James Crombez Week #2 Due 4/12/2010 Case Study #5 Exxon Mobil: Social Responsibility in a Commodity Market MKT 550

50 VB1 Michael P. Levens, Ph.D.

This case discusses the problems faced when Exxon Mobil Corp. (Exxon), the largest company in the US, as it earned record high profits in the wake of rising gas prices. Exxon was investigated by several state attorney generals and accused by some US policy makers and consumer activist groups of price gouging and corporate greed. The case discusses the allegations made against Exxon of artificially inflating the price of oil and Exxon's responses to having the highest profits in the industry. According to the Fortune 500 list, released in April 2006, Exxon Mobil Corp. (Exxon) had replaced Wal-Mart Stores, Inc. as the largest company in the US for the top 10 companies by revenue and for the top 10 companies by profits. Even more impressive were the company's profits for 2007, which stood at $40 billion, much higher than any other company in the corporate history of the US on revenues in 2007 of $372 billion. The public was less than thrilled in the huge profits earned by Exxon making it suspect in the eyes of US lawmakers and the general public. Exxon's profits came at a time when consumers in the US were feeling the strain of rising gasoline prices, with the prices exceeding $4 per gallon of gasoline, leaving one to wonder about Exxons Corporate Social Responsibility policy. A few US policy makers called for an investigation of the high gasoline prices and accused Exxon, and other oil companies of price gouging. Lawmakers were also concerned about Exxon's $400 million retirement package paid to CEO Lee Raymond, who retired on December 31, 2005. Many felt that no measure of Raymond's performance could justify that amount. U.S. Senator Byron Dorgan said, "There can be no more compelling evidence that the price gouging and market manipulation which has produced record oil prices is out of control, and is working to serve the forces of individual greed and corporate gluttony at the painful expense of millions of American consumers. (www.dorgan.senate.gov, April 18, 2006)

Exxon with its record profits, were extensively criticized about their ethical business behavior by senators, activists and the general public. Exxon along with other major oil companies were called up to the senate to face questions about potential price gouging in response to the industry's record profits at a time of high gas prices for consumers. Exxon defended its high profits by explaining its viewpoint through newspaper ads. The oil industry defended Exxon's record profits through a media blitz. 1. Impact of rising prices of gasoline on other product and services: If fuel prices go up, our economy doesnt just stop. People still have to go to work. The result is the demand for gas says constant and people will continue to buy it and be required to pay more for the fuel, but will be forced to change their spending activities elsewhere because of their fixed income. If individuals and companies are forced to pay higher prices for fuel, then naturally there is less money available to purchase discretionary items, affecting the economy. Gas prices affect every product that is shipped. Truckers are forced to add fuel surcharges to their bills, and retailers react by raising prices on consumer goods; the airlines are adding fees, cutting capacity, eliminating jobs and considering mergers to stay profitable. Even the services industry is being adversely affected. It is a vicious cycle. Every extra dollar we spend on gas is another dollar we are not spending on groceries, vacations, consumer products or health care etc. There is virtually no product or service that is not affected by rising gasoline costs. 2. In this case relate the criticism that marketing causes higher prices than normal: The case study in the text state that distribution and marketing combined make up 10 percent of the cost of gasoline. Most gasoline is shipped from the refinery by pipeline to terminals near consuming areas then loaded into trucks for delivery to individual stations. I believe that the

majority of that combined cost is in distribution. How much can be just from marketing? In our marketing based economy, companies spend money on marketing to create awareness and to convince consumers to buy their products over their competitors. The end result is that marketing expenses are passed on to consumers. Gas is a commodity and there is very little differentiation in the products and brands, and in this case, it states that consumers do not perceive a difference; resulting in little need for marketing. Therefore it will have very little effect on the price. 3. Is ExxonMobil acting responsible with respect to pricing? Can it keep prices stable or lower them when market prices increase? Should it even try? There was no evidence found that any wrong doing or anything illegal price manipulation took place. Obeying the law is fundamental but it is not sufficient enough to protect the public. They are expected to have a strong focus on business ethics as well. Profits and social responsibility should be considered together to ensure that they do its part for the benefit of all its investors and customers alike. Personally, I dont believe they were acting responsibly and had more control over the rising cost then we (the public) were lead to believe. Gasoline is a commodity, and like all commodities, its price fluctuates constantly and for often unseen reasons. To have complete control over the price of gas is not possible for Exxon. There are too many factors involved outside their control; for example the supply, demand, futures trading and the competition. To an extent they can control the supply from their own refineries, but not the overall market supply. They have almost no control over the global demand unless they were to endorse research in alternate fuel sources. So, it would be foolish to expect them to keep their prices stable when the market price is increasing. 4. Perspective of social responsibility, what role does the consumer play in the price of gas? The consumers will dictate the demand. Simple economics can be explained in terms of

supply and demand which state the more consumers purchase, the higher the demand for the product, thusly resulting in a higher price. Conversely the less consumers use gas, it will reduce the demand for it and will lower the price. From the perspective of social responsibility, if consumers thought a company was acting unethical or socially irresponsible they then could boycott that company and choose not to purchase its products. Therefore, reducing the demand for those companies products and lowering the companys price to make it more attractive to the consumer. Simply put, if consumers boycott and dont purchase any gasoline from Exxon, they will be inclined to reduce their prices. If they reduce their prices, the other oil companies will have to follow suit. 5. How would you fix the problem of rising gas prices? What are the advantages and disadvantages of proposed solution? From the consumers perspective cutting back on trips is one way to offset the costs of rising gas prices. But a more permanent approach is to increase the domestic supply to meet demands. Increase offshore and Alaskan drilling where there are known sources to exist. Another avenue of price relief, which has become popular to consumers, is a suspension of the federal gas tax. This measure has been proposed by the past presidential candidates as a means of shaving 5% off the price of gas to not only give consumers and businesses a break, but free up money to stimulate the economy. Lastly, one of the causes of the increased oil price is the commodities market on the trading floors. Presently, the price for a barrel of oil is not driven by the demand to put gas into a vehicle; rather its driven by commodities speculators creating a demand for barrel options. Some economists believed that cutting the federal interest rates will stabilize the commodities market.

References

Cohen, Ken P. (2002, January). Social responsibility. Executive Excellence, 19(1), 12-13. Retrieved April 12, 2010, from ABI/INFORM Global. (Document ID: 103446040). Crooks, Ed. (2008, October 31). ExxonMobil in push to drive down costs. Financial Times, 21. Retrieved April 12, 2010, from ABI/INFORM Global. (Document ID: 1586993521). Pulver, Simone. (2007). MAKING SENSE OF CORPORATE ENVIRONMENTALISM. Organization & Environment, 20(1), 44-83. Retrieved April 12, 2010, from ABI/INFORM Global. (Document ID: 1253219171). Watkins, Eric. (2006, June). A company plan on human rights. Oil & Gas Journal, 104(21), 28. Retrieved April 12, 2010, from ABI/INFORM Global. (Document ID: 1070693091). Environment: No change in Exxon's climate. (2006, March). Energy Compass,1. Retrieved April 12, 2010, from ABI/INFORM Trade & Industry. (Document ID: 1004695831). ExxonMobil Financials. Retrieved April 12, 2010, from http://www.exxonmobil.com/corporate/files/news_pub_sar_2007.pdf Fortune 500 (April 16, 2007) Retrieved April 12, 2010, from http://www.money.cnn.com/magazines/fortune/ Byron L. Dorgan - United States Senator, North Dakota. Retrieved April 12, 2010, from http://www.dorgan.senate.gov/