Exxon's Hoard

Includes: DBO, OIL, XOM
by: Felix Salmon

I missed this, last week:

Exxon Mobil has amassed a large pile of common stock held in treasury. At the end of 2007, the company had 2.367 billion shares held in treasury, for which it paid $113 billion over the last 10 years, according to a regulatory filing. If that stock were valued at the current market price of $90 a share, it would be worth $237 billion, or $124 billion more than what Exxon Mobil originally paid for it.

In fact, if you look at the most recent 10-Q rather than the older 10-K, the numbers are even bigger: Exxon now has 2.736 billion shares held in treasury, for which it paid $123 billion. (The NYT report has a typo: the number at the end of last year was 2.637 billion shares, not 2.367 billion shares.) But the value of the shares that Exxon owns in itself is still about $238 billion, since the shares have now softened slightly to just over $87 apiece.

This is a good reminder that Exxon is not in the business of investing in oil production, so much as it's in the business of maximizing shareholder value. That $123 billion it's spent on its own stock could have been invested instead in the oil business - but Exxon refuses to invest any money unless it gets a return on capital employed of more than 35%. Any excess cash gets returned to shareholders in one way or another, either through dividends or through stock buybacks.

State-owned oil companies are also prone to underinvestment these days, using the much easier tactic of simply leaving oil in the ground:

The Saudis have indeed deliberately decided to leave theirs in the ground. "King Abdullah, the country's ruler, put it more bluntly: "I keep no secret from you that, when there were some new finds, I told them, 'No, leave it in the ground, with grace from God, our children need it'.'' FT 5/19/08. I see the interest rate as part of the Saudis' decision how much oil to pump. Because the current rate of return on financial assets is abnormally low, they can do better by saving the oil for the future than by selling it today and investing the proceeds. Holding back production raises today's oil price, to a point where the expected future return on oil has fallen to the same level as the interest rate.

All of which leads me to conclude that if high oil prices act like a natural carbon tax, in terms of bringing down demand, then financial incentives act a bit like a natural carbon cap, in terms of bringing down the amount of investment and production in the oil industry as a whole. It's just that at the moment, the financial benefits of these decisions go entirely to oil-producing nations and to the shareholders of big oil companies. If we implemented a carbon tax or a cap-and-trade system, everybody could get some of the upside.