(We Are Not) Drilling Our Own Grave


By Joe Kearns

When you are in a hole, keep drilling. That notion seems illogical for the oil and gas industry. Brent crude prices have fallen by more than 50% since June 2014, yet there is merit to the strategy for some firms. Despite suffering declines in profit last year, Exxon Mobil and Chevron can afford to produce more oil because they are large firms involved in both the drilling and refining stages. This means they are less sensitive to price shocks than their smaller competitors. The oil supply glut has reduced industry demand and, consequently, the cost of services from firms who work for oil and gas companies. Eight of Exxon’s large projects came on-line last year, and there are more to come. Meanwhile, Chevron intends to expand production up to 20% by 2017. Production from these firms’ projects will last for decades, so short-term losses will likely amount to long-term gains. These companies would be foolish not to twist the knife while their competitors are wounded.