Why Exxon is out of gas

You would think that with the average price of gasoline topping out at more than $3.10 a gallon that Big Oil would be pouring those extra profits into research and development and using advanced technologies to increase production. Not really.

So what is ExxonMobil, the world's most profitable company, doing with the cash bonanza it has received from record oil and gas prices? Giving it back to shareholders, according to the Business Week story, Pumping Oil, Not Cash. Exxon and other big oil companies have decided that it's less risky to simply buy back their own shares to boost stock prices than it is to put money at risk by investing it in their core business to increase production and grow earnings the old fashioned way. Exxon is, according to the story, "bingeing on buybacks to help boost profits."

According to Business Week, Exxon ...

• Spent 60% of the excess cash flow it collected at the pump in 2006 on stock repurchases. Since 2000 it has bought back 16% of its outstanding shares, transferring the extra profits at the pump directly into the pockets of shareholders
• Cut its staff by 10,000 since 2002 (part of that was the Exxon / Mobil merger)
• Backed out of a project in Qatar that would have produced diesel fuel for export
• Declined to invest in a new Alaska pipeline unless it is given tax breaks
• Has decided against building any new refineries in the U.S. (but has decided to build one in China)
• Has kept production output nearly flat since 2000

At least one other oil company is following suit. Chevron has apparently repurchased $4.5 billion of its own stock in the past year, up from $2.6 billion the year before, Business Week says.

That may be short-term thinking for Big Oil. But where does that leave consumers? Ultimately, better off.

Energy guru Amory Lovins, chairman and chief scientist of the Rock Mountain Institute, has consulted with oil companies for more than 30 years. "...there`s a big split down the middle of the industry now between those making smart investments and the rest," Lovins said during an interview with TV personality Charlie Rose last November. His summary of Exxon: "I`d say they`re the best in the industry in execution and probably the worst in strategy." Meaning, he says, that "they do inadvisable things very efficiently." (For more on Lovins' ideas on energy conservation, including how to use slush to cool data centers, see today's Computerworld interview with Lovins).

But stock buybacks may not be one of them. An Exxon spokesperson told me last year that that there are no viable alternatives to oil. What he meant was that there are no viable alternatives to oil that suit the Big Oil business model. But there are alternatives that Exxon isn't willing to invest in. Higher oil prices make alternative technologies more attractive. And by buying back its stock, Exxon is freeing up capital that shareholders can use to invest in smaller, more aggressive alternative energy companies.

The future may belong to an array of distributed power schemes, such as cogeneration, fuel cells, solar, biodiesel, wind and other micropower schemes that won't necessarily scale well to the big oil model. And this may be precisely why the company isn't investing in more refining capacity for the medium term. Exxon's reluctance to build new refining capacity in the U.S. is in part related to its fears that ethanol fuels and conservation will cause prices of gasoline to drop in the future, according to comments from CEO Tillerson that were summarized in the Business Week story. Oil is a commodity, and in a commodity market, what goes up will come down - sometimes with a crash, as anyone who remembers 99 cent per gallon gas knows.

If Exxon can't make use of those bonus profits, I say give it back to shareholders. Just as in the IT sector, the extra capital can only serve to help fund new startups and allow alternative business models to flourish.