away. Lucas: I think that's the right takeaway. For investors, it's worth watching what Shell does with its cash flow over the next twelve months. If buybacks continue to grow while renewables investment stays flat, that tells you something about management's true priorities. And for the rest of us, it's a reminder that energy economics is always about choices — and those choices have consequences.