With oil a hot topic these days, I thought it might be a good idea to reprise my "REAL Oil Business" columns from 2007. The factual information that strips away the myth of US BIG OIL...
I love reading about the oil business in the press... You know, Big Oil, popularly portrayed as a monolithic behemoth run by fat American men that rule the world and screw counsumers while gleefully counting their vast supplies of money... the Clooney version... the Hollywood version... the CNN version of the world that defines what typical 'Mericans think. I have spent my entire adult life working in this industry, several years of it with Big O'l, and have never seen anything that even remotely resembles this cartoon. Except for the fat American men part, o'course.
So, truth seekers, here is the Oil Business from puny insider American Producer of American Energy point of view... be patient... this could take several posts....
The REAL BIG International Oil Business... The Big Picture... Over 70% of the world's reserves are produced by National Oil Companies... Companies with reserves and production that dwarf those of ExxonMobil or Shell, and with names you have probably never heard unless you are in the bidness... Pedevesa, Aramco, PetroBras, CNOOC, Gazprom, Yukos, Pemex....
Some of these companies are owned by countries that enjoy membership in OPEC, some by those that don't. Of course, being "National Oil Companies", ie those owned ostensibly by "the people" but controlled by the "peoples representatives"... you know... politicians and despots... profitability and sustainability aren't the rule of the day. "The people" as shareholders have a very different ethic from "the people" as "owners" of something nebulous that they cannot sell or control. Thus, the politicos use the oil companies as golden geese to provide... noble things, like class warfare that to allows the leaders to confiscate whatever other wealth still exists in a country while being lauded as a "Friend of the Poor", ala Jugo Chavez, or the more mundane efforts of the less visionary leaders, like stuffing Swiss Bank Accounts to the bursting point with the "people's" cash flow. Another popular practice is to use National Oil Companies to "Provide Employment", an especially enticing carrot to the command and control types, which, ironically, actually minimizes the value of labor.
A quick example... I was vacationing in Central Mexico last year. An old man was sweeping the street with a stick with three twigs nailed to it. I suggested to my friend, a Wharton grad and part-time resident of the picturesque village we were visiting, that a village investment in a whisk broom might provide much higher productivity.
"Oh, no, no ... " , replied my friend smilingly, "if he had a whisk brooms, then the village couldn't provide jobs for the other 8 old men it has hired to sweep streets".
"But isn't there a more productive use for them?" I asked?
"Welcome to the third world, amigo. When you have a permit process that stifles private enterprise, and endemic corruption that signficantly retards success, you get a country where people pay to become cops and villages provide toothbrushes to old men to clean the sidewalks", he replied.
Wow. Paying people to do something, anything, as an end and not the means, without any thought to productivity. This is why the Soviet Union had the dubious distinction of selling a loaf of bread for LESS than the component cost of the grain. Value destruction all along the production chain. In the words of my environmentalist brethren... this isn't "sustainable".
In any case, these third world nation-owned companies provide the bulk of the worlds hydrocarbon, and together dictate the raw commodity price of oil.
"But, but... third worlders, those "live off the land" victims of western imperialism wouldn't manipulate prices for economic gain... like, like... business men, would they?" one might ask with quivering chin.
Oil price manipulation isn't a huge secret... there is a little cartel created to do just that... its name is OPEC, and its official, publicly-stated mandate is to... manipulate world oil prices. Last I checked, NONE of the hated major oil companies were members. They were BUYERS of that oil.
Saudi Arabia, being the world's supposed swing producer, meaning it can single handedly raise or drop the price of oil by merely by turning a valve... ok, maybe 3,000 valves... is even rumored to have hedged a significant partion of its production before it tanked oil prices in the early 1990's. Ahhh... to make no-risk money in high price AND low price environments! The sweet perquisite of being the swing producer.
Why would anyone in their right mind take a futures contract position opposite Saudi Arabia? Basically, because Saudi Arabia supposedly made those contracts through hundreds of intermediaries with shadowy ownerships.
So why would Saudi Arabia LOWER the price of oil? Well, as I just pointed out, they can do so with only minor revenue repercussion to themselves. In the early 1990's, OPEC was watching its pricing power deteriorate due to significant North Sea production being brought online, and many OPEC members were cheating on their production quotas, as is their wont. Saudi, in addition to swing producer, has by far the lowest lifting costs per barrel of oil, maybe $0.25 per barrel compared to $10 per barrel or higher for the western world (this does not count FINDING costs), and once its hedges were in place, announced it would increase production by 2-4 million more barrels per day. The price dropped to $10 dollars per barrel, OPEC cheaters were chastised and financially hurt, worldwide capital projects for new oil came to a screeching halt because no one wanted to invest in money losing captial projects, the bankers of the world were reminded once again of the risk endemic to oil investment, and Saudi was banking close to the old price per barrel of oil. The world was brought to heel one again and all was well again in the kingdom of heaven.
Oh, and it wasn't a one time thing. Saudi helped spark the American economy and bring the Soviet Union to its knees by doing the same thing in 1986 at the behest of Ronald Reagan. The price? Letting the Saudies buy significant refinery capacity in the US, so it could make money upstream in low price environments.
When Matt Simmons questioned Saudi reserves and deliverability in the early naughts (00's), The Saudis responded by sending their Oil Minsister and the head af Aramco to discretely meet with oil producers, bankers, and engineers to talk up their 300 year plus reserve life. I attended one of those meetings at the Dallas Petroleum Club, all the while choosing which fat white man I was gonna dive under to provide me with a human shield if some sort of Jihadist burst in given the minimal security... "business card, please... ok, yes, you are on the list". There is huge political value in them preserving at least the illusion of swing producer status... whether they are actually still swing producers or not. I mean, how satisfying must it be to have your **** ****** on command by the Leaders of the world? OK, Figuratively. Literally, mebbe not so great. An interesting aside, the Texas Railroad Commission was the most powerful political entity on Earth until 1973 because up until then, IT was the world's Swing Producer based on its control of Texas production allowables. Remember those days? When we shut in portions of our production?
Why would Saudi let the price get higher? Well, you can't hedge forever. You want to maximize your cash flow, but you don't want to let it get so high that alternatives are given much financial traction.
So when I think "Big Oil", I think of a couple of Middle Eastern countries. Fat Brown Men, so to speak, with National Oil Companies that are not preserving the patriarchy, but, instead, act as huge piggy banks that help build huge personal fortunes safely esconced in Geneva and the like, and to fund wasteful social experiments to allow despots to stay in power THAT much longer.
What I DON'T think about is ExxonMobil, or Shell, or the like. Maybe at the turn of the Century, and maybe as late as the 1960's, but for the last 40 years, these companies have been robbed via 'nationalization", where the product of their investment and intellect was taken without compensation because armed robbery is perfectly legal once your assets are big enough.
All of this reminds me of a couple of stories, one true and the other possibly true. The possibly true story was when Lee Raymond, then CEO of Exxon, was introduced to the head of the Soviet Oil and Gas Ministry. Raymond introduced himself as CEO of the "largest oil company on Earth". His Soviet counterpart countered by introducing HIMSELF as "head of the largest oil company on Earth".
The second story, absolutely true, was the rage expressed by the Saudi oil minister at an OPEC meeting after several Western European countries instituted gasoline taxes greater than the price of the raw commodity. "Britain and France make more off of a barrel of Saudi oil than we do" he exclaimed. Given that fact, and the fact that, say, ExxonMobil pays twice as much in taxes, duties, and tarriffs than they have in profit, I would characterize Governments as BIG OIL much more than ExxonMobil. How would YOU like to get taxed or "fee'd" at 90%, then get back 40% of that as some sort of deduction or credit, and have that 40% derided as "Corporate Welfare"? If you appreciate that sorta thing, welcome to the Oil Bidness!
NEXT... BIG U.S. OIL...