By Steven Pearlstein
Wednesday, April 26, 2006

(A copy of the following top-secret memorandum was recently obtained from a senior White House official. Its authenticity could not be confirmed.)

TO: Director/National Clandestine Service/CIA

FROM: Chief of Station/Lagos, Nigeria

RE: Results of Interrogation of Exxon Mobil CEO

Above-named subject, Rex W. Tillerson, was apprehended while disembarking at Lagos airport and brought to Covert Interrogation Center #7. After a cocktail of Sodium Pentothal and Desoxyn was administered, subject suffered some disorientation but was able to answer questions on oil and gasoline pricing and company finances submitted by FTC/DOE/DOJ joint task force, pursuant to presidential directive of 26 April. Water-boarding proved unnecessary. After return to hotel, subject slept. The next morning, he appeared to have no recollection of the interrogation.

At outset of interrogation, subject became positively giddy when asked about 2005 financial results, which showed a profit of $36 billion on sales of $371 billion. He reported return on capital employed was 46 percent for upstream drilling and production operations, and 32 percent for refining and marketing -- hedge fund returns, he kept calling them. Four years ago, those same figures were 22 percent and 5 percent.

Subject showed no remorse about impact of higher prices on consumer finances, saying the recent results were merely "payback time" for all those years of lousy returns and all those years of having to live in Houston.

On the issue of recent spike in crude oil prices, subject said at least $15 a barrel reflected the increase in speculation in oil futures by pension funds and other non-industry investors. Two years ago, they had about $20 billion in the market. Today, it's $150 billion.

But the bigger factor, he acknowledged, was OPEC, which along with cooperating countries such as Russia and Mexico, has successfully limited the growth in production capacity in recent years so it lags behind global economic growth. That way, OPEC ministers can go to "those useless meetings in Vienna," as he called them, and say with a straight face that they are pumping "full out" -- when, in fact, they've held back on the number of wells they have to pump. The China and India booms have also played right into their hands by giving a plausible story of how an unexpected surge in demand for oil has overwhelmed supply.

Given OPEC's role in limiting global crude supply, subject was asked why he failed even to mention it once during his recent Senate testimony before the Senate Judiciary Committee. He said it was a game all the companies worked out years ago at a meeting of the American Petroleum Institute. That way they can avoid all the bad publicity and antitrust problems that might come from being seen as too close to a price-fixing cartel, while taking care not to antagonize the very people responsible for their windfall profits.

"You don't think we were able to earn $24 billion profit from $30 billion in upstream sales last year just because we're smart and work hard?" the subject said. "It's mostly just dumb luck. But don't tell that to the compensation committee."

On the question of the shortage of U.S. refining capacity, subject confessed it really wasn't all those environmental laws that prevented his and other companies from building new refineries. In fact, he said, the joke at the Petroleum Club is that they needed to keep the greens in business to have a handy excuse for disinvesting in refining.

After all, for most of the past 30 years, refining has offered only lots of headaches and sub-par returns, he continued. Now that the industry has consolidated into a handful of players, the plan is to follow the OPEC model of "disciplined investment." And, during times like these, when gas supplies are tight, he said the majors charge their own branded dealers below-market wholesale prices to weaken the market position of the independents.

Going forward, he said, the real action would be in ethanol. "The plan is to stand back and let the farmers ride the ethanol craze for a while, then wait for the bubble to burst and swoop in and buy up the industry for a song," he explained. "In the meantime, we'll continue to charge them inflated prices for all that fuel they need to run their tractors, transport their corn and turn it into ethanol. That way, we get 'em coming and going."

Subject admitted to selectively using financial data to confuse Congress and the public. Exxon Mobil, for example, claimed it has invested more money in exploration and other capital expenditures during the past five years -- $74 billion -- than it made in profit. But the important number, he explained, isn't profit, but cash flow from operations, which totaled $161 billion -- more than enough to pay $34 billion in dividends and still have plenty left over for executive comp.

Subject became agitated and abusive on the subject of taxation. He complained that Exxon Mobil last year made so much money that it ran out of tax loopholes and actually had to pay an effective corporate tax rate on U.S. profits of 33.5 percent. Only three years before, the effective tax rate was 5 percent.

Subject simply smiled when asked about Republican congressmen beginning to make noise about some form of windfall profits tax. "Election year posturing."

But his mood changed dramatically when asked to read a proposal from a number of liberal economists calling for a big new fuels tax -- with the money rebated to consumers through a reduction in the payroll tax.

"The Europeans realized years ago that, in the long run, it is not consumers who pay a fuels tax -- it's the industry," he said. "Why else do you think our margins over there are so low? We've been lucky that Americans and their politicians have never figured that out."

Steven Pearlstein will host an online discussion at 11 a.m. today athttp://washingtonpost.com. He can be reached atpearlsteins@washpost.com.