Commodities Give Me a Headache

And not just at the pump. A lesson in the Calculus of “Acceptable Investment Return”.

…But how is it that crude can still trade above $100 a barrel, three times what it sold for at the start of the decade, despite a very wobbly economy?

… Ponder that for a minute. Texas-based Exxon is the largest publicly traded company in the energy business. In fact, it’s the most profitable company in the history of capitalism, earning a record $40.6 billion on sales of $404 billion last year. Yet even with prices at the pump near all-time highs, Exxon isn’t planning on producing any more oil four years from now than it did last year. That means the company’s oil output won’t even keep pace with its own projections of worldwide oil demand growth of 1.2% a year.
Imagine a chief executive of another growth company making a similar announcement to Wall Street as Exxon Chairman Rex Tillerson. What if Steve Jobs said Apple (AAPL) wasn’t going to sell any more iPhones than it did in 2007? What if Howard Schultz said Starbucks’ (SBUX) latte production would stagnate, at least until the next U.S. president embarked on his or her reelection campaign? Shares of both companies would plummet.

3 Responses to “Commodities Give Me a Headache”

  1. Nobrainer says:

    Apple and Starbucks may not be great examples.
    Think instead of, perhaps, mortgage lenders and some investment banks. I’m sure that as of a couple years ago they had tremendous plans (and of course very thoroughly researched and vetted forecasts supporting their decisions) to grow by increasing annual volume.

  2. major dad says:

    To produce more oil they would have to drill in more places, that’s not likely. Besides you have to have refinery capacity, that’s not going up anytime soon either.

  3. The_Real_JeffS says:

    Spot on, major dad. God forbid that we ramp up oil production and processing in this day and age of rampant NIMBY.

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