No More Gushers for ExxonMobil

By Justin Fox

In January 1981, as gasoline prices set all-time highs in the wake of the Iran-Iraq war, oil giant Exxon announced that it would pour $11 billion into capital investment and exploration over the course of the year. That was a 35% increase over 1980 and a tripling of the budget from 1973, the year when the Arab oil embargo first sent prices skyrocketing. "The $11 billion is almost three times the profit we made in 1979," a company vice president told a reporter.

You probably know what happened next: conservation and a global recession--and the gusher of new oil produced by all that capital spending by Exxon and its brethren--sent prices plummeting.

Today, though, prices at the pump in the U.S., adjusted for inflation, are approaching those record 1981 levels for the first time. The company now called ExxonMobil turned a profit of $39.5 billion last year (on sales of $365.4 billion), more than any other corporation ever. Yet it isn't making nearly the investment in finding new oil that it did in 1981.

Last year ExxonMobil spent $19.9 billion looking for oil and improving its refinery, pipeline and pumping capacity. The company predicts that its capital and exploration spending will average more than $20 billion a year for the next five years. That's not spare change, but adjusted for inflation, it's only about 60% of what Exxon and Mobil together spent in 1981. Tellingly, it's also a lot less than what ExxonMobil handed over to its shareholders last year--$29.6 billion in stock buybacks and $7.6 billion in dividends.

The combination of high oil-company profits and high gasoline prices has led to much fulminating on Capitol Hill, mostly about refining bottlenecks that have brought near record prices at the pump. But the main reason gas prices are so much higher now than a decade ago is that crude has jumped from $10 per bbl. in 1999 to $64 today. And the fact that the world's biggest nongovernment oil company isn't going like gangbusters to find more of the stuff will have far more impact on future prices than the Federal Price Gouging Prevention Act approved by the House on May 23.

It's not just ExxonMobil. Oil-field-services provider Baker Hughes keeps a monthly tally of how many rigs are active around the world, and the rig count peaked at 6,227 in December 1981. In April of this year it was just 2,836. But ExxonMobil is the most cautious of the lot. Slightly smaller rival Shell spent 25% more on capital and exploration in 2006, and the other oil majors spent more than ExxonMobil relative to their size. The Dallas-based industry leader still reports that its oil and gas reserves are growing. But recent gains have been modest, and most have been in natural gas, not the crude that is refined into gasoline.

ExxonMobil's official mantra is that "we are doing all we can to bring more petroleum products to market to meet growing energy needs." The numbers say otherwise, and this is a company where numbers speak louder than words. The number that matters most is return on capital employed--that is, net profits divided by what's been invested in oil rigs, pipelines, refineries, etc. ExxonMobil's ratio, 32.2% last year, is consistently the industry's best. When ExxonMobil gives more money to shareholders than it spends on capital and exploration, that means its executives can't find enough new projects that they think will generate 30%-plus returns.

Getting their hands on oil fields is the biggest issue. "They can see the opportunities," says veteran oil analyst Fadel Gheit of Oppenheimer & Co., "but they don't have access to them." Only 7% of the world's estimated oil and gas reserves are in countries that allow companies like ExxonMobil free rein, according to consulting firm PFC Energy. Fully 65% are in the hands of state-owned companies such as Saudi Aramco, and the rest are in the likes of Russia and Venezuela, where Western companies can get a foothold one day but lose it the next.

Shell and BP have taken bigger risks than ExxonMobil in this latter zone, with mixed results. And while the state-owned companies appear to have lots of oil, they're generally less adept at getting it out of the ground quickly than the private Western oil giants. All of which appears to mean that today's gasoline prices, unlike those of the 1980s, won't be returning to earth anytime soon.