Despite a landmark decision by a Dutch court that Shell has to reduce its carbon footprint and environmentalists getting on Exxon Mobil’s board, demand for fossil fuels is on track to exceed pre-covid levels on a path to new records.

The Investors Business Daily reported that Exxon’s meeting, activist investor Engine No. 1 gained ground in its fight to get the U.S. oil major to take a more proactive approach to climate change, which it believes will have major ramifications for Exxon stock. In particular, it wants Exxon to pledge to reduce its emissions to net-zero by 2050 and wants to replace four board members with its candidates. Greg Goff, ex CEO of refiner Andeavor, and environmental scientist Kaisa Hietala will now join the board. While Engine No. 1 won two seats on the board, votes on the other two are too close to call. Exxon recessed the meeting to extend voting to avoid a loss. But Darren Woods was re-elected CEO, though he likely will face more pressure to act on a climate-change agenda.

Reuters laid out the Shell decision. They reported that a Dutch court on Wednesday ordered Royal Dutch Shell (RDSa.L) to significantly deepen planned greenhouse gas emission cuts, in a landmark ruling that could pave the way for legal action against energy companies around the world. Shell said it was “disappointed” by the ruling which it plans to appeal. Here are some key points about the ruling:

WHAT WAS THE RULING? The district court ordered Shell to cut its absolute carbon emissions by 45% by 2030 compared to 2019 levels. Shell currently aims to reduce the carbon intensity of products it sells by 20% over the same period from a 2016 baseline.

DOES THE RULING AFFECT SHELL’S GLOBAL OPERATIONS? Yes. The reduction relates to Shell’s global operations and is not limited to the Netherlands, the court ruling said.

WHAT DOES IT MEAN FOR SHELL? The ruling said that, “it is up to RDS (Royal Dutch Shell) to design the reduction obligation, taking account of its current obligations and other relevant circumstances.” Shell earlier this year announced a strategy to become a net-zero emissions company by 2050, meaning its absolute emissions will also be net-zero at that point. It has stated that it believes its emissions peaked in 2018.

ABSOLUTE TARGETS VS INTENSITY TARGETS? The court ordered Shell to reduce absolute emissions by 45%. Shell’s short and medium-term targets are intensity-based. Intensity-based targets measure the amount of greenhouse gas emissions per unit of energy produced. That means that absolute emissions can rise with growing production, even if the headline intensity metric falls.

At its annual general meeting this month, Shell CEO Ben van Beurden rejected setting absolute reduction targets, saying: “Reducing absolute emissions at this point is predominantly possible by shrinking the business.”

HOW BIG ARE SHELL’S GREENHOUSE GAS EMISSIONS? Shell, the world’s largest oil and gas trader, produced 1.38 billion tonnes of CO2 in 2020, roughly 4.5% of global energy-related emissions that year, based on International Energy Agency figures. Shell’s 2020 emissions were down from 1.65 billion tons the previous year, largely as a result of a fall in oil and gas demand due to the coronavirus pandemic.

So those are the facts. It means we will have more lawsuits and more reductions. It also means that we will face energy shortages in the future. Correct me if I am wrong. I do not think that Royal Dutch Shell forced anyone to buy their product. In fact, in the decision paper, the court acknowledged that the Netherlands has relatively high per capita CO2 emissions compared to other industrialized countries. Yet while governments, activists, and courts want to reduce our carbon usage, demand is on the rise! Especially in the increasingly vaccinated USA.

Yesterday’s demand numbers were a stark contrast from a year ago. The EIA reported that, “Total products supplied over the last four-week period averaged 19.1 million barrels a day, up by 18.1% from the same period last year. Over the past four weeks, motor gasoline product supplied averaged 9.1 million barrels a day, up by 29.4% from the same period last year.  Distillate fuel product supplied averaged 4.2 million barrels a day over the past four weeks, up by 19.7% from the same period last year. Jet fuel product supplied was up 109.6% compared with the same four-week period last year.

The EIA also says that, “Memorial Day weekend serves as the unofficial beginning of the U.S. summer driving season when increased vehicle travel leads to more demand for gasoline. The American Automobile Association (AAA) expects more than 37 million people to take trips this Memorial Day weekend, traveling 50 miles or more from home between May 27 and May 31. This total marks a 60% increase from 2020, when only 23 million people traveled, the fewest since AAA began recording in 2000. The U.S. average retail price for regular gasoline on May 24, the Monday before the Memorial Day weekend, was $3.02 per gallon (gal), a decrease of 1 cent/gal over the previous week (the highest price since 2014), $1.06/gal higher than in 2020, and 38 cents/gal higher than the 2015–19 average.

In 2020, the seasonal increase in gasoline demand during the summer was offset by the substantial reduction in gasoline demand that resulted from reduced vehicle travel during the COVID-19 pandemic.

Rising vaccinations and the gradual recovery in overall U.S. economic activity since the beginning of 2021 have contributed to increasing gasoline demand going into the summer. However, refinery production of gasoline has not kept up with increasing U.S. gasoline demand because of unplanned refinery and pipeline disruptions in recent months, which has contributed to upward pressure on retail gasoline prices.

Oil prices are in a funk as the market is trying to adjust to the possibility of Iranian oil supply. Yet we think we are just consolidating before getting ready for a $70.00 test.

Thanks,
Phil Flynn

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