What Record Profits Mean for Exxon Mobil

Peter Coy, economics editor of BusinessWeek, discusses Exxon Mobil's record profits and what such robust earnings mean for the oil company more broadly.

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ROBERT SIEGEL, host:

Peter Coy is economics editor for BusinessWeek. He's in New York.

Peter Coy, unprecedented profits for Exxon Mobil. Are oil company executives unprecedentedly confident about their future?

Mr. PETER COY (Economics Editor, BusinessWeek): You'd think so, wouldn't you?

SIEGEL: Yeah.

Mr. COY: You would think they'd be overjoyed right now, but I don't think they are. I think they're actually kind of worried. I think they're scared on a lot of fronts. First of all, even from their own shareholders, the people who should be happiest, are looking at these profits and saying any idiot can make a lot of money when oil is over $60 a barrel. No challenge at all. You haven't proven your worth to me as a shareholder in your company.

Obviously consumers are angry at them. Congress is angry at them. The media is jumping all over them. And probably even more serious than any of those things is that they're worried about what they're going to do for their second act. You know what happened? I think the single most interesting statistic in the Exxon Mobil profit report that came out today was what happened to production last year.

SIEGEL: Mm-hmm.

Mr. COY: It fell. Here it is. They could've made so much more money if they had produced more. Their production fell 3.6 percent for the year as a whole. And I'll give you another statistic. That was --

Okay, you can say Katrina, Wilma, and so on, Rita. Even excluding the hurricanes it would've fallen 1 percent. They cannot even produce as much as they produced a year earlier, the point being that they can't replace the oil that they produce now with new wells coming on stream. If you had to name anything that scares them, it's their inability to get new oil to produce what they've already -- to supplement what they've already produced.

SIEGEL: Do you really mean that it's the atmosphere of the markets nowadays that if you're -- if the company brings in a profit or whatever, it's $36 billion in one year, the answer is what have you done for me lately? What are you going to do in 2006?

Mr. COY: It's more like what are you going to do for me next.

SIEGEL: Next. I see.

Mr. COY: If you look at the stock price of Exxon Mobil, it has not really budged since March. It's been up and down. It came up a little bit today. But it's nowhere above where it was almost a year ago. Investors are not confident that these companies have any real future. It's hard to believe, isn't it? With the situation we have now, with the billions in profits, and yet they don't have any friends. Not even their own shareholders like them.

SIEGEL: Well, one thing seems pretty obvious, and Scott Horsley said this in his report, that in this particular business, the oil business, the price can shoot up for petroleum products, and there doesn't seem to be any significant reduction in consumer demand --

Mr. COY: Right.

SIEGEL: -- in response to that. This is not a bad business to be in.

Mr. COY: Right. It's inelastic demand, the same as, like, cigarettes, that can go up in price and people keep smoking, because they don't really have much of an alternative. We have the same sort of addiction to oil in this country that some people have to tobacco.

In the longer term, you would see more of a reaction. If prices stay anywhere near where they are now, you'll see a shift in people's buying behavior. They'll switch away from SUVs to higher MPG vehicles and maybe even in the very long term change their commuting patterns. But over the course of months, there's really not much people can do to conserve on oil. And that's why the consumption has been so high, and that's why it's such a problem that Exxon Mobil produced less oil in 2005 than it did in 2004.

SIEGEL: One last question. What do these profits portend for relations between Exxon Mobil or other oil companies and the countries in which they do their drilling?

Mr. COY: That's an excellent question, and that is another part of their problem. During times when oil prices are low, a big company like Exxon Mobil can come in with all its financial strength and its technology and offer these poor countries, such as Angola, a deal that's hard to beat. But now that those countries are raking in pretty good money on their own, they are less willing to cut an attractive deal with the Western oil majors. So it makes it harder for Exxon Mobil, Chevron, Conoco-Phillips and so on to cut deals and to find new sources of production.

SIEGEL: Peter Coy, thank you very much.

Mr. COY: Thank you.

SIEGEL: Mr. Coy is economics editor for BusinessWeek. He spoke to us from New York City.

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