Exxon Mobil's Profit Decline at $100 Oil

It was tough for many to understand and tougher to interpret. How was it possible, at record oil prices inching towards the real and especially psychologically important $100, for Exxon Mobil and other huge oil companies to report decreasing profits? Aren’t they supposed to be the ones causing the surge in the price of oil? Worse yet, how dare they deprive politicians from railing against Big Oil and its insatiable desire to screw the public?

But there was the headline. On November 1, the US largest public company and the world’s largest oil company reported a “steep” 10 percent decline in its profit to below a market expectation level of $9.41 billion! To be sure this was still a huge profit, one of the largest in history, a history of records that was created by the company itself and now, the inevitable victim of its own success, facing the decline. Exxon Mobil sneezed and, coming at the heels of recent profit declines by BP and ConocoPhillips and expected similar trends by other multinationals, the stock market caught a cold dropping 362 points that day.

Most analysts, in classic short-sightedness, tried to micro-interpret the situation, blaming downstream margins, operating costs etc. Oil-field service companies had demanded huge increases in what they charged, drilling rigs were hard to come by for a while, daily rates went up and up. But I say this again: if I were working for major multi-nationals I would be worried silly for the future.

In this web site just last August for what was then “record” $75 oil (do we already forget?) I wrote: “But what keep the price of oil high first and foremost are geopolitical headlines fueled by the energy militants: Hugo Ch??¡vez in Venezuela, the Iranian mullahs, and decidedly Russia under Vladimir Putin… There is again an underlying real issue: the shutting off of major multinational oil companies from these countries’ reserves. In spite of record profits I would be quite worried about the future of these super-giant companies had I been sitting in their boardrooms.”

I went on to say that we were even luckier that other, far bigger headlines, such as a potential war with Iran, hadn’t happened yet which could easily move us past $100 oil. In the meantime we should have been thankful for $75 oil. Well what do you know?

The largest western oil companies suffer from a political squeeze game: at home environmental activists and global warming enthusiasts are forcing governments to look at big oil as the enemy within. Oil is bad, solar is good. This is in the face of some simple inconvenient truths. The world still draws 87 percent of its energy from fossil fuels (oil, gas and coal with oil right at 40 percent of the total). By everybody’s estimates (EIA, IEA) this percentage will not change by 2030, even with a 50 percent increase in total world energy consumption, and solar and wind will never account for more than one half of one percent of the world energy supply with or without government subsidies. Biofuels look increasingly as a cruel and inefficient scam. Oil is where the foreseeable future of world prosperity still depends.

But rhetoric and Gorism with a Nobel are not devoid of danger. There is little political capital in the United States and Western Europe to support the international predicament of oil companies which is their biggest problem. They are shut out of new reserves by energy militants such as Venezuela and Russia or are under enormous tax regimes for their declining joint ventures in both hostile and, presumably, friendly countries. It is hard to gain a benefit from oil prices if one does not own the oil, especially in prolific, easy to produce, high margin areas. Worse yet are production sharing agreements where oil companies do all the work, put up all the operating costs but as the price of oil increases they are taxed through the teeth. High oil prices mean their downstream operations have to pay a much larger price for what their upstream division got an ever decreasing profit margin.

The future of big oil looks bleak compared to its past and, depending on ones point of view this could be something to lament or rejoice, except for this: the impact on energy supply and consumer prices will be swift and large. Perhaps this is what certain governments of both producing and consuming countries want for different reasons. But the latter should think hard and long, less about prices and more about supply. It’s hard to fathom a modern world functioning properly with energy shortages and from my vantage point now there is little light at the end of the tunnel.