The world's biggest energy companies are poised to deliver another quarter of bumper profits, fuelled by record refining margins. Flush with cash, Big Oil now needs to chart a course for future growth in a world reshaped by the Middle East crisis.
Big Oil has seen its cash coffers balloon this year. The five largest Western oil companies — BP, Chevron, Exxon Mobil, Shell and TotalEnergies — are expected to report combined third-quarter profits of around $53 billion, according to RBC Capital Markets estimates, up from $48 billion in the second quarter and more than double year-earlier levels.
Yet since the start of the Iran war in late February, oil majors have largely reacted cautiously to this windfall, directing billions toward debt reduction rather than major new investments.
Combined debt is set to drop to $150 billion in the third quarter from $200 billion in the first quarter, according to LSEG estimates.
That approach made sense in the early months of the conflict, when energy markets were swinging wildly on every headline and investors largely accepted US President Donald Trump's prediction that the war would be short-lived.
Seven months later, the industry finds itself facing a very different reality.
What began as a confrontation between the US, Israel and Iran has evolved into a protracted, low-intensity regional conflict characterised by attacks on energy infrastructure, refineries and shipping lanes.
Many of the consequences for global energy markets – including a higher geopolitical risk premium, altered supply lines and greater energy nationalism – are likely to linger long after the fighting ends.
That changes the calculus for an industry that makes multibillion-dollar investment decisions with time horizons measured in decades.
The first question is what the future holds for refiners.
The third quarter earnings surge has been driven primarily by record refining margins.
Benchmark US crack spreads have averaged about $63 per barrel so far this quarter, compared with $50 in the second quarter and $26 a year earlier. The pressure has been particularly acute in diesel markets.
Among the majors, Exxon stands to benefit the most given its refining capacity of roughly four million barrels per day, the largest among the majors.
The refining boom represents a remarkable reversal for a segment of the industry that many executives had viewed as a low-priority business. Over the past decade, majors reduced their refining exposure amid concerns about emissions, weak returns and uncertain long-term fuel demand.
Will the Middle East crisis change this? Not entirely.
Companies remain unlikely to build new refineries in Europe or North America, given the challenging economics. But investing in new capacity in Asia or Africa has become significantly more attractive, particularly when linked to long-term supply and purchase agreements.
Yet concerns about the long-term outlook for fuel demand remain, especially in Asia, where the growth in electric vehicles has exploded amid the surge in gasoline and diesel prices.
The conflict has also exposed the need for buyers to diversify supplies.
For decades, consumers, refiners and producers organised investments around access to the cheapest, largest reservoirs of oil and gas, often treating energy security as a secondary consideration.
That balance is shifting. Buyers shaken by months of disruptions are increasingly willing to pay a premium for reliable supplies, while producers are reassessing the value of geographic diversification.
For international oil companies, this strengthens the case for directing capital toward new producing regions such as the Atlantic Basin, Africa and Asia rather than concentrating investment in the Persian Gulf.
Companies are therefore beginning to accelerate development of existing oil and gas assets while increasing exploration spending in countries such as Namibia, Brazil, Angola and Venezuela.
Competition for resources outside the Persian Gulf is therefore likely to intensify.
The challenge will be ensuring new projects remain profitable in what is likely to be a much lower-price environment in the future – even as firms face rising costs today for rigs, equipment and skilled labour. In recent years, major oil companies have targeted average breakeven costs of roughly $40 a barrel for new developments, but that figure will likely rise in the coming years due to inflationary pressures.
Finally, the conflict has reshaped global trade flows.
As Asian buyers increasingly source crude oil and liquefied natural gas from the Atlantic Basin, voyage times have more than doubled compared with traditional Middle Eastern routes, pushing tanker rates to record highs as supply chains stretch. What initially appeared to be a temporary adjustment is increasingly becoming a structural feature of global energy markets.
For companies with large trading businesses, including Shell and BP, longer supply chains could justify greater investment in tankers, storage facilities and trading infrastructure. This could expand into an important source of earnings beyond oil and gas production.
The industry can no longer afford to simply sit on its cash.
For now, investors still welcome greater returns in the form of dividends and share repurchases, but, over time, Big Oil will need to put forward a clear vision for how it will navigate this altered environment.
The winners of the next decade will not be the energy companies that merely harvest today's windfall profits. They will be those that use them to prepare for a world of higher geopolitical risk, longer supply chains, and a global push for energy security.
(Ron Bousso; Editing by Marguerita Choy)
