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Is Big Oil Still a Big Deal?

From Monday there will be just one oil company in the Dow Jones Industrial Average — Chevron Corp. The removal of Exxon Mobil Corp. from the index after an uninterrupted presence since 1928 shouldn’t come as a surprise. It’s not the end of Big Oil, but it may signal the start of the beginning of the end.

It may seem odd to remove one of only two oil companies in the index at a time when the shale boom has transformed America’s role in the global market. After all, the U.S. now produces more oil and more natural gas than any other country. Last year’s domestic oil production was up by 125% from levels in 2010, while gas output has increased by 60%.

But those figures only tell part of the story, and not the most important part.

It’s not the first time that there’s only been one oil and gas company in the Dow. The last time was between 2000 and 2008, when Exxon was the sole industry representative. Before that you have to go back to the 1920s. For a brief period of two weeks in 1924, there were none at all.

Why remove Exxon rather than Chevron? That’s easy. The Dow is calculated using share prices, not market capitalization, so Chevron’s higher share price (it’s more than twice that of Exxon’s) gives it greater weight in the index. At the close of business on August 27, Chevron accounted for 2.04% of the Dow; Exxon just 0.96%.

Removing Chevron would have reduced the weight of oil to an unreasonably low level. Its stock has also outperformed that of its larger rival over almost any recent period you care to choose.

The replacement of Exxon with, a cloud-software bellwether, reflects the evolution of the U.S. economy even as the current president champions the fossil fuel industries.

The first shale boom, which saw natural gas output start to rise from 2005 and oil follow it five years later, helped spur a massive surge in jobs in the sector. The number of people employed in oil and gas extraction rose from about 125,000 in the first half of 2005 to a peak of more than 200,000 at the end of 2014, according to the Bureau of Labor Statistics. The second shale boom only created a quarter of the jobs that had been shed in the sector between 2015 and 2017 before it ran out of steam at the end of last year — and then the Covid-19 pandemic struck.

Despite record production levels, oil and gas extraction contributed a mere 1% of U.S. GDP last year, according to the Bureau of Economic Analysis.

Oil just isn’t what it was to the U.S. economy and, with much of the shale boom driven by small independent oil and gas companies, Big Oil is even less important.

It is not just in the U.S. that Big Oil faces headwinds. Its opportunities and reputation are in decline worldwide.

The oil majors, including Royal Dutch Shell Plc, BP Plc and Total SE, operate in a world where they are often denied access to prime prospects. They’re kept from investing in key areas of low-cost production, such as Saudi Arabia, Iran, Venezuela and Russia, by local laws or the risk of sanctions. In other areas, they face contract terms that make investment unattractive.

It’s not just the lack of opportunities to discover and develop big, new oil fields. The companies are facing the need to reinvent themselves in a world where their core product is coming under increasing pressure from consumers for its impact on climate change and local pollution. And the long, hard slog of trying to turn themselves into producers of sustainable energy has only just begun.

Exxon’s removal from the Dow may not signal the end of Big Oil, or even that its end is near, but it is reflective of the industry’s failure so far to adapt.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

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