If you’re running a major oil company, says Chevron (CVX) CEO John Watson, 58, it is key that you “not react too much or too little” to volatility. In a recent visit to Fortune, he explained why he’s taking a measured approach to the more than 50% plunge in oil prices in recent months.
Edited excerpts:
How surprising has it been for you to see oil prices fall so dramatically?
I’ve been in my job five years, and I’ve been with the company 35 years. This is the fifth time in my career I’ve seen a 50%-plus drop in oil prices. So in that sense, it’s not surprising. While it’s happening, you’re always a little bit surprised. When you get an imbalance in what is being produced, either too much or too little, prices can move up or down very fast.
You’re cutting capital spending by $5 billion this year. Do you have a “cheap oil” protocol?
We have a playbook of sorts in that we’ve been through it before. We know the levers we can pull. We’ll look hard at costs. You may slow down some work. We’ve done that. We’re a long-cycle business, so we try to keep our balance sheet in such a condition that we can weather events and keep going.
As the leader of a company with 64,700 employees, how do explain your strategy when you’re in a belt-tightening period?
We’ve had very consistent strategies for a long period of time. So the long-term strategies don’t change, but employees are watching very intently. You have to size the workforce for the work that you have. What I try to do is be candid about it. If you’re straight with people, I think they accept that.
When do you see supply and demand balancing out and oil prices rising again?
Our best guess is next year. In general the discourse that you read all over the place is about the U.S. [production surge]. But I stand back and say, “It’s a 93-million-barrel-a-day market.” The U.S. produces 9 million barrels a day of crude. We’re not the whole story. And in the U.S., a big part of the story is shale. The unique characteristic of shale is very rapid decline. You drill a well, and 12 months later that well will be producing 70% to 75% less. So you have to keep drilling. The interesting thing will be whether investment is maintained around the world and how long before production starts falling.
How close are we to transitioning away from fossil fuels in the long term?
There’s a very large gap between rhetoric and reality. Those who follow the energy business in think tanks will tell you that right now about 80% of our energy is coming from fossil fuels. And if you go out 20 years, about 80% of our energy’s going to be coming from fossil fuels. If you look at the priorities around the world, the average government is trying to create prosperity for their people. And affordable energy is the backbone of that prosperity.
This story is from the April 1, 2015 issue of Fortune.
