Margins Mask Exxon's Production Woes

Refining margins had an impact, no question. And, earnings will likely continue to feel pressure in the fourth quarter as signs of refining margin recovery are slow to materialize. However, a focus on production volumes -- at Exxon and other majors -- provide an important clue to the future of crude oil prices.

My recent trip to the Middle East made it very clear that future production challenges will only worsen. Whether you are Saudi Aramco or Exxon Mobil, the best prospects are gone. Future oil production will come from more difficult, more expensive and less prolific prospects.

More wells will reveal less oil, with each incremental well producing less oil than the last. Existing wells will show signs of accelerating decline, creating the need to drill more new wells just to keep production even. The production treadmill will move faster and faster.

That doesn't mean we will run out of oil. However, it does mean each new barrel of oil will take more effort and resources. That does suggest the end of cheap oil is here. While prices will continue to move quickly, $100 oil does seem like reality.

Just ask Exxon. As its third quarter shows, producing that extra barrel of oil isn't nearly as easy as it once was.

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At time of publication, Edmonds had no positions in stocks mentioned, although holdings can change at any time.

Christopher Edmonds is managing principal at Energy Research & Capital Partners, an energy investment firm and an affiliate of FIG Partners. He is based in Atlanta. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.