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Wednesday, May 03, 2006

ExxonMobil on Gas Prices: We Couldn't Manipulate the Price Even If We Wanted To

On behalf of this blog, The National Center's Peyton Knight participated in a blogger conference call this afternoon with ExxonMobil Vice President Ken Cohen. The following is Peyton's report:
Along with eight representatives from various other weblogs, I participated in a "blogger conference call" Wednesday afternoon with ExxonMobil Vice President of Public Affairs Ken Cohen. We discussed issues surrounding gas prices and his company's record profits.

Cohen says that the current negative press surrounding his company's profits has more to do with a lack of understanding of the oil industry than anything else. In this regard, he says, ExxonMobil needs to do a better job communicating with the public and helping folks understand all of the forces at play in the oil business.

According to Mr. Cohen, there are "three data points" that need to be connected. "First, we all have to have a common understanding of what the facts are... then, what are the policy options, and what is the cost-benefit ratio? And right now we don't have a good common understanding of what the facts are."

There are currently about 170,000 gasoline service stations in the United States, and, according to Cohen, ExxonMobil owns and operates less than 1,000 of those.

"We control the pricing at less than a thousand gasoline stations in the United States... We have about seven percent of global refining capacity and 12 percent in the United States. That's not market power." He notes that ExxonMobil couldn't manipulate the price of gasoline even if it wanted to.

Cohen acknowledges that "right now, [profit] margins are good," but says, "it's a cyclical business."

Even so, I believe many people would be surprised to learn that as good as ExxonMobil's profit margins are, it's government that is reaping the biggest "windfall" in this time of higher gas prices.

According to Mr. Cohen, in the first quarter of 2006, ExxonMobil made $8.4 billion in total profits. Profits in the U.S. accounted for $2.3 billion of that total. And what did ExxonMobil pay in total government taxes in the U.S. in this first quarter? $3.7 billion. The company paid $1.4 billion more in taxes than it took in profits.

In fact, Mr. Cohen says, from 2001 to 2005, ExxonMobil's total U.S. tax bill was $57.1 billion, and its total earnings in the country were $34.9 billion. This means that over the most recent five-year period, the company paid $22.2 billion more in taxes than it earned in profits.

In 2005, he says, ExxonMobil earned 9.7 cents per dollar of sales in the U.S. To put this in perspective, he notes that pharmaceutical companies earned 17.6 cents per dollar, banks earned 19.1 cents, and household and personal products firms earned 10.9 cents.

When asked about so-called price-gouging, Mr. Cohen's answer was simple: "We don't."

"We are the most heavily regulated industry in the country," said Cohen. "The FTC (Federal Trade Commission) has a special branch that does nothing but regulate energy companies."

"With regard to the current climate," he noted, "We are in an election year and it appears that the candidates are more interested in running against us than running against an opponent."

When asked about his thoughts on a possible "windfall profits tax" on the oil industry, Cohen points out that "there is a history we can refer people to... it's been tried before... it really impacted citizens in the country negatively, and did not have the desired impact."

He also noted that boycotts, such as the one being promoted by a county judge in Beeville, Texas, "will have no effect on ExxonMobil or the global commodity markets, though it could impact the individual owner of the service station."

When asked what potential impact drilling for oil in ANWR might have on the current situation, Mr. Cohen stressed that "we don't know exactly [how much recoverable oil] is there" and there is a need to conduct a seismic evaluation to get a better idea. However, he did note that if current estimates of recoverable oil are correct "it would make a very positive contribution."

He explained that world oil supply isn't concentrated in "one big pool," so ANWR must be viewed in the proper context. That context, according to him, is ANWR representing one potentially significant piece of the larger oil supply puzzle.

Cohen notes that there are several factors driving the cost of gasoline, and simple supply and demand are chief among them.

"The hand of Adam Smith is at work here -- the market determines the price."

He also notes that "oil is the biggest global commodity" and that developing nations such as China are drawing heavily on the global supply.

"We've seen unprecedented growth in the developing world," he observes. "They want more energy because energy is absolutely essential for economic development."

"You have to look at it through the eyes of the commodity trader. A lot of it is speculation," Cohen says, adding, "We at ExxonMobil do not get involved in the trading [of oil futures] on paper."

"Traders take a look at the draw down in spare capacity and then they look at the draw down of the political risk... and the pricing of gasoline is based on the stock market and futures market."

When asked what impact environmental regulations such as "boutique fuel" mandates have on gasoline supply and prices, Cohen explained, "it is a big issue because it impacts your flexibility."

"There are 17 formulations [of gasoline] around the country," he noted. "Let's assume you have an outage... machinery breaks down... occasionally there's a storm. You don't have the spare capacity to move in and replace [fuel]."

For example, if a pipeline carrying a specific boutique blend of gasoline to one area breaks down, that area's supply is cut off, demand outpaces available fuel, and prices skyrocket. But because that area is required to use a specific boutique blend of gasoline, it can't simply supplement its supply by purchasing gas from a neighboring area that uses a different blend.

According to Cohen, boutique fuels don't only complicate things in the event of a mechanical breakdown or natural disaster.

"This plays big into commodity markets," he says. "This impacts the commodity market. This impacts the commodity trading. And this impacts the price."

As far as alternative fuels go, Cohen says, "We were the biggest investor in solar in the '70s and '80s. The technology platform for solar is such that until there is a technological breakthrough it will be a niche source."

He says that this is why ExxonMobil is currently focusing on the technology side of alternative fuel development, and "searching for the technological breakthroughs that need to occur for this technology to be feasible."

There may be good news on the horizon. Cohen stated, "If expanded refinement in the works comes online in the next three to four years, we could in very short order be looking at a surplus." In addition, he notes that, currently, expanding existing refineries is preferable to building new "grassroots refineries."
Disclaimer from Amy: As noted in this post and various others on this blog, The National Center has received contributions from ExxonMobil, most recently in 2005. These contributions equal about one half of one percent of our total budget.

Addendum, 5/4/06: Here are some snippets from posts by other bloggers who participated in the call (please click on the links to see their full posts):
Hugh Hewitt (Mary Katherine Ham): "Exxon's 2005 [profit margin] figure was 9.7 cents on the dollar. That puts the company at No. 116 on the Fortune 500 in that category. This year in the first quarter, though earnings went up, the profit was 9.4 cents on the dollar."

PoliPundit (Lorie Byrd): "...here is one bit of information that I learned... that I found a bit shocking (and I don't shock particularly easy on the issue of taxes): 'Over the past five years' Exxon Mobil's 'tax bill ($57.1 billion) exceeded...U.S. earnings (34.9) by over 22 billion.'"

Wizbang (Kim Priestap): "To begin, the biggest issue facing oil companies in general is the lack of understanding about how the energy industry works in general and how ExxonMobil works in particular. First, ExxonMobil only produces 3% of the world's oil. There are approximately 170,000 gasoline stations in the US; ExxonMobil owns and operates fewer than 1000 of them. Regarding the sudden increase in gas prices, Mr. Cohen said a lot of it is due to the unprecedented growth in other parts of the world, such as in China and India. He said that the growth in those countries was not unexpected, but their rate of growth was."

Captain's Quarters (Cap'n Ed): "Oil is a commodity, just the same as oranges, pork bellies, and a range of other products. When traders sense potential issues for future production, they buy more and drive prices up so that they can take advantage of better pricing now. The volatile nature of the major oil exporters... creates a hair-trigger sensitivity for traders."

Right Wing News (John Hawkins): "ExxonMobil was a big investor in solar power in the 70's and 80's, but they got out of it because they didn't think it could be anything more than a niche alternative. That's still the case and unless there is a big leap forward in solar technology, it's never going to be an important part of meeting our energy needs."

Suitably Flip: "...check back later for a detailed recap of the thorough and wide-ranging discussion between Cohen and the bloggers on profitability, the mechanics of commodity markets, the impact of speculators, price gouging allegations, antitrust considerations, tax climates, and all things oily."
If/when more bloggers post their reactions to the call, I'll post links.

Posted by Amy Ridenour at 10:21 PM

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