Political Instability: Exxon's Unavoidable Expense

Exxon released quarterly earnings results, reporting a 2% increase in quarterly profits to $9.4 billion, or $1.97 per share, an increase of 6.5% on the previous year. This increase was despite a drop in oil-equivalent production of 9%. The firm's EPS results matched average analyst expectations. Exxon is expecting oil prices to jump around July 1st, when the E.U.'s embargo on Iranian oil begins. Separately, the OPEC Secretary General has said that there is plenty of oil to go around, so the spike in prices will be a political consequence divorced from actual inventories and production potential. The argument between the EU and Iran may also shift the flow of oil from the Middle Eastern state, after resource-hungry

said that it would not cut imports from Iran. India finance minister Pranab Mukherjee said on Sunday that his country, like any emerging economy, was dependent upon energy imports for growth. Exxon has three subsidiaries in India, including one liquified natural gas supply project and one natural gas supplier. When it comes to sales, the company is exposed to the European market, which accounts for 24.5% of the company's total petroleum sales of 6.49 million bpd. While growth in Asian oil consumption spells opportunity for the company, Asian oil sales, at 1.22 million bpd, accounts for just 18.8% of the company's total oil sales. While an expansion into growing markets may benefit the company, it must tread carefully. Exxon's exposure to politically volatile regions is an unavoidable liability that can hit the company's operations at unexpected times. The recent attempted coup in Papua New Guinea, where Exxon has a $15.7 billion liquefied natural gas project, demonstrates that much of the company's operations are at the mercy of internal power struggles in unstable regimes. Likewise, ecological concerns and underdeveloped infrastructure issues are also a challenge for the oil megagiant. A

that may have killed as many as 60 people, also in Papua New Guinea, forced Exxon to halt operations for a day at its natural gas project. Meanwhile, protectionism in nations where it operates is another primary concern. Indonesia, where growing concerns about domestic resource consumption swayed recent elections, announced last week that it may stop all crude oil exports due to rising domestic demand. This would hit Chevron

, which intended to drill 380 wells in the country in 2012 and to upgrade its current operations to boost output to 15,000 bpd. Exxon is more heavily invested in the southeast Asian giant and former OECD producer, with gas and oil output of 20,000 bpd from its Cepu block in Java. The company can avoid these uncertainties by focusing on the American market, which still accounts for 39.7% of the company's total oil sales, but it will face challenges of lowered demand due to lower

. While

disappointed, there are signs of growth that may translate into higher oil consumption. On the other hand, higher prices at the pump due to an EU embargo could stop any uptick in oil sales, and possibly even challenge the American recovery as a whole. When Exxon had the option to focus on natural gas in previous years, that is no longer a safe avenue, since hydrofracking has increased natural gas supplies so much that prices are only now recovering from a

. While an increase in exports

, Exxon is currently facing a natural gas glut combined with falling oil demand at home and abroad. It is no surprise that investors are unimpressed with the 2% uptick in profits, and the stock is trading at almost 2% its opening price in morning trading. It may still be too expensive. The stock still remains near its 52-week high, and its P/E ratio of 10.11 is above competitors such as CVX, BP

, and Royal Duch Shell

, all of which are trading at single-digit P/E ratios.