It's Time for Big Oil to Step Up Its Efforts
to Find More Oil
By FLOYD NORRIS
he results are in on the first nine months
of 2000 for Exxon Mobil, the oil
behemoth created by the merger of two
already huge companies. Profits are soaring,
up 122 percent, to $12.5 billion, as high oil
prices and rising profit margins for refineries
create a torrent of cash.
There is no complaint here about those
profits. Exxon Mobil did not create the tight
market and it has every right to profit from it.
But there is room for concern about what the
company is doing with all that money — or,
to be more specific, what it isn't doing with it.
While the cash was pouring in, Exxon Mobil
embarked on a major share repurchase
program. It cut back deeply on its
expenditures to find more oil and natural gas.
Spending there was down 24 percent.
That is important. "Clearly, capital
expenditure growth does not guarantee
production growth," wrote Paul Ting, the oil
watcher at Salomon Smith Barney in a report
this week. But a lack of investment
"practically guarantees lack of production
growth."
Exxon Mobil attributes this year's drop to
completion of some big projects last year
(when spending also declined), and notes that
those projects have enabled it to raise
production. But weakness in exploration
spending has been common among the major
oil companies. In the third quarter, most of
them started to raise spending, but that came
after more than two years of declines. Most
are spending less than they budgeted for this year. Spending must surge
this quarter if those budgets are to be met.
Why is this happening? A conspiracy theorist might assert that the oil
companies like raking in profits and have no desire to jeopardize them by
looking for additional oil supplies that could push prices down. The more
reasonable explanation is that the companies were traumatized by the
1998 collapse in oil prices and became hesitant to spend money on
projects that won't be profitable if oil falls back to $15 a barrel.
The assumption that high oil prices were a transitory thing has been
widespread in the economy. Just as oil companies were hesitant to drill,
consumers did little to conserve energy. The oil futures market has
consistently — and wrongly — forecast an imminent drop in prices.
That complacency has played into the hands of the hawks in the
Organization of the Petroleum Exporting Countries. They recall that
previous oil shocks led to recessions that cut demand and then to
double-barreled efforts to increase conservation and energy production.
With none of those things happening this time, why cut prices?
Now, there are signs of change on all those fronts. Mr. Ting of Salomon
Smith Barney thinks the third-quarter rise in capital spending may have
been an inflexion point that indicates the trend will be up. Fred Leuffer,
the oil analyst at Bear, Stearns, reports that while oil companies did very
well in the third quarter, there were signs of slowing demand in Europe
and parts of Asia.
Weaker demand despite the lack of evidence of conservation efforts
sounds as if recessionary forces might be building. That would bring
down oil prices, but it is a movie we've seen before and did not enjoy.
This is a situation that needs to be addressed. The new president needs
to lead the way in conservation, although neither candidate has shown
much inclination to do so. And the big oil companies must decide to
spend their soaring profits on looking for more energy, rather than simply
using the cash to buy back more of their shares. |
