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I had the opportunity to take part in a conference call earlier this evening with several fine bloggers and Ken Cohen, Vice President of Public Affairs at ExxonMobil. As you might imagine, Mr. Cohen has a busy job these days fending off calls for federal investigations and explaining free-market economics to anyone who bothers to listen. The purpose of this conference call was to allow bloggers an opportunity to ask Big Oil questions about their issues and to get some perspective on the volatile energy market.
Cohen started off with a very short statement, preferring to move quickly to a Q&A rather than a prepared presentation. He spoke of the lack of education most consumers have about the nature of the energy markets and the effects that politics and global tensions have on pricing. Oil is a commodity, just the same as oranges, pork bellies, and a range of other products. When traders sense potential issues for future production, they buy more and drive prices up so that they can take advantage of better pricing now. The volatile nature of the major oil exporters -- only Norway is a stable democracy [er, so is Canada! see update II] -- creates a hair-trigger sensitivity for traders.
Cohen also acknowledged that the industry underestimated the growth curve in Asian economics. India and China have over two billion people between them, and both nations have begun massive modernization in their economies -- and that depends on ever-increasing demand for energy, especially oil. The supply has also increased in that time but not nearly at the same rate, driving prices ever upward.
It took a long time to get to this stage, and a lot of what drives prices flew under the radar during that period of time. With prices relatively low, public interest in market forces didn't exist, and the oil companies grew complacent in informing their consumers of these issues. When the inevitable crises hit over the past year, people did not have a good basis for understanding why prices suddenly and dramatically jumped. That explains part of the hysteria, but not all of it. Cohen noted in response to questions that his company earned 9.7% profit as share of revenue, a good performance but hardly spectacular. Even some newspapers do better than that.
In the extended section, I have included my notes from the Q&A. I may also add more from the presentation provided to us by Cohen as background for the conference. The information certainly gives a different perspective on the notion of a monolithic corporation with the power to bend the market to its will, and should provide enough information for research and debate in the days ahead. I look forward to your comments!
UPDATE: Other attendees: John Hawkins, Mary Katherine Ham, Flip Pidot, Lori Byrd, Rob Bluey, Pat Cleary, Kim Priestap, and Peyton Knight. And a big round of thanks to Amy Ridenour, who went way out of her way to get me included in the call.
UPDATE II: Lexhamfox reminds me that Canada also qualifies as a stable democracy -- d'oh! He also suggests Mexico, but the corrupt nature of the government and politics there could put "stable" into question.
Why did it take so long to get back to the offense, rather than being defensive?
Took us a number of years to get into this situation (high prices), not a good understanding of how we got here. When prices remained low, no one cared about the underlying market forces that eventually caused these. Opinion leaders literacy on energy is appallingly low. In the past, took more of a hygienic approach, now understand that they need to be proactive about education. They plan on being aggressive about it now.
Boycotts on oil companies to lower prices – how effective can this be?
One county judge has called for a boycott on one service station, a franchisee. Cost to the station is $1.70, after taxes ~ $2.25 per gallon or so. EM produces only 3% of the world’s crude, produces 2.5M bbls/day, buys another 3.5M bbls/day; they’re hostage to the commodities market. Boycott will do nothing for the price of gasoline, but it will hurt the 51 people employed by the franchisee.
Maria Cantwell’s ignorance; how do you deal with ignorant lawmakers?
Must start with finding easy comparisons with other commodities: oranges, wheat, pork bellies, etc. The market determines the price. Oil does not move on long term contracts any longer.
We know about supply & demand, but why the big price spikes in the span of a few weeks?
If I knew that, I’d be on a resort island relaxing. The spikes come from speculators in the commodities market. EM does not participate in speculation – they only buy real barrels at market price. Unanticipated for the past two years was the rapid pace of growth in Asia, and the energy needs for that growth did not get forecast. Political risk in exporting countries also plays into the psychology of the commodities traders. Gasoline also is a commodity (not just oil), which is why the prices at the station can change so quickly. The prices reflect the expected cost of the next shipment, not the current one.
How much do the boutique formulations play into pricing and supply problems?
Impacts flexibility; the smaller number of plants and the growth in formulation differences mean that refineries cannot make up capacity for another refinery when it goes off line. That also impacts the gasoline commodity market. Temporary waivers allow for much greater flexibility.
If ANWR were on line and producing, how much of an impact would that have on pricing?
We’d have to know the state of the rest of the world and the actual production level of ANWR; still need seismic assessments to prove the reserves. It’s an investment, one of many, and it would be very valuable if predictions are borne out.
Payout ratio is around 20%, so 80% goes to R&D and reinvestment. How much more could it be?
We could be looking at a surplus if we expand the refining capacity – we could be seeing a lot of gasoline. Building a new refinery is a Herculean effort. If everything goes perfectly, it takes 5-6 years before it comes on line. It won’t work on prices immediately. The approach they take is to expand existing capacity. It’s quicker and cheaper.
Current political rancor – similar to when we last enacted windfall profits taxes?
Yes, similar, although the situation is different. Then we had actual product runouts. This time, prices now send a signal for more expansion. Consumers and automakers are getting signals for increasing efficiency. It shows the beauty of the market approach.
Has EM exploring hydrogen and other fuels? EM had been the biggest investor in solar, but pulled out because the tech platform couldn’t deliver mass energy production. Can try to use current technology and expand it (wind, water, solar), or look for a new technology for development. They take the second approach. They partner with Toyota, Caterpillar, General Electric, and others on alternate energy projects.
Any advertising/PR campaigns planned?
Yes, looking at it as a good way to improve energy literacy.
What about Bush’s call for more hearings on energy prices? Frustrating from someone with energy literacy?
Have to get started on the literacy program. Oil is the most heavily regulated of the industries. Investigations on gas prices are a constant. We don’t gouge.
How many FTC employees work full time on gas prices?
Will supply. They have a division doing nothing but supervising gas prices.
The media has not covered the pricing effects of nationalized oil companies. Can you describe your strategy to get the media to focus on that part of the problem?
Starting to see more awareness of the psychology of the market in the media, will continue to pursue it. The real effect doesn’t hit the actual supply but the psychology.
Schumer’s call to break up the oil companies – reaction?
The majors now own fewer gas stations than earlier. They own less than 8% of the ExxonMobil gas stations in the US. It’s not a concentrated market. EM has 12% of the refinery capacity in the US and 8% global – not nearly enough to control pricing. The economics of the downstream: 85% of revenue went to buy crude oil, 12% went to keeping the doors open, and only 3% went to the bottom line. Right now margins are good. Profits as a share of revenue came to 9.7%, a middling performance in the Fortune 500 (#140).
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