Chat With ExxonMobil VP Ken Cohen

Later today, I'll be participating in a blogger conference call with Ken Cohen, Vice President of Public Affairs for ExxonMobil.  This follows an appearance this morning by Exxon CEO Rex Tillerson on NBC's Today Show, discussing oil prices and refuting accusations of industry collusion.

Cohen will take any questions posed by participating bloggers, but likely areas of focus will include oil industry profitability, trends in global supply and demand, Exxon's exploration initiatives for additional reserves and alternative fuel sources, the current tax climate for oil companies, the [dreadful] prospect of windfall profit taxes, and other actions government can take to improve or exacerbate the impact of energy prices on U.S. consumers.

Watch this space for a recap...

Update: The call has just ended.  Cohen was highly informative and was keenly aware of (and willing to share his thoughts on) many of the factors that yield "illiteracy" about the global oil industry among policymakers and the media, leading to misunderstanding and negative impressions among consumers.

Misconceptions

Cohen identified three primaries concepts that he feels have led to this misunderstanding:

1) The enormity of the world oil market.  ExxonMobil is the world's largest non-state-owned oil company, but only the 5th largest overall and the only U.S. company in the top ten worldwide.  One fact he cited that people are typically stunned to learn is that Exxon only produces 3% of the world's oil.

2) The nature of commodity markets.  A commodity is essentially any product category for which any unit is perfectly substitutable for any other.  A gallon of light sweet crude is a gallon of light sweet crude, no matter where it comes from, so suppliers can only compete on price and a global commodity market will therefore be tightly integrated.  Price moves based on demonstrated and foreseen trends of supply and demand and global stability will therefore strongly hinge on the forecasts and expectations of speculators trading "paper barrels", not any pricing determination of suppliers.

3) The law of big numbers.  Given the time scale of exploration and refining projects (measuring in decades, in contrast with electoral horizons, measuring 2, 4, or 6 years), an economy-wide shift to alternative energy sources cannot be done by "snapping your fingers".  When an alternative is found to be sufficiently robust to scale up worldwide fuel replacement efforts, and once market signals indicate that such a migration will in fact make sense, only then will the massive infrastructure required to efficiently develop and implement that alternative begin to develop.

On the regrettably inevitable issue of windfall profit taxes, Cohen (who has been with the company for 30 years) noted that the 1980 windfall tax levied on oil companies served only to retard investment, rendering the industry less efficient, and driving up the cost to consumers.  [Even without this empirical evidence, this would be the only reasonable outcome to expect from such an economically insane idea.  The fact that we do have this concrete example makes it completely incomprehensible that people are still talking about this as a real possibility.]  Cohen went on to detail the tax burden that ExxonMobil currently bears.  In 2005, the company paid $100 billion in taxes worldwide, on revenues (not income before taxes, revenues) of $371 billion.  In the U.S., net income was $11.3 billion in 2005, while domestic taxes were far higher at $14.4 billion.  In the most recent quarter, the company paid $3.7 billion in domestic taxes, while its U.S. income totaled $2.3 billion, meaning company's effective domestic tax rate for the quarter was over 60%.

Competition

Cohen responded to a question from Ed Morrissey about competition, specifically reacting to "Make the Oil Companies Pay" UpChuck Schumer's allegations that consolidation in the industry has enabled companies to collude on oil prices.  Cohen noted that, when talking about the retail gasoline market, the majors have a smaller market share than they did 5 years ago.  ExxonMobil has a smaller combined market share than its two component companies did pre-merger.  The company owns less than 1,000 service stations in the U.S.  The rest are owned by independent franchisees, all but ensuring robust and aggressive retail price competition.  This is also an area the FTC focuses on intently.  The agency in fact has a branch dedicated to nothing but watching for gas gouging and collusion.  For each of the 30 years Cohen has been with the company, he can recall at least one investigation of gouging at either the federal, state, or local level, and it has always come up empty.

I asked Cohen whether the company itself has any monitoring or control procedures in place to root out any sporadic gouging perpetrated by its independent franchisees.  He noted the company does encourage fair pricing practices and would take swift action if it were ever to find instances of gouging, but he couldn't recall ever having encountered it.  He was going to research this issue and get back to us with any instances that may in fact have been uncovered, including how there were found and what the response was.

Boycotts

Mary Katherine Ham asked Cohen about those e-mails that you get once in a while from people who never took an economics class, calling for the boycott of [fill in the evil oil company of your choice here], ostensibly to force prices down.  In particular, she referenced a judge in Beeville, Texas who is making such a stand against ExxonMobil stations in his county.

Cohen identified this as a good example of the misunderstanding affecting so many people about how the oil business [in my opinion, about how business in general] works.  The judge wants a boycott until the price of gas falls to $1.30 per gallon.  Given the per gallon price to Exxon of $1.70 and the $0.46 per gallon in state and federal taxes (give or take, depending on the state), even ignoring transportation, marketing, payroll, insurance, and all the other costs that are incurred downstream of Exxon's acquisition of the product, the price will have to be well over $2.00 to break even.  Add in all those costs and the profit margin demanded by investors to compensate them for the risk associated with their investment and, voila.  The price of gasoline.

This gets to Cohen's primary point - that the price of the feedstock is the primary driver of oil prices.  And given the commodity nature of that feedstock and the global nature of that commodity market, that price will be driven not only by the laws of supply and demand, but by the forecasts of speculators and traders about future trends in supply and demand, as well as global unrest in the lands lying above much of that supply.

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As we well know, demand is rising sharply as the enormous and energy-hungry economies of China and India emerge into industrialization.  Supply, meanwhile, has suffered unfortunate hits, notably including an interruption in output from Iraq during the liberation and the effects of Hurricanes Rita and Katrina in the U.S.  Opportunities to expand supply have been stymied by legislative opposition to sussing out promising reserves here at home.

As for windfall profit taxes, anyone who continues beating that drum with a straight face should be ready to offer subsidies to oil companies in times of low energy prices.  And while we're at it, we should probably think about taxing Hollywood when a movie with a $100 million budget rakes in a billion dollars.  Talk about a windfall.  Who cares that most movies lose money and all the risk of these mammoth projects is borne by the shareholders of these companies.  That kind of profit is just obscene and should be duly taxed (or at least designated for reinvestment in new FX technologies celluloid alternatives at the discretion of legislators), so we the ticketholding public don't have to face the specter of $12 admission fees.

Oil companies have lower profit margins than their industry-leading counterparts in other big economic sectors, like big pharma and financial services.  Furthermore, their dividend payout ratio (for ExxonMobil: 20%) tends to be far lower.  This means a far greater portion of every dollar of income is indeed being put straight back into new exploration and R&D initiatives.

Still, as Cohen noted, electoral time and energy time don't mesh particularly well, so a lot of the frankly nonsensical emotive arguments scapegoating the providers of our energy will continue to have legs in the halls of Congress (and troublingly, even the White House).  Hopefully, this new PR effort, seeking to bridge the gap between reality and the general public's understanding of the mechanics of the industry, will serve to debunk some of the bunk.

Many thanks to Ken Cohen for taking so much time to chat with all of us and also to Pat Cleary from NAM for alerting me to the event.  For much, much more, check out the writeups from the other bloggers on the call.

Captain's Quarters
Hugh Hewitt
Polipundit
Wizbang
National Center Blog
Right Wing News
National Association of Manufacturers
Human Events Online