[Choi Ji-woong's Oil Hegemony War] The Falling Confidence of ExxonMobil: Where Does It Come From?

ExxonMobil Posts Consecutive Losses for Second Quarter Due to Oil Price Drop
Sticking to Its Own Path Amid Rush of Oil Companies Entering New Businesses... Here's Why

Asia Economy Newspaper publishes biweekly on Fridays a series titled 'Choi Ji-woong's Oil Hegemony War,' diagnosing changes in the international oil order and the future of the energy industry. The author joined Korea National Oil Corporation in 2008, working in the Europe & Africa Business Division and the Stockpile Business Division before completing an Oil & Gas MBA program at Coventry University in London in 2015. Last year, he published the bestseller 'How Oil Rules the World,' which chronicles the modern history of oil.

ExxonMobil was the largest company in the United States. Since 2000, it consistently ranked first or second in market capitalization and held the undisputed top spot for a long period starting in 2006. Although it lost the number one market cap position to Apple in 2012, it still generated hundreds of billions of dollars in net profit annually and maintained a high dividend policy while investing globally, embodying the most American of companies. Reflecting its status as a representative American company, Rex Tillerson, who served as ExxonMobil's CEO for 10 years, was nominated as the first Secretary of State under the Donald Trump administration.

However, ExxonMobil recently recorded losses for two consecutive quarters due to falling oil prices and suffered the humiliation of being removed from the Dow Jones Industrial Average. Consequently, some argue that ExxonMobil is missing the changes of the times and is in decline. If oil prices remain persistently low due to the COVID-19 pandemic, few oil companies will be able to endure. Therefore, many oil companies are attempting to enter new energy sectors or diversify their businesses. In particular, BP, Europe's largest oil company, has declared it will reduce oil and gas production by 40% by 2030 and significantly expand investments in renewable energy businesses.

However, ExxonMobil insists on continuing its current approach. In other words, based on the expectation that oil demand will recover, it maintains a strategy focused on the oil business in the future. So what is ExxonMobil's calculation for sticking to its business direction despite the current situation? In other words, what do ExxonMobil's strategists believe that leads them to focus on the oil business?

Based on 'Long-term Population Growth Forecast'Focusing on Oil Business Despite Falling Oil Prices
The actual increase in global population is a decisive factor in oil demand

There are many factors that determine a company's strategy, but currently, the one they rely on most heavily is the 'long-term population forecast.' ExxonMobil CEO Darren Woods has stated in interviews with the media that energy demand will increase by 20% by 2040, especially due to population growth and the expansion of the middle class, and that this demand will be met by oil and gas. ExxonMobil explicitly cites the 'increase in oil demand due to population growth' in its annual report this year as the basis for its long-term strategy.

In fact, the biggest determinant of oil demand has been the size of the global population. The main reason oil consumption has trended upward over the past 20 years is because the population has grown, leading to an expansion of economic scale. Not only for oil demand but also for long-term economic forecasts, population is the most important factor. Peter Drucker, known as the father of modern management, emphasized the impact of population by stating, "Demographic changes are the only means to make accurate future predictions."

Oil demand has a higher correlation with population than any other commodity except food. This is because oil is an essential good for daily life and industry, playing a vital role in our living and production activities. The steady trend in oil consumption over past decades, despite sharp fluctuations in oil prices, attests to this. Even in 2011, when the average annual oil price rose more than 20% year-over-year, surpassing $100 per barrel, and in 2016, when it fell more than 20% year-over-year to the $40 range, oil consumption did not significantly decrease or increase. It only maintained a gradual upward trend similar to the population growth rate.

▲Choi Ji-woong, author of 'How Oil Rules the World,' working at the Petroleum Information Center of Korea National Oil Corporation

According to the United Nations (UN) '2019 World Population Prospects,' the global population was approximately 7.7 billion in 2019, is expected to reach 9.2 billion by 2040, and surpass 10 billion by 2057. This population growth inevitably increases energy consumption. As the population grows, markets will naturally expand and economic scale will increase. The number of people moving and the volume of goods will rise. Above all, more food and housing will be needed, and more daily necessities will be consumed proportional to the increased population. It is difficult to dispute that population is the most fundamental factor determining oil demand.

Population Growth → Inevitable Energy Consumption... Data from the Past 20 Years Supports This
ExxonMobil's Decision Reflects the Most Capitalistic Attitude, Excluding Politics and Trends

The trend over the past 20 years also supports this. The global population, which was about 6.1 billion in 2000, increased by 25.6% to approximately 7.7 billion in 2019. During the same period, oil demand rose from about 77 million barrels per day to about 100 million barrels per day, an increase of 28.5%. Over the past 20 years, oil demand grew slightly faster than population. The UN projects that the current global population of 7.7 billion will increase by about 19% to 9.2 billion by 2040. If the past 20-year trend repeats, oil demand in 2040 will increase by more than 19%. ExxonMobil CEO Darren Woods claims a 20% increase in demand, 1 percentage point higher than 19%.

Of course, there are factors other than population that affect oil demand. Representative examples include the expansion of renewable energy, improvements in energy efficiency, and the spread of electric vehicles. Expectations for renewable energy are particularly high, and its expansion is a desirable future scenario. However, the positions of the International Energy Agency (IEA) and the Organization of the Petroleum Exporting Countries (OPEC) on this matter are clear.

Renewable energy will be 'added' to the existing energy mix in the future, but it will be difficult for it to grow enough to 'replace' existing energy sources. The IEA forecasts that the share of renewable energy, currently 14.1% of energy demand by source, will increase to 20.7% by 2040. This level of increase can 'slow' the growth of oil demand but cannot 'offset' the growth itself. Of course, the trend of expanding renewable energy will become more pronounced than in the past. Therefore, the IEA expects that even with a 19% increase in global population by 2040, oil demand will remain at about a 10% increase. In other words, the 6.6 percentage point increase in renewable energy share (from 14.1% to 20.7%) somewhat mitigates the growth in oil demand.

One might wonder if ExxonMobil's thinking is too simplistic. However, as noted earlier, oil is a product with very inelastic demand relative to price. The more inelastic a good is, the more essential it is. Therefore, the forecast that consumption will increase proportionally with population growth is reasonable. Of course, there is no absolute answer in future predictions, and it is uncertain when and what events or technologies will emerge to change the world. Also, if COVID-19 persists beyond the year after next, it could significantly affect population structure. Nonetheless, regardless of right or wrong, the strategy of a U.S. company using the proportional relationship between population and oil demand may represent the most capitalistic attitude, excluding politics and trends.

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