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Oil companies continue to spend more on buying back their own stock than on new exploration

January 27, 2010

Historically oil prices have always behaved cyclically. Whenever demand outstrips production levels for whatever reason, the price of oil goes up along with the value of oil company shares. Oil companies then have the financial incentive to fund more expensive exploration projects that were previously unaffordable. Eventually new sources of oil begin to enter the market and the prices are driven back down.

In recent years the oil companies have started behaving somewhat differently. A report published by in October 2007 stated the following…

Theres a steady liquidation of the world oil industry. […] Exxon is buying back about $30 billion of its shares each year. If that continues, Exxon will have repurchased all its stock by about 2024.

It has continued. In October 2008 CNN issued this report…

Exxon said it spent $6.9 billion on oil exploration in the third quarter, a jump of 26% from the same period last year. […] Exxon also has an aggressive program for buying back stock, with 109 million of its shares repurchased during the third quarter, at a cost of $8.7 billion.

This behavior is not unique to Exxon – the ‘big 5’ (Exxon, BP, Chevron, Shell and ConocoPhillips) are all frequently spending more on buying their own stock back than they are on new exploration.

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