Abstract
Oil companies are currently being chastised by employees and investors for taking extremely shortsighted perspectives in both operations and investment practices. Such criticism is old hat for other industries in the Western world. Advocates of the Japanese business style actively promote radical restructuring of American business to force management to take a longer view, especially in the petroleum industry. Even as the flaws in the Japanese system become more apparent, raising some doubts about the Japanese ability to sustain future growth, the core question still remains: Is the petroleum industry taking a shortsighted view and if so, what are the causes?
Only one possible cause for shortsightedness is addressed in this article. Other causes certainly do exist and deserve discussion but are beyond the scope of this paper. The economic methodology forming the basis for investment and operating budgeting decisions provide is the only explanation discussed. The current methodology, in its myriad of applications, contains several fundamental assumptions whose implications for investment strategies are not well understood. This shortcoming causes some to favor extreme conservatism over a thoughtful, long-run strategic plan.
The background for the shortsightedness is reviewed first and the implications for petroleum investments summarized. One possible solution for the shortsightedness and the habit of multi-counted risk levels is outlined. No single measure of profit, however, can ever hope to encompass the vast range of risk and return issues facing companies today. To realize the limitation of any single profit measure is the first step toward a more thorough decision-making process.
