BIG OIL: NEWS ANALYSIS
Combination of Exxon and Mobil Aims to Cut Costs of Producing Oil
By LOUIS UCHITELLE
For all the wealth of Exxon and Mobil -- and all the market power inherent in their announced merger -- these two oil giants are essentially purveyors of an ordinary commodity, and commodities are a drug on the market today, cutting into profits everywhere and hurting national economies.
The move is essentially an attempt by Exxon and Mobil, particularly Mobil, to sustain profits. That helps to explain why investors, rather than celebrate the deal, drove down the stock prices of both companies on the New York Stock Exchange on Tuesday.
The two companies are among the nation's most profitable, but the current price of crude oil, $11.13 a barrel, is barely enough to cover Exxon's exploration and production costs, and less than what Mobil spends to find and retrieve oil and natural gas.
"The cost reductions from this huge merger will come in many different areas," said Victor Burk, chief of Arthur Andersen's Energy Services Group. "Exxon and Mobil will combine their headquarters and back office operations, and their purchases of supplies and services. As the world's biggest company, their negotiating power will be greatly enhanced. And they will try to reduce Mobil's costs for finding and developing oil reserves, bringing them more in line with Exxon's."
All that cost cutting cuts two ways for ordinary Americans. Lower costs mean lower prices for gasoline, plastics and other petroleum-based products. But this merger, and others in the oil industry, represents a significant departure from more traditional mergers, and that works against ordinary Americans, says Peter Bernstein, an economist and consultant.
"It used to be that mergers were to gain market share," he said. "This one is to cut costs, and that involves losses to society. Cost-cutting means people lose their jobs, and the impact on society of downsizing is probably on balance negative."
Cost cutting through mergers is hardly a new tactic. In the oil industry, BP Petroleum and Amoco have already taken this step, and so have Texaco and Shell. With oil prices unlikely to rise until Asian demand revives -- probably many months in the future -- other oil companies appear to be moving in the same direction. France's Total SA announced Tuesday that it had acquired a 41 percent stake in Belgium's Petrofina SA.
The plunge in commodity prices goes beyond oil, and also beyond steel or textiles or livestock or grain or all the other basic materials that the word "commodity" brings to mind. Because of the collapse in Asian demand, an index of 28 of these commodities has fallen by 25 percent since last spring, a record drop. But in today's modern global economy, "commodity" also takes in numerous manufactured goods that are easily produced anywhere.
Commercial airliners are not commodities. Two companies, Boeing and Airbus, control the key technologies and production skills. Highly technical medical devices are also exempt, their production limited to those companies and workers with the necessary know-how. But razors are a commodity, the very best easily copied and manufactured.
Cars are another example, and so are apparel, lathes, computer chips, small appliances, toys, kitchenware, television sets, watches and many other electronic devices. Commodities in this broader sense are in over-supply mainly because so many companies stepped up production in recent years, in the expectation that as supply rose, so would demand, absorbing the new supply.
The Asian crisis destroyed that strategy, and now manufacturers find themselves unable to sell all that they can produce, and often forced to cut prices, hurting profits and forcing layoffs in the United States and abroad as production has been cut back. "The basic phenomenon, however you to define the word commodities, is that there is a huge amount of slack capacity in most industries," said Alan Blinder, a Princeton University economist.
Exxon and Mobil are caught in this squeeze. No U.S. corporation was more profitable than Exxon last year, and Mobil was also among the top performers. The two giants are still reporting healthy profits. Their refining operations and gasoline marketing, for example, continue to prosper.
What's more, says Burk, an Exxon-Mobil merger will give the new company much more clout in dealings with OPEC. "In terms of production," he said, "it will be near in size to several of the big state-owned oil companies in the Middle East. It will have the means to finance very large exploration and development projects. And we may see Saudi Arabia and Kuwait, for example, opening their countries to foreign oil investment."
But right now, in the basic business of exploring for oil, drilling the wells and recovering crude oil and natural gas, Exxon's and Mobil's costs are beginning to reach or surpass the basic price they get for even the best quality crude, known as West Texas Intermediate Crude. Its price of $11.13 Tuesday is down 41 percent from $18.83 last summer.
Exxon, the stronger of the two companies, pumped from its U.S. fields 204 barrels out of a total worldwide production of 584 barrels last year. The exploration and production cost averaged $7.11 a barrel, according to Arthur Andersen's Energy Services Group, which surveys oil industry costs, based on public disclosures. Outside the United States, the Exxon exploration and recovery cost was $10.39 a barrel -- a healthy margin last year, when crude oil rose above $20 a barrel for a while, but uncomfortably close to today's much lower price.
Of the 250 million barrels of crude oil that Mobil pumped everywhere in the world last year, 89 million came from U.S. fields, at a cost of $14.85 a barrel in the United States for exploration and recovery, and $11.52 abroad.
"Mobil is not in good shape today in this category," Burk said, " and when you consider all the other costs involved in recovering crude oil, the cost for both companies is probably more than the current world oil price."
Copyright 1998 The New York Times Company
Louis Proyect
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