Hofmeister: Oil companies actually hate high prices

When it comes to oil companies and how they think, John Hofmeister knows of what he speaks. So when the former president of Shell Oil took to the lectern at the Hudson Institute’s “Fueling American Growth” conference in Washington, D.C., on Thursday and told the assembled that Big Oil actually doesn’t like high oil prices, it shouldn’t have come as a surprise.

And yet … let us gather that in: Companies like BP and ExxonMobil that post billions in earnings (or slightly less, as the price of oil slipped late in 2014 and into 2015) actually prefer a world in which a barrel of oil trades at a safe, predictable, boring price.

Here’s an excerpt from Hofmeister’s remarks:

Contrary to some popular belief, oil companies don’t actually like high oil prices. They like predictable, rational prices that deliver a return on investment over time. Companies do not like spiking, ever-higher prices, because of what happens as a consequence: The cure to high oil prices is high oil prices. People stop buying. Surpluses develop and prices collapse.

What’s the cure to low prices? Low prices. Because people stop producing and, sure enough, we run into shortages, and prices rise. This ever-continuing volatility is not good for the industry, it’s not good for national security, and it is horrific for the economy. And oil companies have been around for a long time. They see beyond the advantages of volatility either way, and look for those predictable price spots – they call them sweet spots, actually – where you can achieve an attractive investor return on investment, and you can maintain a stable workforce, and you can invest in R&D, and you can produce just enough energy to keep the nation well-supplied.

Hofmeister, who’s on the board of advisors with Fuel Freedom Foundation and is one of the stars of the foundation’s documentary, PUMP, has predicted that oil prices will continue to surge upward over the next year because U.S. drillers won’t be able to simply ramp up production quickly again after the recent downturn in prices forced many of them to suspend operations.

The foundation has argued that the best way to reduce oil consumption, end oil-market volatility and make prices gasoline permanently low for consumers is to open the transportation-fuel market to cheaper, cleaner alternatives like ethanol and methanol.

Hofmeister said: “We will never get past the volatility of oil until we get to alternatives to oil.”

The primary reason that I care so much about alternatives and future fuels is, as a person from the oil patch, I know the limitations. I know what’s possible and what’s not, and the appetite for oil worldwide will never, ever be satisfied from the oil patch. It can’t be. The risks, the costs, the geopolitics, really cannot begin to address the 2 billion people on this earth who really don’t have access to oil-based petroleum fuels, and most of them never will. There just isn’t enough.

You can watch the whole video clip here:


Broadcast live streaming video on Ustream

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