NEW YORK (FORTUNE) - It's either a great time (record profits, soaring share prices) or a terrible time (Capitol Hill's scrutiny, the public's ire) to be a Big Oil chief executive.

FORTUNE sat down with Dublin-born David O'Reilly, 59, the CEO of Chevron (Charts), the world's fifth largest oil company. We asked him about what Chevron is doing to increase oil supplies, the company's new biofuel plant in Houston, and why the United States' 18 different grades of gasoline are making everyone pay more at the pump.

More from Fortune Will Mmmhops be a hit? NBA confirms L.A. Clippers sale to ex-Microsoft CEO Steve Ballmer FBI and SEC probe into Carl Icahn and golfer Phil Mickelson FORTUNE 500 Current Issue Subscribe to Fortune

Special Reportfull coverage America's cheapest gas is in this town Summer drivers to get a break on gas Why gas prices are likely to keep climbing You'll pay a little less for gas this summer Expect relief from record February gas prices Why gas prices are rising

What's your sense of the direction of the global oil market these days?

Clearly demand growth, because of the higher prices, has slowed. It's still growing, but not as rapidly as it was. There are countries in Asia that have been shielded from the early rise in oil prices because of subsidies and price controls, that finally the governments have looked to their treasuries and said, 'look, we need to do something about this.' .... So I'm not sure the full effect of $70 oil has really hit the consumer yet in all of the Asian countries, but it's beginning to.

How about in the United States?

In recent weeks there's been a slowing, a few places where the demand has gone down. But year over year it's been flat, maybe a few places up, but it's certainly not gone down. At least not [in] our own numbers.

Is the oil industry addressing some of the supply-side concerns?

We're in a big investment cycle, no doubt about it. Our company - and we're no exception - our investment budget this year is $14.8 billion to be precise. And that's going into developing new oil and gas fields, as well as into expanding and modernizing refineries, and all of the infrastructure. This perception that oil companies aren't investing is not true.

What percent of Chevron's profits are being invested?

Last year we made $14.1 billion, this year we're investing $14.8 [billion]. If you look cumulatively over the last four or five years, we've invested every dollar we've earned. We invested in the business.

And what kinds of projects is that going toward?

Seventy percent goes into new upstream, exploration and production, and then about 20 percent or so is allocated to the refining and marketing business in markets in which we operate.

What about alternative types of gasoline?

We're investing in biofuels and biofuel research, because we don't think corn is the answer. Anybody can make ethanol out of corn, but eventually you've got to grow the corn, and there's already a bit of a tension between the food chain and the fuel chain.

Fifteen percent of the corn crop today goes into fuel, but it's only 2 percent of the fuel. Do the math on how practical that is for the long term. You've got to go to some other means of making ethanol, from something that's a waste product. That's where we've got to go for the long term.

What kinds of policy issues should Washington be addressing?

[The] gasoline market itself. It is the most convoluted thing. Most of us think when we go to the pump there are three grades of gasoline. But the reality is that there are 18 different types of each of those in the country. ... The way a market resolves shortages that are regional or local is for product to flow from a region where there's more flexibility. That can't happen in this market.

There are all sorts of barriers to efficient functioning of the market. This has been pointed out to Congress for a decade now, if not longer, but nothing has been done about it.

Should we allow more exploration to happen in the United States and its coastal waters?

If there's one good thing about $3 gasoline, it's that maybe - maybe - people will get engaged enough that the options get on the table and we can talk about it. Because you can't have your cake and eat it. You can't not permit production in this country and say you're going to be independent.

We're actually becoming more dependent over history. And until we turn this around and decide we're willing to make tradeoffs, it's very easy to be dependent when there's plenty of spare capacity in the world. But when the rest of the world is growing and chewing up all that spare capacity, and now we're dependent. We say we want to be independent, you've got to do things to be independent.

Has the job of CEO gotten tougher in recent years?

Maybe in our business because we're going through a lot of scrutiny.

Let me step back a minute. We're a profitable business, we pay well, we have skilled jobs - thousands of thousands of skilled jobs, well-funded pension plan, a paid dividend, I would think people feel good about that. Companies that do all these things, do them well, ought to be praised, ought to be admired, not vilified.