The Trouble with Crude Oil

The U.S. needs a decisive federal strategy on energy, with greater research, ConocoPhillips CEO James Mulva says

by Moira Herbst

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ConocoPhillips Chief Executive James Mulva

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Fretting about climate change, calling for conservation, and making fuel from animal fats—these days James Mulva might not sound like the chief executive of the third-largest U.S. oil company, ConocoPhillips (COP). With 34 years in the oil business, Mulva concedes that times for his industry have changed. As crude oil prices surge—hitting yet another record on Oct. 26—and worries about global warming and China's oil thirst abound, Mulva and his peers at other energy giants are now pressing for a new federal energy policy.

"We don't have a national energy policy," says Mulva, who met with BusinessWeek editors and reporters on Oct. 25. While the U.S. lacks a consistent, forward-looking plan, competitors are amassing power in the marketplace, he says. "The Chinese have a very coordinated strategy that allows them to support economic growth and their standard of living."

To ensure U.S. oil companies can compete, Mulva says, Washington must step forward with a robust new policy (BusinessWeek.com, 6/28/07) that guides energy production and consumption. He says it should consist of four main parts: developing new energy sources, conservation, increased government investment in energy technology, and federal regulation of carbon emissions.

Eroding Income from Refining

The emphasis on environmental sustainability stands in sharp contrast to some other prominent voices in the energy field. ExxonMobil (XOM) CEO Rex Tillerson says U.S. energy policy should focus on loosening access to domestic supplies of oil, an effort that has been marked by fierce political fights over opening the Alaskan Arctic and portions of the Gulf of Mexico near Florida. Exxon's former CEO Lee Raymond became known for casting doubt on the science behind climate change. And Shell CEO Jeroen van der Veer has similarly expressed skepticism about claims that the energy future lies in alternatives and renewables, arguing these sources could provide no more than 30% of the world's energy supply.

Mulva spoke at BusinessWeek a day after ConocoPhillips reported that its third-quarter profit fell 5%. A key factor in the drop is that higher crude oil prices eroded income from gasoline refining. Crude oil continued its bullish run on Oct. 26 as it hit another record high. Light, sweet crude for December delivery gained $1.40, to $91.86 a barrel, on the New York Mercantile Exchange, a settlement record, after earlier touching a new high of $92.22. Mulva says he expects pricey oil will persist because of tight supplies, increased demand, a weak dollar, and political turmoil. Oil prices are up 52% (BusinessWeek.com, 10/16/07) from a year ago. "I think oil prices will stay pretty strong, definitely above $70," he says.

The Growth of National Oil Companies

Another blow to the traditional oil majors' business model: the rising clout of national oil companies, which are now fierce rivals in the race for access to fossil fuels. National oil companies, which already own or control more than 90% of the world's oil reserves, can accept lower profit margins from exploration projects, an avenue not open to publicly held U.S. companies. In other words, national oil concerns can place politics above profits. Last month, Venezuela said it will invest up to $10 billion (BusinessWeek.com, 10/2/07) to develop a heavy oil patch in Venezuela for sale in the Chinese market.