1-19-08 by dugan
How’s your 401 K? Having any trouble paying the mortgage, or the rent? Not Exxon’s problem. It’s on the hunt for bargains–specifically, other oil companies. There’s been a burst of stories like this one, from the British Guardian newspaper, about Exxon’s $40 billion cash hoard burning a hole in the corporate pocket. It’s way too late to stop the consolidation that killed competition among the oil titans. Even so, if Exxon tries to buy another major oil company, from No. 2 Shell to the smallest of the Big 5, Conoco Phillips, the White House must send an instant message: No way. Not now, not ever.
If such a merger were even considered by U.S. regulators, Exxon CEO Rex Tillerson would go shopping for an ermine robe and a golden scepter.
That $40 billion in Exxon’s petty cash fund, and its $100 billion-plus piggy bank of repurchased corporate stock, all came from our wallets while the U.S. economy was tanking and the price of gasoline rocketed over $4 a gallon. Exxon pocketed the money instead of upgrading its refineries, developing greener alternatives to petroleum or even doing much exploring for oil. That’s the benefit oil companies reaped from the round of mergers in the 1980s and 1990s that eliminated competition and turned the major oil companies into a cozy cartel, especially when it came to refining gasoline.
Here’s a link to what I call the Ultimate Merger Chart: just the mergers since 1996, which cut the number of major integrated oil companies in half. Since then, ExxonMobil has grown to more than twice the size of nearest competitor Shell Oil.
The last wave of mergers happened as oil prices crashed in 1998 (back when even $40 a barrel was considered an impossible price). From the Guardian:
Oil companies enjoyed record earnings over the last couple of years and have in some cases been spending billions of pounds rewarding investors through share buybacks. Service companies such as Schlumberger and Halliburton have also seen profits soar as steadily increasing crude prices led to a drilling boom that enabled them to charge much higher prices for providing rigs, well work and personnel. Until last year there were huge shortages of equipment, and massive inflation, in the industry. But now that situation is changing fast.
"In my 30-year career I have never seen before so many in the industry – even the most conservative companies – believe so hard in the fairytale of unjustifiably high crude prices," says Fadel Gheit, analyst with Oppenheimer & Co in New York. "We saw a range of mega-mergers in 1998 when the price collapsed to $9, including BP taking over Amoco, Exxon acquiring Mobil, and Chevron buying Texaco, and I would not rule out a similar outcome this year."
The other result of the drop in oil prices to the mid-$30 range for a barrel of crude oil has been that companies are cutting back oil production, meaning the next round of price increases will be even steeper.
Conoco Phillips even announced major layoffs and claimed $34 billion in writeoffs for the last quarter of 2008. Most of the writeoff is in the ephemeral corporate "goodwill" category. That means Conoco will get a really big tax cut on the basis of an intangible loss–and may look like a sweet buyout prospect to Exxon.
Regulators have a big backlog of demolished oil industry regulation to fix. But stopping an Exxon buying spree before it starts should move to the top of the list. Otherwise, we can stop wondering who’s in charge and start sending our taxes to Exxon headquarters in Irving, Texas.