Tags: raymond | us | oil | demand

Former Exxon CEO Raymond: US Oil Demand to be Sluggish for Years

Friday, 10 Feb 2012 02:49 PM

The United States may be living through 10 years of sluggish growth that does little to boost domestic oil demand in the short term, the former head of oil supermajor ExxonMobil told Reuters.

Lee Raymond, 73, is renowned in the industry as the chief executive and chairman of Exxon from 1993 to 2005, including after its merger with Mobil in 1999 to form the world's largest listed oil company. The South Dakota native is today a director of bank JPMorgan Chase, among other positions.

"The downturn that started four years ago may have a run of 10 years or so. We may have the equivalent of a lost decade," Raymond said in an interview on the sidelines of an energy conference.

"It means it will meander along at 1 to 2 percent economic growth. That does not give anybody any type of confidence (to make investments)."

Wearing a blue jumper emblazoned with the symbol of the Augusta Golf Masters and speaking in a broad Midwestern accent, Raymond described how he expected U.S. oil demand to eventually recover to the record-high levels of 2007.

"Sure, it will. Three times in my career I have heard people say, 'gasoline prices will never get this high again', and every time it went higher," Raymond said.

"We have to get to a point where we have a few years of 3.5 to 4 percent (U.S. economic) growth, and then we will see demand really go up again. That is going to be a while, unfortunately."

Other factors driving oil demand are population growth and the push for higher fuel efficiency, he added.

"If the population keeps growing, the number of cars will grow. And if you look at the data you will find out that every time cars become more efficient, they drive further," he said.

"The data is very clear on this, it is amazing. It goes back to the 70s. When we started seeing that, we almost could not believe it."

REFINING

In recent years several oil companies have shed their refining and retail businesses to focus on exploration and production.

Raymond disagreed with this strategy, saying that a diversity of business ensures stability of revenues.

"A few analysts on Wall Street who come and go, and who have never really seen these things for a long period of time, aren't the people to decide how companies should be organized," he said.

"Over a long period of time refineries have turned into a profitable business. And if you take the view that you have a couple of tough years, this is not this business. The oil business is a long-term, capital-intensive business."

He also cited political and marketing reasons.

"The perception of an oil company to the body politic is what their service stations look like," he said.

"Because they never see anything else. They don't see the tankers nor the crude oil production. The natural gas that comes into their house does not have Exxon on it."

The key, he said, is for oil majors to have the best refineries. "If you do that, you will be OK. If you have second-rate ones, you should not have had them in the first place."

U.S. GAS

Raymond expects U.S. gas prices to stay low for several years around their current level of about $2.50 per million British thermal units due to the country's shale gas bonanza.

"It is at least two-three years into the future (before they rise), but it could be extended for a period longer than that," he said. "That is driven largely by how demand evolves and the state of the economy."

At the same time high oil prices are leading energy companies to exploit shale areas that are rich in liquids, with gas being produced as a byproduct, he said.

"If you really want to sustain the (gas) industry, it probably needs something like $4-5," he said, given that oil prices stay around current levels.

At that level, "the marginal producers are probably covering their costs," he said. "At $2.50 they are not ... They might cover even their marginal costs, but not their total and average costs."

Energy firms that hold acreage of shale gas that is "dry" of liquids, rather than "wet," will therefore face problems because they cannot compete on costs.

"Companies that do not have access to the wet areas, if this persists for very long, are going to be in tough, tough shape financially," he said.

The boom in gas production has led many to suggest the United States could become self-sufficient in energy, with BP predicting in January it could happen by 2030.

Others have said the country could become an exporter of liquefied natural gas (LNG), while some politicians argue this should not be allowed, because it would push up domestic gas prices.

"Even if in the short-term it looks like there is an excess of (gas) supply, and 20 years from now you build this LNG plant, and of all of a sudden the U.S. becomes short on gas again, I have the full confidence that Washington would screw it up. Because that is how it works," he said with a chuckle.

He also cast doubt on BP's analysis. "We need to a see lot more data, for a lot longer period before we can start believing that."

© 2017 Thomson/Reuters. All rights reserved.

 
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