Oil firms pour on charm before posting fat profits
African children smile for the camera, a youngster sips pink medicine from a spoon and a doctor explains his part in a venture to fight malaria, the No. 1 killer on the continent. It’s an effort, he says, that will help save hundreds of thousands of lives.
The images look like something out of a health documentary, but it’s a commercial for oil giant Exxon Mobil Corp., for which the doctor is medical projects director.
Exxon’s other new ads talk about efforts such as its breakthrough technology for hybrid-electric car batteries. Chevron Corp. is showcasing its geothermal operations. Of the energy challenge, one ad says, “This isn’t just about oil companies. This is about you and me.”
The world’s best-known oil companies are pouring on the charm as they get ready this week to parade another round of fat profits before a public that is feeling suddenly poorer. The spotlight will shine on Exxon on Thursday and Chevron on Friday. Such advertising makes sense after a summer with oil at nearly $150 a barrel and a fall likely to bring renewed scrutiny of their investments and tax breaks.
But when oil companies spend their money, it’s less about you and me than about their shareholders. In many respects, industry experts note, what’s good for Big Oil’s bottom line isn’t necessarily good for Joe Q. Jetta.
“That’s a game that oil companies have been playing for a while, but they’ve been pumping more money into it lately,” said Sheldon Rampton, research director at the Center for Media and Democracy. “They’re hoping to mitigate their bad reputation rather than become beloved.”
A few examples in which shareholders have trumped consumers:
* With world oil production falling behind demand, major oil firms are spending a larger share of their record profits on stock buybacks and dividends rather than increasing supply-boosting exploration.
* In July, when refiners saw profits squeezed by high oil prices and lower fuel demand, they throttled back production. When hurricanes hit the Gulf Coast, as much as 14% of the nation’s refining capacity was off-line and gasoline inventories were unusually low. Drivers quickly felt the effects.
* As high diesel prices help put truckers on the road to bankruptcy, refiners have been sending diesel to Europe to fetch a better price.
In nearly every industry, shareholder returns regularly win out over the needs of consumers -- who may also be shareholders. Energy companies are unusual, though, because the planet hasn’t yet figured out how to get by without their products.
And unlike regulated utilities such as Southern California Edison Co. and Pacific Gas & Electric Co., which have a legal duty to consider the needs of ratepayers, oil companies today have little direct connection to the customers who frequent their branded gas stations. Most Shells, Chevrons and the like long ago were sold off to dealers and wholesalers.
“It’s a tough, tough business, and that’s why they’ve decided to get out of it,” said John Felmy, chief economist at the American Petroleum Institute, the industry’s lobbying group. But, he said, “we do care about consumers. If you don’t care about consumers, you’re not going to stay in business.”
That allegiance to consumers is sure to be tested in the next year, as Congress and the public weigh major energy proposals, said Amy Myers Jaffe, energy fellow at Rice University’s James A. Baker III Institute for Public Policy.
“The question is, would consumers be better off if they spent more money on exploration and less money buying back stock? In my opinion, the answer to that question is yes,” Jaffe said.
In 1993, the five biggest publicly traded oil companies -- Exxon Mobil, Royal Dutch Shell, BP, Chevron and ConocoPhillips -- spent 39% of their operating cash flow on development projects, 14% on exploration and only 1% on buying back their own stock. In 2007, they spent 34% on development, 6% on exploration and 34% on stock buybacks, according to a study co-written by Jaffe.
In a capitalist market, though, “you could say that it’s not their job to be doing things in the public’s best interest,” Jaffe said.
Domestic oil exploration illustrates the point.
Congress recently voted to ease long-standing bans on new offshore oil drilling in certain regions. Whether the energy companies pursue any new drilling will depend not on the needs of consumers but on profit considerations such as the price of oil, the cost of the project and estimates of future demand.
When oil pushed toward $150 a barrel and natural gas fetched $13 per thousand cubic feet, it was hard to imagine any company having second thoughts about new drilling.
But oil prices have slumped below $70 a barrel. Natural gas prices have fallen by nearly half. And the economies of the U.S. and elsewhere are flagging, cutting energy demand.
Natural gas producer Chesapeake Energy Corp., whose ads assert that the answer to the nation’s energy crisis is “right under our feet,” isn’t as enthusiastic now. Last month, the company told investors that production was “uneconomic” at today’s prices.
So Oklahoma City-based Chesapeake, one of the largest suppliers of U.S. natural gas, cut production by 4% and investment spending by 17% through 2010. The company also is eyeing exports, calling the opportunity for overseas sales “very compelling” for U.S. natural gas companies.
This summer’s soaring gasoline and diesel prices and post-hurricane shortages underscored the fragility of the nation’s fuel supplies. Even though the nation’s fuel production runs chronically short of demand, the combination of rising construction costs, sinking demand, greater use of renewable fuels and worsening credit markets have tempered enthusiasm for investments that would pump up output.
Last week, Canada’s Connacher Oil & Gas Ltd. shelved plans to more than triple production at its Montana refinery. The project “would have increased diesel supplies in the Northern Rockies and in some Western provinces that at times have been chronically short of diesel,” the Oil Price Information Service said in a subscriber note.
Valero Energy Corp., the largest U.S. fuel maker, is one of the few refiners planning big investments. But like its rivals, the company keeps its focus on the bottom line. The company noted that high gasoline stocks in the spring cut into profit, but the returns on diesel have been “terrific all year,” Chief Executive Bill Klesse told analysts last month.
“Valero has exported a lot of diesel fuel, both to Europe as well as to South America, even to Australia,” Klesse said. “We were making good money.”
Felmy, the oil industry economist, said some of what refiners are exporting isn’t usable in the U.S. because of clean-air requirements.
“If you have the ability to be able to reduce your costs by exporting a product, just as we export anything in the United States, it makes economic sense,” he said.
Profits on gasoline picked up after the hurricanes, in part because several refiners had cut output to reduce inventories and revive profit margins. That decision left the Gulf Coast region with inventories too low to make up for the lost production when hurricanes Gustav and Ike shut refineries.
In mid-August -- before the first hurricane hit -- U.S. refineries operated at nearly 86% of capacity, and gasoline inventories dropped below a 21-day supply -- a very small cushion, said Tom Kloza, chief oil analyst for the Oil Price Information Service. After the hurricanes, refiners’ profits perked up as prices leaped and shortages developed.
“Even though prices have leveled off and come down, I think people are still leery of the oil companies,” said Tyson Slocum, director of the energy program for Public Citizen, a Washington-based consumer group. “As soon as prices go back up again or we see more record profits, steam will be coming out of people’s ears.”