American multinational energy company Exxon Mobil Corporation recently had a dispute with its workforce over a proposed labor lab. This resulted in strike action at its Port Jerome refinery in France, preventing the refinery from functioning & meeting its maximum output capacity of 235,000 barrels of oil per day. Like other firms operating in the oil sector, Exxon Mobil saw their profit margins squeezed as a result of the slump in oil prices (towards the start of 2016.)
The price of oil fell below $30 per barrel, with an analyst predicting the it could fall below $10 per barrel (this is a much more unlikely prospect now.) The price of oil plummeted due to falling demand from China (as a result of slowing economic growth), and excess supply, caused by Iran entering an already oversupplied market.
Extracting Oil Isn’t Viable Business Model in Long Run
Although the price of oil has recovered (trading at around $49 per barrel on the 1st of June), firms such as Exxon Mobil should consider entering other industries, and diversifying away from oil. Fundamentally, oil is a finite resource, and once it has run out, Exxon Mobil & its competitors will face dire consequences, unless they are already active in other sectors.
Renewable Energy – Suitable Alternative For Exxon Mobil
Many businesses that are operating in the oil sector are already active in renewable energy. In September 2015, Bloomberg reported that Total SA was planning to invest $500 million per year in renewable energy (specifically, biofuels & solar power.) While $500 million per year sounds like a lot of money to be investing in renewable energy, it is not sufficient (as the firm will still be overwhelmingly reliant on its oil business.)
As well as investing in current sources of renewable energy (e.g. hydropower, solar power, geothermal energy & biofuels), Exxon Mobil should also invest in developing new sources of renewable energy (research & development.) The increase in the price of crude oil makes the proposal more viable, as they should be operating at a profit again, so they will have the necessary sources of funding.
Investing in renewable energy will also give Exxon Mobil the added benefit of being perceived as an ethical, eco-friendly & highly innovative firm.
Renewable Energy As Direct Substitute For Oil
Certain forms of renewable energy are direct substitutes for their oil alternatives e.g. bio-fuels can be used to power cars in the same way that petrol or diesel could, and electricity generated from a wind farm is the same as electricity from an oil-burning power station. However, there may be some differences in how they are used or how they generate energy.
While there is no perfect form of renewable energy, they can successfully provide energy on a large scale when they are used in conjunction with one another. Iceland is known for producing most of its electricity from renewable means (around 65% from geothermal energy & 20% from hydropower.)
According to a report issued by REN21, investment in renewable energy in 2015 was $285.9 billion, with China leading the way by a large margin. Despite the impressive figures,the executive secretary of REN21 said that “For every dollar spent boosting renewables, nearly four dollars were spent to maintain our dependence on fossil fuels,” demonstrating that the complete transition to renewable energy is still a distant prospect.
As the market closed on the 1st of June, a share in Exxon Mobil Corporation was trading at $89.22.