Company Case

ExxonMobil: Social Responsibility in a Commodity Market

One fine spring day in 2008, Joe Tyler watched the numbers on the petrol pump speedily climb higher and higher as he filled up his 2002 Toyota at the neighborhood Exxon station. When his tank was full, what he saw shocked him right down to the core of his wallet. It had just cost him $43.63 to fill up his economy car. How could this be? Sure, the tank was completely empty and took almost 11 gallons. And, yes, petrol prices were on the rise. But at $4.04 per gallon, this was the first time that a fill-up had cost him more than $40.

In the past, Joe hadn't usually looked at his petrol receipts. Even though petrol prices had risen dramatically over the past few years, it had still been relatively cheap by world standards; still cheaper than bottled water. Until now, Joe didn't think that his petrol expenses were affecting his budget all that much. But crossing the $40 line gave him a wake-up call. Although it was far less than the $100 fill-ups he'd heard about for SUV drivers in places like Los Angeles where prices were among the highest in the United States, it didn't seem that long ago that he'd routinely filled his tank for not much more than $10. In fact, he remembered paying around $1.20 a gallon to fill this same car when it was new in early 2002. Now, he was starting to feel the frustration expressed by so many other buyers. What had happened?

Not long before Joe's epiphany about petrol prices, a man named Lee Raymond was retiring after 13 years as the chairman and CEO of ExxonMobil. He probably wasn't too concerned about how much it cost him to fill up his own car—or his jet for that matter. Including all his pension payoffs and stock options, Raymond's retirement package was valued at a mind-boggling $400 million. And why not? While at the helm of the giant oil company, Raymond had kept ExxonMobil in one of the top three spots on Fortune's 500 list year after year. By the end of 2007, ExxonMobil had been the most profitable company in America, setting a new record every year. While Joe and other consumers were going through pain at the pumps, Exxon had racked up $40 billion in profits on $372 billion in sales. ExxonMobil's fourth-quarter revenues alone exceeded the annual gross domestic product of some major oil producing nations, including the United Arab Emirates and Kuwait.

Was it just a coincidence that ExxonMobil and the other major oil companies were posting record numbers at a time when consumers were getting hit so hard? Most consumers didn't think so—and they cried "foul." In an effort to calm irate consumers, politicians and consumer advocates were calling for action. Maria Cantwell was one of four U.S. senators who backed legislation that would give the U.S. government more oversight of oil, petrol, and electricity markets. "Right now excuses from oil companies on why petrol prices are so high are like smoke and mirrors," Senator Cantwell said. "The days of Enron taught us the painful lesson that fierce market manipulation does happen and I don't want American consumers to have to experience that again." In a hearing in 2008, U.S. Congresswoman Maxine Waters even threatened the CEOs of the largest oil companies with nationalizing their companies if things did not change.

Several state attorney generals also launched investigations. Even the George W. Bush administration demanded an investigation into petrol pricing. In a speech to the country, President Bush said, "Americans understand by and large that the price of crude oil is going up and that [petrol] prices are going up, but what they don't want and will not accept is manipulation of the market, and neither will I." But no investigation into the pricing activities of U.S. oil companies had ever produced any evidence of substantial wrongdoing. The FTC had found isolated examples of price gouging, as in the wake of 2005 hurricanes Katrina and Rita. But most of those were explainable and the FTC had never found evidence of widespread market manipulation.


Although the many parties disagree on where to place the blame for skyrocketing petrol prices, there is a high level of consistency among economists and industry observers. They agree that crude oil and even petrol are commodities. Like corn and pork bellies, there is little if any differentiation in the products producers are turning out. And even though ExxonMobil has tried hard to convince customers that its petrol differs from other brands based on a proprietary cocktail of detergents and additives, consumers do not generally perceive a difference. Thus, the market treats all offerings as the same.

Walter Lukken, a member of the U.S. Commodity Futures Trading Commission, has stated publicly what many know to be true about the pricing of commodities. In testimony before Congress on the nature of petrol prices, Mr. Lukken said, "The commission thinks the markets accurately reflect tight world energy supplies and a pickup in growth and demand this year." But is it really as simple as demand and supply?

Let's look at demand. In the early 2000s, when oil was cheap, global demand was around 70 million barrels a day (mbd). Eight years later, world consumption had risen to 87 mbd. Many environmentalists point the finger at the driving habits of North Americans and their petrol-swilling SUVs—and with good reason. The United States continues to be one of the world's leading petroleum consumers, with an appetite that grows every year. And as much as U.S. consumers cry about high petrol prices, they've done little to change how much petrol they consume.

However, although the United States consumes more petrol than any other country, this consumption has grown only moderately. Over the past decade, the rise in global demand for oil has been much more the result of the exploding needs of emerging economies. The biggest contributors are China and India, which together account for 37 percent of the world's population. Both countries have a growing appetite for oil that reflects their rapid economic growth. With manufacturing and production increasing and with more individuals trading in bicycles for cars, China and India have the fastest growing economies in the world, with annual growth rates of 10 percent and 8 percent, respectively.

Now, let's look at supply. Recent spikes in the global price of crude are occurring at a time when rising demand coincides with constrained supply. Supply constraints exist at various levels of production, including drilling, refining, and distributing. In past decades, oil companies have had little incentive to invest in exploration and to expand capacity. Oil has been cheap, and environmental regulations created more constraints. Oil producing countries claim that they are producing at or near capacity. Many analysts support this, noting that global consumption of oil is pressing up against the limits of what the world can produce.

Similar constraints place limits on other stages of the supply chain. For example, U.S. refineries no longer have the capacity to meet the country's demand for petroleum-based fuels. Not only has no new refinery been built in over 30 years, but the total number of refineries has actually shrunk. Many point to government regulation and public resistance as the reasons for this. And as regulations dictate more petrol blends for different regions, refineries feel an even greater pinch, and distribution lines experience bottlenecks.

But as much as supply and demand account for fluctuations in petrol prices, there is a third factor. At a time when supply is stretched so tightly across a growing level of demand, price volatility may result more from the global petroleum futures trading than from anything else. Modem futures markets function on speculation. When factors point to a rise in prices, traders buy futures contracts in hopes of profiting. When oil seems overvalued, they sell. The net effect of all the buying and selling is a constant tweaking of oil prices, which reflects both the fundamental supply-demand situation as well as the constantly changing risk of a major political crisis or natural disaster.

Some policymakers and consumer advocates have pointed to speculative futures trading as a cause of high gas prices. But according to Walter Lukken, "Blaming the futures markets for high commodity prices is like blaming a thermometer for it being hot outside." Although it is true that the oil futures trading can artificially inflate prices in the short term, economists have found that such activities have more of a stabilizing effect in the long run. Speculators absorb risk, often stepping in when nobody else wants to buy or sell. In fact, as with other commodities, the more traders in a given commodity market, the smaller the gap between the buying and selling price for petroleum. This reduces costs for companies at all stages of the value chain, which should ultimately lower prices for customers. Accordingly, if not for the global oil futures market, price spikes and crashes would probably be even bigger and occur more frequently.

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