Tags: oil | jpmorgan

Can ExxonMobil Weather an Oil Price Fall?

Wednesday, 30 March 2011 03:05 PM

Pity the poor oil company executive. While most of America cheers when companies do well, nobody seems happy for the oil barons. They get hauled before Congress to explain themselves instead when gasoline ticks over $4 a gallon.

Okay, so oil execs are not “poor.” And Wall Street bankers have become the villains of the day. But you can expect some grandstanding in Congress over oil in the months ahead, for sure. Regular is already above $4 in San Francisco, and the national average is at $3.57 a gallon. That average price is not too far from the highest nominal price on record, according to the American Automobile Association, which was $4.12 back in July 2008.

That price was the result of catastrophically high oil, from when crude rose to $147 a barrel. Of course, what followed was a swift collapse in demand as the credit crisis took hold. Oil dropped like rock, down to $32 by December before stabilizing later in 2009 to between $60 and $80.

Investment bank JPMorgan now sees Brent crude, the price paid in Europe, averaging $110 a barrel in 2011, largely based on Middle East unrest. The more commonly quoted WTI will average $99, the bank told Reuters. Americans pay gas prices based on a rough average of these two barrel prices.

Could news get much worse? Of course it could. But a generalized recovery worldwide is also likely to put a floor under the price of oil in any case. Steady demand from the emerging markets coupled with strained supplies is likely to keep crude well above the comfort level of many drivers for months and months to come.

“The U.S. economy is today well-positioned to absorb an oil spike without experiencing it as an oil shock,” says Don Luskin, chief investment officer at Trend Macrolytics, in an Op-Ed in The Wall Street Journal. “First, we're nowhere near peak oil consumption, which we hit in August 2005 at 21.7 million barrels per day. We're now 9 percent below that, even though consumption has recovered substantially since its worst levels of the Great Recession in September 2008. The last three recessions—those that started in 1990, 2001 and 2008—began only after oil consumption reached new peak levels.”

Imagine, however, the reverse: Another “black swan” flaps into view — a Chinese property collapse, cross-border war in the Middle East, yet another massive natural disaster — and all bets are off. The U.S. recovery evaporates, and oil demand drops. Good news for drivers, perhaps, but what happens to the oil majors if the barrel price, instead of generally inflating from here, drops back down to $32 a barrel?

Essentially, for a company the size of ExxonMobil (XOM), the fluctuations we have seen in the oil price over the past few years simply don’t matter. Energy demand will grow by 1.2 percent per year through 2030, the company estimates. The world’s energy companies, and ExxonMobil is among the largest, will have to spend $580 billion a year between 2010 and 2035 just to keep up with demand, according to the International Energy Agency. ExxonMobil figures oil will remain the biggest slice, at 32 percent of the total energy picture.

"During challenging times for the global economy, Exxon continues to invest at record levels to deliver energy needed to underpin economic recovery and growth," Rex Tillerson, Exxon's chairman and chief executive officer, said in a statement before meeting with analysts who follow the company.

Accordingly, the company is spending now to find that oil. It plans to spend $100 million a day during the next five years to drill for oil in places previously unreachable, reports Bloomberg News. The company will spend $34 billion in 2011 on capital projects, up 5.6 percent from the previous year and up to $37 billion a year through 2015, according to the news service. Eleven new projects are scheduled to begin pumping oil or gas between now and 2013, Bloomberg reported.

Exxon thinks in decades, not months, and while the barrel price might seem problematic for an oil company, the price rarely stays very far up or down for long periods of time. ExxonMobil sees the demand problem as more pressing, thus it is deploying cutting-edge technology to pull oil from deep under the sea and out of reservoirs thought to be tapped out. It expects to actually expand North American production to 35 percent from 27 percent of volume now and to bring on projects on nearly every continent to meet the rising demand.

Taking all of that in aggregation, investors have reason to be confident in Exxon-Mobil’s prospects, even in the face of what may be a volatile year for oil prices, and some soapbox antics by D.C. politicians.


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Pity the poor oil company executive. While most of America cheers when companies do well, nobody seems happy for the oil barons. They get hauled before Congress to explain themselves instead when gasoline ticks over $4 a gallon.Okay, so oil execs are not poor. And Wall...
Wednesday, 30 March 2011 03:05 PM
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