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Wall Street History
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12/02/2005
The View from Big Oil
Back on November 9, 2005, oil company executives were summoned before Congress to testify before a Senate committee on energy. I watched Exxon Mobil CEO Lee Raymond’s testimony and have been meaning to pass it on. Regardless of where you stand on “Big Oil,” Mr. Raymond’s description of the current state of affairs is an accurate one. I was subsequently disappointed, however, to learn that the executives who made their presentations basically lied to one senator when he asked them if they had participated in Vice President Cheney’s energy taskforce back in early 2001. They all denied they had (save one who wasn’t on board at the time), but just this week have now admitted they or their representatives did in fact participate in discussions. On one hand you can say, good, why wouldn’t you want to hear the opinions of the industry leaders in formulating a plan, but on the other hand, it was pitiful some of the CEOs couldn’t come clean with Congress.
Separately, here are three benchmark figures to keep in mind as you follow energy prices in the coming weeks and months the highs in futures prices for crude oil, gasoline and natural gas.
Oil $70.85 (8/30/05) Gasoline .$2.92 (8/31/05)* Natural gas $14.80 (9/28/05)
*The price at the pump is generally about 50-75 cents higher than the futures price, i.e., as I write this gasoline futures have declined to the $1.50 level and across the country, the average price for regular unleaded is in the $2.10-$2.35 range.
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Lee Raymond, CEO, Exxon Mobil
The increases in energy prices following Hurricanes Katrina and Rita have put a strain on Americans’ household budgets. We recognize that.
After all, our customers are your constituents. And we recognize our responsibility to make energy available to them at competitive costs.
It is also our responsibility to engage in an open, honest, informed debate on our energy future: grounded in reality, focused on the long term, and intent on finding viable solutions.
I would like to make three points in my allotted time.
First, given the scale and long-term nature of the energy industry, there are no quick fixes and there are no short-term solutions.
Second, petroleum company earnings go up and down, since prices for the openly and globally traded commodities in which we deal are volatile. But our ongoing investment programs do not, and they cannot, if we are to meet growing energy demand.
And third, as the response to Hurricanes Katrina and Rita have proved, markets work, even under the most extraordinary circumstances. Permitting them to function properly is the kind of leadership required to meet the future energy challenges that we all face.
Let me elaborate on each point in turn.
Currently, the world’s consumers use the equivalent of 230 million barrels of oil equivalent every day from all energy sources. That’s 400 million gallons an hour, or 67 billion gallons a week. Because of the size and strength of the U.S. economy, Americans consume a fifth of this total: more than any other country.
At current market prices, the bill for the world’s petroleum consumption is more than $2.5 trillion a year. That’s greater than the U.S. government’s entire annual budget .
Consider this: Exxon Mobil is the world’s largest nongovernmental petroleum company, with a market capitalization of about $350 billion and operations in 200 countries and territories.
Almost three-quarters of our business is outside of the United States.
On an average day, we produce over 4 million oil-equivalent barrels. That’s about 3 percent of the world’s daily oil and gas appetite.
It is also important to keep in mind the long-term timelines in which we operate. In politics, time is measured in two, four or six years based on the election cycle. In the energy industry, time is measured in decades based on the life cycles of our projects.
For example, Exxon Mobil just announced the first oil and gas production from our Sakhalin-1 project in Russia’s far east. We began work on the project over 10 years ago when prices were very low. And we expect it to produce for over 40 years.
All told, that’s more than 50 years for one project. Fifty years is 25 Congresses and 12 presidential terms. Fifty years ago, Dwight Eisenhower was president of the United States.
So what does that mean for policy-making? It means, given the scale and long-term nature of our business, effective policies must be stable, predictable and long-term in their focus.
History teaches us that punitive measures hastily crafted in reaction to short-term market fluctuations will likely have unintended negative consequences, including creating disincentives for investment in domestic projects.
Think back to the 1970s when we were all in an energy crisis here in this country. First, price controls, then punitive taxes were tried to manage petroleum markets. They contributed to record prices, shortages and gasoline lines.
As the government withdrew from attempting to manage the markets, prices began to come down. In fact, net of taxes, prices in real terms for petroleum products like gasoline, diesel fuel, heating oil and jet fuel have actually declined over the last 25 years.
Which brings me to my second point: The petroleum industry’s earnings are at historic highs today, but when you look at our earnings per dollar of revenue, a true apples-to-apples comparison, we are in line with the average of all U.S. industry. Our numbers are huge because the scale of our industry is huge.
How are these earnings used? We invest to run our global operations, to develop future supply, to advance energy- producing and –saving technologies, and to meet our obligations to millions of our shareholders.
Last year with $40 a barrel oil and high earnings, Exxon invested almost $15 billion in new capital expenditures and more than $600 million in research and development.
And in 1998, when crude prices were as low as $10 a barrel, our earnings were lower, at about $8 billion, but we invested $15 billion in capital expenditures that year as well.
In fact, over the last 10 years, Exxon Mobil’s cumulative capital and exploration expenditures exceeded our cumulative annual earnings. So we keep investing in the future when earnings are high as well as when they are low.
The current discussion on building new grassroots refineries is interesting. Building a new refinery from scratch takes years, even if regulatory requirements are streamlined. Current refining economics are almost irrelevant to that decision.
For us, a faster and more practical way to add capacity has been to expand our existing refineries. It is much more efficient because the basic infrastructure is already in place.
Over the last 10 years, Exxon Mobil alone has built the equivalent of three average-sized refineries through expansions and efficiency gains at existing U.S. refineries.
I should add that we would also like to invest even more in this country, especially in exploring for and producing new supplies of oil and natural gas, if there were attractive economic opportunities to do so. But the fact is that the United States is a mature oil province. Domestic production is declining. And limited opportunities for new investments that have been made available to us.
Finally, my third point: Markets work, if we let them. Hurricanes Katrina and Rita were a one-two punch to the petroleum industry as well as to many of your constituents. At one point, some 29 percent of U.S. refining capacity was shut down. The Congressional Budget Office estimates the hurricanes caused between $18 billion and $30 billion in energy sector infrastructure losses.
But we are recovering. Our diligent and dedicated employees went above and beyond to repair the damage and get back to work.
Credit also goes to the federal government, whose release of the crude from the SPR, temporary easing of regulations such as gasoline specification and the Jones Act enabled us to reallocate resources effectively and efficiently.
But most importantly, credit goes to our free market system. The hurricanes showed that markets work even under the most extraordinary conditions.
Prices for products did increase, of course, but there was no panic and no widespread shortages. Retailers responded to the short-term supply disruption, consumption decreased and imports increased to make up for the shortfall.
In a word: Markets worked.
And letting markets work will enable us to meet our future energy challenges. In just 25 years, global energy demand is expected to increase nearly 50 percent, with oil and natural gas needed to meet the majority of that demand.
The energy industry is meeting this challenge. Government can best help by promoting a stable and predictable investment environment, reinforcing market principles, promoting global trade and the efficient use of energy, and implementing and enforcing rational regulatory regimes based on sound science and cost-benefit analysis.
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Wall Street History returns next week a look at the GI Bill and its impact on the American economy.
Brian Trumbore
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