One beauty of British mystery writers like Conan Doyle and early Le Carre is their use of deductive reasoning to relate odd facts and explain reality. Matt Simmons used the same powers to help us understand why major oil companies deny Peak Oil and why they finance groups like Cambridge Energy Research Associates that go around sewing doubt in the public’s mind about Peak Oil (although, as recently reported, their scheme has failed).
The reason, as Matt told us in Twilight in the Desert, is that the production sharing agreements between the major oil companies and various countries where they produce oil mean that as the price of oil rises, the share of production going to the major oil company declines. Thus, in accordance with their contracts, the oil company’s production shows a decrease even though its revenues increase.
Oil companies don’t like this because Wall Street analysts, in their wisdom, become discouraged by declining production. It causes the analysts to downgrade the stocks, which causes the stock prices to fall. Executives get a lot of their compensation (often most of their compensation) via stock options that are issued every year and sold every year by the executives when the stock price rises. So falling production levels caused by higher oil prices causes the executives’ compensation to fall. Ouch. That’s real money.
Executives, especially Exxon executives, have thought for some time that they could keep oil prices under control by pretending that Peak Oil is a left-wing myth. Or that it won’t happen until we’re all dead. Most executives (other than Exxon’s) have stopped that foolishness by now.
Yesterday, Exxon reported a “plunge” in oil production - in the words of The Financial Times. Revenues and cash flow, mind you, were pretty damn good (see transcript). But the stock was downgraded by analysts because their oil production declined and the stock price was down by more than $3. Q.E.D.