Friday, September 10, 2004

Rumors Quashed?
The Financial Times reports that Total's CEO, M. Desmarest, has denied speculation that his firm is interested in a takeover of Royal Dutch/Shell. Whether this is just the usual rumor control around the edges of something proceeding stealthily, or a genuine recognition that the conditions aren't right for this kind of merger, his remarks are welcome. An increasing number of analysts are recognizing that the global oil industry faces a serious capacity crunch. At this point, the oil majors need to invest in new exploration and production projects, not in each other.

The consequences of previous under-investment weigh heavily on fuel prices today, though they have done wonders for oil company equity prices. The stock of my old firm, ChevronTexaco, is up 15% vs. the S&P 500 in the last six months, and up nearly 30% since the start of the year. But even though recent investment constraints look smart for shareholders in the short run, they diminish the companies' long-term growth prospects and expose the global economy to risks that must affect shareholders' overall wealth to a greater degree.

Unfortunately, if the industry dramatically ramps up investment now, this could create a future oversupply that would undermine the returns on those projects for a few years. This is the perennial paradox of the industry, and part of the cost of doing business. Ultimately, if oil supply fails to keep up with demand, the incentive for alternatives will be much greater, and yesterday's prudence will look like tomorrow's myopia.

No comments: