Jane Hanger ECON 202S

SIN:00763426

Current Events Paper

The Uncertainty of the Oil Industry

The consumerism reputation of the United States is boldly displayed in our society’s

energy dependence that in turn translates to our oil consumption. The energy we depend on from

oil is responsible for fueling our transportation needs, industrial, commercial, and residential

energy uses, and the generation of electricity. Through our energy consumption the oil industry

has emerged as one of the nation’s largest and plays a key role in U.S economics and politics.

But oil is a finite resource and its negative impact on the environment launched the campaign to

find its green replacement. Progress of our nation going green is everywhere from the multitude

of new products in our market, sustainable building design, tax breaks for green investments, and

the billions of dollars allocated to research in alternative energy solutions and green technology.

These are all evidence that our nation is taking steps in the right direction for an environmentally

sustainable future, but the uncertainties connected with alternative energy halt any major

advancement while creating a very unsettling decision process for a multibillion dollar oil

industry.

The blurry future of our nation’s energy source in conjunction with a multibillion dollar

industry that still must fill society’s current unrelenting demand of energy creates a complex

economic puzzle that will make or break oil companies within the industry. The complex nature

of the energy transition is captured in a recent article from U.S News and World Report in which

Kent Garber highlights the magnitude of uncertainty and unpredictability in “The Evolution of
an Oil Giant.” The article reveals a conflict between the most profitable U.S Company, Exxon,

and some of its most substantial shareholders, also descendants of the founder of Exxon’s

original oil company. The shareholders, with ties, interests, and concerns with the economic and

environmental impact of oil are currently pushing Exxon to invest in renewable energy forms

and to open communication on decisions concerning the oil company’s future.

Contrastingly Exxon appears to be in no big hurry to make the energy switch and is

considering the current high demand for energy that produces their multibillion dollar profit.

Although Exxon has been very resistant, with other oil companies(i.e. Shell, BP) investing in

renewable resources over 10 years ago because of the growing concern of environmental

damage, in late 2009 it bid 41 billion for a natural gas company that would make Exxon the

largest holder of new sources of this clean fossil fuel. Exxon’s future is very questionable

because of the economic approach it takes on allocation of resources. It views the energy change

as a process that will take decades and instead focuses their business ventures on the best oil

production technology and new sources of the finite fossil fuels that currently supply the ever

increasing global energy demand. Exxon’s short term economics are obviously very profitable

but if technology, laws, investors, time, or environmental factors don’t play out as expected by

Exxon a crash is inevitable.

The Exxon controversy presented in the article I find so interesting due to the numerous

economic issues that do not have cut and dry solutions. The oil industry is unlike many markets

that are considered elastic due to the nature that producers can increase supply and consumers

can decrease demand for the product. Within the oil industry both supply and demand are

inelastic. Oil is a finite resource so its production and price is dictated by the cost of finding and

refining the oil and Exxon cannot decide to make price cuts or increase production as an
economic strategy in comparison to the marketing strategies of fast food restaurants or Wal-

Mart. The oil industry is dictated by conditions that they are not in control of, and once the

resource is gone they are as well. But, the current demand in our society for energy is also

currently a rigid structure. People need oil to fuel their energy necessities in our society and have

become very dependent on it as a source that is not sacrificed based on price. The fact that both

demand and supply are inelastic with demand increasing and supply decreasing explains why

Exxon was the number one Fortune 500 Company, beating Wal-Mart, the king of all you need

stores with roll back prices in the time of a recession.

The trend of the oil industries inelastic supply and demand, with our government and

national environmental concerns raises another issue presented in the article. As global

economies grow, technologies advance, and the global population will become more dependent

on energy sources increasing the inelastic demand. But with oil supply depleting and the end of

the industry inevitable due to lack of finite resources a new source of global energy and therefore

a new global industry will emerge. The problem is there is no accurate time table for leading oil

companies to transition their assets to new forms of energy in efforts to make their marks on the

new frontier without jeopardizing their current profits still obtained by the oil industry. Exxon is

investing in other renewable energy sources but is primarily focused on short term economics

and profit, and assuming that an energy shift from oil to the new global energy substitute will be

a lengthy multi-decade process that they will have time to assess accordingly. Until that point it

will maintain at its current position as the leading profitable national oil company.

Now Exxon is not making ignorant financial decisions, and a company of that magnitude

and economic power doesn’t clinch the Fortune 500 number one spot, boasting a title of the
nation’s largest corporation in regards to revenue without extensive strategizing and analysis.

Nevertheless, the current green trend within the U.S is not going to look as favorably on them as

they are the companies such as BP and Shell that began investing in new markets and technology

over 10 years ago when the negative properties and limited amount of oil first became public

concern. Reputation doesn’t determine profit and while demand is high and no widely accepted

forms of energy are available Exxon will continue to prosper, but that is assuming the

shareholders continue support. Shareholders and investors are depended upon to bring capital

into a company and use their role as partial owners to invest their personal assets in efforts to

gain a portion of the company’s profit. Exxon’s major shareholders, the Rockefellers, are

preparing a resolution to present in May asking the company to divulge their strategy and

concerns in regards to the future of oil and energy. They have also been pressuring Exxon to

invest in cleaner renewable energy and the current environmental issues caused by oil.

Economic risks are associated with remaining in a current demanded profitable but diminishing,

unpopular, and unknown global countdown of oil dependence or by transitioning assets to new

technologies and alternative energy sources in hope of building and leading a new global

multibillion profitable energy landscape.

Economics are not always clear cut and can’t always be determined by trends and is

exemplified in the current oil and Exxon economic controversy. As society progresses and

population, science, and technology grow the landscape of major industries will continuously

change. Basic economic principles of supply, demand, elasticity, costs, and profits are best used

as an assessment of the financial possibilities, risks, and models of maximizing profits while

minimizing resources. Time is the only factor that will reveal the fate of the multibillion dollar
oil industry companies and the future of global energy economics, until then Exxon is leading the

pack.