Chevron's O'Reilly on Oil Prices and Energy Policy

"Congress [looked] at the impact of the windfall profit tax of the early '80s. And it found that we became even more dependent on foreign oil."

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On Nov. 12 oil prices dropped to their lowest levels in almost two years—around $56 a barrel. That's more than a 60% drop since the middle of the summer, but when I talked with Dave O'Reilly, the chairman and chief executive of Chevron (CVX), earlier that morning, he didn't seem to be breaking a sweat. That's because O'Reilly takes the long view. And the takeaway from a conversation with him is that the price of crude when it hit more than $147 a barrel last July was an anomaly. Perhaps O'Reilly was feeling upbeat because he was having such a big day: Chevron began pumping crude from its new $1.4 billion Blind Faith platform in the Gulf of Mexico on Nov. 12, and in a letter to Barack Obama and in a speech at the Council on Foreign Relations, O'Reilly called on the President-elect to institute a national energy policy.


How low do you think oil prices will go?


Very hard to tell. Clearly, we're in a soft spot right now. But the thing to keep in mind is that oil at $50 or $60 a barrel is still quite high relative to where prices have been historically. They're back where they were around the beginning of 2007. And only in 2008 have oil prices really exceeded $70 a barrel for the year on average. So I still view them as healthy. And I'm surprised how healthy they are given the weakness in the economy in general.

So $50, $60, $70 oil is a price that can work for consumers and support exploration, production, and profits?Well, clearly it's working for consumers, because they're seeing the benefit in lower gasoline prices. But from an investment standpoint, most of our investments are made on the basis of a long-term price assumption that's considerably lower than the prices we've experienced in 2008.

There was a lot of talk during the Presidential campaign about more drilling and energy self-sufficiency. What's real, in your view?Well, you won't get [to self-sufficiency] by drilling alone. I'm a great advocate of opening up more of the offshore coastline to environmentally sound drilling. It's been done in many other places in the world. And we've demonstrated that we can do it in our own Gulf of Mexico. Remember, the Gulf has been hit by a number of very bad hurricanes over the last two years, and we have been able to survive without any big ecological disasters. But drilling alone isn't enough. We've got to work on all of our energy sources. We've got to work on energy efficiency. We've got to work on nuclear, which is a very important source of electricity. We've got to work on coal, which provides 50% of our electricity. We've got to work on the renewables, which are very small today. People don't realize how small. We need all of the above.

How about clean-coal technology. Is that realistic?It's being tested. The big issue is that it has not been tested on [a large] scale yet. So if the government were to step into one area to help, supporting a carbon sequestration project, which would actually extract the carbon from a coal-fired plant and reinject it into the ground, would be an appropriate place to start.

Should there be a national commitment to energy self-sufficiency similar to the one for the Space Program?You know, people don't realize how energy self-sufficient we already are. We're the No. 1 nuclear producer; No. 1 ethanol producer; No. 2 producer of coal, natural gas, and wind; No. 3 producer of oil. We are very close to being energy self-sufficient. We can become closer to being energy self-sufficient, but I'm not sure it's entirely necessary to be totally self-sufficient as long as we're strong.

What sort of individual would you like to see President-elect Obama appoint to head the Energy Dept.?More important, I would restructure the Energy Dept. Right now, it has multiple roles. I would restructure it to focus on the primary mission: the energy security and economic health of the United States.

Let's talk a little more about that. How worried should we be in terms of our national security?The one area of vulnerability we have is oil imports. So I would work on two things: using oil that we have more efficiently, but also increasing the access so we can produce more oil here at home. We're bringing two deepwater production projects on stream in the Gulf of Mexico, one this month and one in the third quarter of next year. They will, combined, produce about 200,000 barrels a day of oil. That's a significant amount of oil and gas to produce for our country. It's $5 billion worth of improvement in our balance of trade. It's thousands of jobs. This is good for the economy. We need to do more of it.

With the Democrats about to take control of Washington, do you worry about a windfall tax on oil profits?I worry about it. And we've tried it before. It was a failed policy. Congress went back to look at the impact of the windfall profit tax of the early '80s. And it found that we became even more dependent on foreign oil because it reduced domestic investment.

What's your sense of the auto business right now? Should the feds give money to Detroit?The [bailout] money, in my view, was set up to help resolve the issues with the financial system so we could get the credit markets flowing again and improve consumer confidence. So in my view, that's what the money should be used for. If we want people to buy cars, we've got to get this financial system sorted out first.

Somebody in the auto business said to me yesterday: "If you let autos fail, that will have a massive impact on oil, steel, and a lot of raw materials and commodities." Do you agree with that?Well, somebody's going to continue to make cars, and people are ultimately going to continue to buy them. So that steel and that oil and that coal will continue to flow.

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