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Peak Oil and E&P Risks

Although Exxon has released statements affirming its belief that peak oil won't be a problem anytime soon, the fact remains that oil is not nearly as plentiful a resource as it has been in the past. That Exxon is even considering oil sands projects says something about the state of oil availability today. If gas prices drop even a little more, riskier (more expensive) projects become unprofitable. Exxon and OPEC probably won't be able to jack up prices as much as they'd want to, either--alternative fuels and energy sources are getting to be a big thing and while they probably won't immediately take a huge chunk out of the gas market, shifts in public perception and accelerating alternative fuel technology is sure to generate a much more defiant, empowered, and less forgiving corporate and consumer market if gas prices jump.

Exxon may develop its technology all it wants to, but the double whammy of more expensive E&P and alt-fuel pressures on gas margins will probably mean a plateau (if not an actual decline) in earnings growth. And as stockholders, we don't need a full-out Exxon earnings loss to lose money--for skittish investors, the slightest faltering in Exxon could mean a mass withdrawal.

Exxon is still a dirty word with many environmentalists and socially conscious investors, even more than 18 years after Valdez. Environmental risks are always present with oil firms. With all the easy oil already tapped, the company is being forced to more exotic geographies and into relatively unstable countries to find growth opportunities. We think margins will probably get squeezed by higher foreign taxes as access to far-flung resources becomes increasingly precious. Oil is a commodity with volatile and unpredictable prices, and oversupply can greatly sap profits. If OPEC lost its grip and oil prices fell, industrywide returns would suffer. The runup in oil prices over the past few years has emboldened oil-rich countries to demand more control and a greater percentage of the profits from national oil and gas fields. This trend could limit Exxon's investment opportunities, given the firm's high required rate of return.

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