Why Exxon won't produce more oil
The energy giant is being managed to achieve an acceptable investment return for shareholders, not for the benefit of consumers. Less supply of crude oil means higher prices -- and record profits.

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March 20, 2008 -- 16:20 ET  On Thursday, the stock market closed the shortened week on a high note. The major indices surged more than 2% in heavy trading, and finished near their best levels of the session. Financials led the way higher, thanks to... More

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Reports of slackening demand sent oil down another 2.5% on Thursday to $101.84 per barrel. Crude prices have declined 7.6% since the beginning of the week. Not long ago, that would have been an astonishing plunge that shook the trading establishment. These days? Nah, that's just the ho-hum volatility in the oil market. But how is it that crude can still trade above $100 a barrel, three times what it sold for at the start of the decade, despite a very wobbly economy?

If you want to understand that, it helps to listen in to ExxonMobil's presentation to analysts in New York City in early March. Halfway through the three-hour meeting, Exxon management flashed a chart that showed the company's worldwide oil production staying flat through 2012.
Ponder that for a minute. Exxon is the largest publicly traded company in the energy business. In fact, it's the most profitable company in the history of capitalism, earning a record $40.6 billion last year on sales of $404 billion. Yet even with crude oil prices near all-time highs, Exxon isn't planning on producing any more oil four years from now than it did last year.

That means the company's oil output won't even keep pace with its own projections of worldwide oil demand growth of 1.3% a year.
Imagine a chief executive of another growth company making a similar announcement to that of Exxon Chairman Rex Tillerson. What if Steve Jobs said Apple wasn't going to sell any more iPhones than it did in 2007? What if Howard Schultz said latte production at Starbucks would stagnate, at least until the next U.S. president embarked on his or her re-election campaign? Shares of both companies would plummet.

After the management presentations, Tillerson took questions from the audience. The first hand that shot up was that of Deutsche Bank oil analyst Paul Sankey, who wanted to know why the company wasn't showing any volume growth.

"We don't start with a volume target and then work backwards," Tillerson explained. Instead, he said, his team examines the available investment opportunities, figures out what prices they'll likely get for that output down the road and places its bets accordingly. "It really goes back to what is an acceptable investment return for us," Tillerson said. In other words, producing more barrels just to ease prices for consumers is not part of the company's calculations.
Last year, ExxonMobil led the industry with a return on capital of 32%.

Exxon chief sees growth opportunities
As production costs escalate, ExxonMobil is forced to significantly boost capital spending just to maintain oil and gas reserves near existing levels.
Exxon's flat oil forecast was even more surprising because it came during a meeting when the company was trumpeting a big increase in capital expenditures -- to at least $25 billion a year going forward, up from $21 billion last year.

The company also outlined a slew of big projects, 12 of which are starting up this year. These include the 600 million barrel Kizomba C development off the coast of Angola that began producing on New Year's Day and another in a string of giant liquefied natural gas facilities in Qatar. Unlike oil, Exxon's production of natural gas -- much of it liquefied and shipped in tankers to Asia and Europe -- is projected to climb over the next four years.