Publications: Notes at the Margin

MEGA: Making Exxon Great Again (December 16, 2024)

 

During a December 11 call with reporters, ExxonMobil announced a significant increase in its exploration budget. Although CEO Darren Woods did not say it, he intends, echoing Donald Trump’s MAGA slogan, to “Make Exxon Great Again.” If he had said it, he could have added, “OPEC be damned.”

 

According to Financial Times’ McCormick and Smythe, the company will boost its output by over one million barrels per day by 2030. Furthermore, they noted that Exxon had brought its exploration and production costs well below those of competitors, whether publicly or privately held companies or oil-exporting nations.

 

On the call, Woods apparently did not discuss MEGA’s impact on oil-exporting countries. If not, the omission comes as no surprise. Exxon has the cash resources to continue expanding and can thus ignore those in the financial community who want it to follow Wall Street’s “capital discipline rules” and the oil ministers, especially the Saudi minister, who wish to maintain current oil prices.

 

ExxonMobil’s announcement could portend a period of Schumpeterian creative destruction. Creative destruction occurs when an innovative entrepreneur, be it a company or nation, drives other established market players from the field by developing significant output volumes that can be sold profitably at prices well below competitor breakeven costs. Such events are not new. In 1985, tin prices collapsed when new low-cost producers refused to join an international price stabilization agreement. Exxon’s aggressive plans may have the same effect. In addition, if the firm realizes its goal, it will reestablish the global oil market primacy it lost more than fifty years ago.

 

A MEGA success would bring lower short-run prices absent strong US sanctions on Iran and Venezuela because the key driver of global oil consumption growth, China, appears headed for recession and declining oil use. History teaches, though, that those who win Schumpeterian battles can enjoy much higher prices in later years after the vanquished high-cost producers have shut down, assuming demand increases.

 

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