Exxon CEO Advocates Fuel Efficiency

Wednesday, October 14, 2009

At the Exxon Mobil Annual Meeting, Chairman Rex Tillerson rejected efforts by members of the Rockefeller family to invest in alternative fuels. Tillerson indicated that Exxon Mobil specializes in oil and gas and that alternatives don’t make much money.

Tillerson said that “the way to deliver meaningful environmental improvements in the short term is to improve the efficiency by which we use traditional fuels.” He said that Exxon Mobil’s strategy was to improve the efficiency of its global operations and offer products to help customers to improve efficiency.

Mr. Tillerson recognized that high gasoline prices are hurting people and suggested consumers try to conserve. He said if consumers work on the demand side, Exxon Mobil will work on the supply side.

His view of Exxon Mobil as only an oil and gas company creates a corporate mindset that limits the consideration of other energy in the company’s portfolio. While the world depends on oil and gas today, technological changes could revolutionize this overnight. We have seen how changes communication and computation have transformed these industries. From a forecaster’s perspective, the world is unlikely to ease into alternative fuels. Also today’s higher oil and gas prices, create increased economic incentives to develop alternative fuels that may hasten the demise of the oil and gas age. Tillerson’s perspective, while not a popular stance, reflects the realities of energy supply and demand and pressures from the investment community.

His suggestion that consumers try to conserve energy lacks sincerity. The rapid and uncontrolled increase in pump prices has given consumers little time to react. There are few options available to those who want to use less. Curtailing driving and adjusting thermostat settings may help, but how do consumers deal with rising food costs that are the result of out-of-control diesel fuel prices. Compounding rising energy costs is the impact on the economy that spirals toward a recession.

Tillerson tells consumers that if they will conserve more Exxon Mobil will add more to supply. According to the Company’s 2007 Annual Report, liquids production grew 4% over the past four years while natural gas output declined 7%. The resulting oil equivalent production has actually declined slightly from 2003. On the refining side, refinery throughput has only increased 1% over the period. The past performance indicates that Exxon Mobil has not added more supply. Further, there is no reason that Exxon Mobil should increase supply at the sacrifice of profit or return on capital.

Exxon Mobil may be a national treasure but it is not a national entity. The Company operates and performs for the benefit of its investors. In this capacity, they have done well as measured in terms of performance relative to competitors and return on capital employed. There is no incentive for Exxon Mobil to lower prices or to take actions that would increase supply and lower prices. This is the reality of competing on the worldwide stage. Exxon Mobil may support charities but it is not a charitable organization and to expect performance characteristic of not-for-profit organizations is naïve.

Tillerson’s comments indicate that Exxon Mobil is not a warm and fuzzy Teddy Bear seeking love, but a tough-minded, pragmatic company working hard to satisfy investor’s expectations. His short-term view of Exxon Mobil as an oil and gas company is disappointing from an investor’s perspective and begs the question: “How will management transform the company to compete in the post oil and gas age?”

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