Exxon Mobil Corporation
A New era of higher prices?

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By madamebutterfly1
August 23, 2004

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I believe we have entered forever a period of much higher prices.

To my knowledge, upper management has not publicly said much about any changes in plans due to these higher prices -- at least none that is evident to me. Not much appears to have changed (yet) with the investment plans to suggest that new investments are being added or modified as a result of a new conviction that we have entered forever a significant higher price era.

To some extent, this should not be a big surprise since XOM was burned once before for making investment decisions assuming that crude prices were going to skyrocket forever, when, as it turned out a few short years later, they actually collapsed and stayed relatively low ($14 to $20/B) until recently (1991 Gulf war, excepted).

However, the grunt group with which I deal on a regular basis is beginning to believe that if prices continue above $35 to $40 for several more months, with the supply demand balance gap still exhibiting longer term tightness, management, is believed, will "do something" more aggressive.

Someone remind me that when prices collapsed back in the early 80's, they collapsed because there was still a lot of spare crude capacity under the wings of OPEC and prices had climbed artificially high because of managed supply restraints on the part of OPEC. But today, that spare in OPEC is practically gone, and there is nothing to push prices down other than a slowdown of demand through higher prices.

Despite the fact that OPEC will be able to add more capacity, also will non-OPEC countries; demand is growing too robustly to imagine that any significant spare will ever again be developed. Even if there is a mild recession, new discoveries have slowdown over the past 10 years, quite dramatically. So will a slowdown may give us a bit of breathing room, the longer-term supply demand balance is really tight.

So what do we do?

My guys have ruled out solar or such nonsense. They like to quote from Lee Raymond's (CEO) May interview on PBS in which he said that one would need the entire state of New Jersey covered with solar cells to generate energy equal to the energy that is dispensed/sold in 1 year through 6 average XOM service stations. Given that XOM has 33 thousand service stations, the use of solar energy as an energy solution is considered impractical and tree huggers and other impractically minded, or individuals that subscribe to the romantic notion that we should return back to the simpler life of the 19 century, would be about the only people who would hold to that notion.

My personal belief speaking with some old timers is that Tar Sands in Canada, and the revival of Shale Oil may well be the next area of big focus for XOM as well as other oil companies. XOM is already investing in LNG and gas-to-liquid (GTL) projects to help satisfy increasing demand for energy.

Madame Butterfly

P.S: By the way, there are 2.6 Trillion (10 raised to the 9th power) barrels of oil in Shale oil. Of these, 2 trillion are in the U.S. -- so, excuse me for not being too lady-like--but what the hell are we waiting for. Shale oil is economic at $25/B.

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