The Oil Drum

My guess would be that Exxon executives do not believe in peak oil now, that they were genuinely trying to increase production at 3% a year to maintain or increase their market share as the market grew, but they underestimated the decline rates in their existing production base and so only maintained production more-or-less flat. Their executives are on record here and there as saying they think oil is going to go back to $45, and I don't see an obvious reason to think them insincere in that respect (just because they don't have a vested interest in talking the price down - not that they aren't capable of mendacity if they think it is in their interests - their climate change actions have proven that).

Obviously Chevron has a different view...

I think you are right. But I draw attention to your last statement - "It's pretty hard..."

That doesn't translate to impossible. I'm going to think about it and try to square it, just for the hell of it. After all, that's what we're here for, if we can't do it, nobody can.

I don't think it's so hard to explain. If they think prices are going to soar, it almost makes sense for them to cut back now so they have more to sell in the future. However, that behaviour would be known as "hoarding." What do you suppose the reaction would be in Congress if Exxon/Mobil, or any of the oil majors for that matter, were found to be hoarding available production of oil? We would have the biggest investigations of price manipulation since Standard Oil.

If I were running such an organization, I would only hold back now to the extent that it wouldn't trigger investigations. It seems perfectly reasonable to hold production at the current level in that case.

Your reasoning is plausible in some alternative world when all "externalities" like government, media, shareholders, executives that plan safe retirement etc. are non-existent.

First, Exxon-Mobil it too huge to start hoarding oil without the risk of investigation.

On the other hand it is too small for even a moderately-sized cut (say 200 kbd, which is 10%) to influence prices in a world-scale market. They will lose market share and their shareholders will ask them where are our profits?

Actually most likely both the government and shareholders will sue them. AFAIK in USA laws require that public companies to protect the interests of their shareholders by all means. In both cases willingfully cutting the production will be a very very bad idea.

Well that reminds me of a TOD article  by Dave from around the new year: The Extraction of Exhaustible Resources.

It discusses the work of Harold Hotelling regarding the Extraction of Exhaustible Resources, including the idea that there is an incentive to leave the oil in the ground for later when the price will be higher. But the price has to be expected to rise quite a bit to justify leaving the oil in  the ground:

If one "owns" an oil well, one has to decide whether to "produce" (i.e. extract) and sell the oil now or later. If one produces and sells the oil now, one can put the money in the bank, and it will grow because of the interest it will earn. If on the other hand one produces and sells the oil later, one has to discount the money one will get for the oil, because one is getting the money later, and not now. With either way of looking at this, there is only an incentive to produce and sell later (rather than now) if one has the certainty that the oil in the ground is appreciating as fast as the money in the bank (in annual percentage rate), or as fast as the annual discount rate used in the operation one runs. Many operations (companies, etc.) use an annual discount rate of 10% or even larger.

Consider an annual discount rate (or interest rate) of 10% and a 25 year-long generation. In 25 years, a compounded 10% annual interest rate will multiply an original investment by a factor of 10 (yes, ten), and an annual discount rate of 10% will decrease a later money receipt by a factor of 10. What does this mean? It means that an oil well owner using a discount rate of 10% has no incentive to leave any oil in the ground for our children 25 years from now unless there is a certainty of getting the children to pay 10 times as much for the oil as we are paying now, and our grandchildren 50 years from now would have to pay 100 times as much as we are paying now.

(from Dave's article, quoting Francis de Winter at hubbertpeak.com.)

Oil companies could believe near-term peak oil is likely, but still not be convinced that the increase in prices will justify pausing production now.

As for risking an investigation by congress, I really don't get that. It's a free market, and they don't have to pump at full blast if they choose not to. Is there some law against that??

I have had a thought on what is happening with the oil price recently this morning and this is the closest post I can connect to (probably be an open thread soon after I post this).

For those that remember the Miner's Strike in the eighties, when Maggie Thatcher defeated Arthur Scargill. Scargill decided or was forced by circumstances to go on strike as spring was starting, the power stations had massive amounts of extra coal mined by his union members during the winter period. Using coal as a weapon of choice was negated for 6 to 9 months, until demand for electricity picked up again next winter. Thus Scargill and his union members had a very long wait on no pay before anything that could bother authorities occurred. Thatcher forced Scargill to declared a war that he could not win.

If you see the similarities with US (Maggie Thatcher), Iran (Arthur Scargill) and coal (oil). The US has had a few months of record levels of imports of crude, petrol and distillates. The storage tanks can't have much more storage left to fill up. If Iran decides to play silly buggers and stop its oil exports, its 2.5 million barrels a day being taken off the market could be a useless ploy. We are coming into slack (spring) period in the oil market, OPEC may need to cut back on oil production to stop the price of crude falling too much. If Iran stops its exports, the US thumbs its nose at Iran saying we have plenty of oil stocks for 6 months - go ahead and make our day, OPEC instead of forcing its members to have production cuts now tells them to carry on producing as normal, the oil price stays within acceptable boundaries to OPEC and the US, Iran looses out on oil money and gets a black mark on its copy book.

Does this scenario make sense to people (okay to UK TODers. US TODers may not know who Scargill was)?