Economides_edit.qxp 22/10/08 9:52 am Page 22
Oil Prices and Big Oil
Industry Outlook
a report by
Michael J Economides
Professor, Cullen College of Engineering, University of Houston
The influence of ‘big oil’ on oil prices is greatly exaggerated. No Figure 1: Oil Price and ExxonMobil Stock Price
liberal politician in America or Europe can talk about national energy
160
policy without mentioning oil companies and railing against their
Exxon stock
140
profits. Nor can a successful conservative appear to protect oil
Crude oil
120
‘corporate welfare’. Seemingly, oil companies are responsible for
$)
100
refusing the consumer the inalienable right of free gasoline and, as
(
US
of late, for destroying the planet due to the burning of their
c
e
80
Pri
products. However, as often happens, facts have a tendency to
60
disappoint those who have such a neat view of the world.
40
20
First, big oil in the US can no longer be referred to in the abstract. In
0
8 8
fact, it refers to just three companies: ExxonMobil, Chevron and
8
/200
1/14/2004
8
/1
/2004
8
/2007
2/17/2005
9/5/2005
3/24/2006
10/10/2006
4/2
11/14/2007
6/1/200
12/1
ConocoPhillips. There are three other European multinational Date
companies: British BP, British/Dutch Shell and French Total. Other the insidious nature of the atrocity, it showed America to be an
than these, there are just national or state-controlled oil companies. ineffective occupying power in a country with a raging insurgency.
The truth is that, even with record profits (but by no means record While Iraq, with proper investment, can deliver 6 million barrels per
returns on investment), big oil is in a lot of trouble – and therefore so day, it still languishes at about one-third of that, still not quite offering
are America and Europe, because oil will continue to dominate the the conditions for good exploration and production. Third, there was
US economy for decades. Importing almost 70% of it makes a Venezuela, with the western hemisphere’s biggest oil reserves. Hugo
mockery of any slogan for ‘energy independence’. Chavez loved to be the thorn in the side of George W Bush and the
US, threatening to re-nationalise the country’s oil industry and kick out
The issue, far more than price and associated profits, is oil supply. the multinationals. Two years later he made good on his threat.
One thing on which almost all now agree is that there are no easy
fixes. Of course, the fact that the situation was allowed to develop Until early this year, the price of oil and ExxonMobil’s stock tracked each
in the first place is a tragedy. Access to this vital commodity is other both in trends and, by coincidence, in actual dollar value. People
hostage to politics and life philosophies that are at times incoherent thought that geopolitical pressures meant scarcity of oil, which meant
and contradictory, and it has thus been allowed to dwindle and higher oil prices, which meant higher profits for oil companies. With such
become difficult. logic, for much of 2007 ExxonMobil’s stock performed better than the oil
price. However, then reality sank in: ExxonMobil and the rest of big oil
It is interesting to look at the correlation between the price of oil over were in fact getting shut out of reserves. I wrote in mid-2007 that, record
the last four years and ExxonMobil’s stock price (see Figure 1). What profits notwithstanding, had I been sitting in the board rooms of the big
caused what? 2004 was a fateful year in the oil business, and three multinationals, I would have been scared to death about the future of the
major factors that affected the oil industry come to mind. First, in company and where the next oil would come from. Apparently, many saw
Russia Vladimir Putin launched his assault on the country’s largest oil the same point. Oil prices went through the roof in 2008, but the stock
company, Yukos. By hook or by crook – and mostly by crook (his own prices did not. In fact, in the last two quarters, on the day that ExxonMobil
chief of staff called it the ‘robbery of the century’) – Putin took over announced its customary record profits its stock price took a dive because
almost total control of the Russian industry. For the previous decade at the same time its oil production was also announced, showing a decline
Russia had been the brightest spot in terms of new oil reserves for big of about 10%.
oil, but Putin’s reversal removed the biggest source of new activities.
Second, in Iraq the Abu Ghraib controversy became public; beyond Headlines of course still rule the oil price. As President Bush lifted the
moratorium on offshore drilling, and both McCain and Obama started
talking about drilling, the oil price went south, losing almost US$30 in
Michael J Economides is a Professor at the Cullen College of Engineering, University of
just one month. I do not see it taking the nose dive that some are
Houston, and Managing Partner of a petroleum engineering and petroleum strategy
consulting firm. He is also Editor in Chief of the Energy Tribune. He has authored or co-
predicting. To begin with, if the oil business were run by western norms
authored 11 professional textbooks and books, including The Color of Oil, and almost 200
the price should be close to US$60, maximum; however, it will not go
journal papers and articles. Professor Economides undertakes a wide range of industrial
consulting, including major retainers by oil companies at the national level and by Fortune
below US $100: the same energy-militant countries that helped the price
500 companies. He has had professional activities in over 70 countries. In addition to his rocket to more than US$100 will see to that. Russia is now losing more
technical interests, he has written extensively in wide-circulation media on a broad range
than US$120 million per day from its peak; big oil can only wish to still
of issues associated with energy, energy economics and geopolitical issues.
wield such power. ■
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© TOUCH BRIEFINGS 2008
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