Monday, June 09, 2008

Big Oil doesn't get it

It amazes me to see how disconnected Oil Execs are from their customers in the current debate over the price of oil. For evidence, consider this article on statements by the CEO of BP... summarize, he states that the reason for high oil prices is... previously low oil prices. That's right. His claim is that oil's price was kept artificially low by maqgnanimous oil companies who then did not have money to invest in increased production. Therefore, he implies, oil's price should be kept high so as to keep oil company profits at record levels, so that they can build more capacity.

This article flabbergasted me. It is like saying the reason Jack the Ripper killed so many women in so short a time, is because he had not killed any for a long time before that. Oil companies need to grow up and realize that the world is the way it is because they made it that way. If they charged too little in the past, then start channeling some of those record profits into building. If they are unhappy with their business model, it is THEIR responsibility to change it. Most other branches of industry do this all the time.

How long until shareholders come to their senses and throw out the management of some of these companies?!

The right argument would be that States (I mean U.S. states and countries at large) have hampered efforts to expand oil production/refinement for environmental reasons. Those are beyond their control. But blaming the market for their woes is simply disingenuous.


quizwedge said...

In short, it was a stupid comment from a PR move, but assuming he's not just stupid, I might understand what he's saying and why, from someone who lives and breathes the oil business, it makes sense. The way drilling for oil works is this. Supposed you find the holy grail of oil fields that has more oil than all of the other oil fields combined. You calculate the cost to drill for that oil is $200 / barrel. The problem is that oil doesn't sell for $200 / barrel, so you don't develop any of the infrastructure to get at that oil. There is a lot of oil out there, in some places it's just been too expensive to get it. Now that demand is so high (based on the projection of future shortages), we can tap that more expensive oil, but it takes time to gear up and get it out of the ground.

But like I said, from a PR move, it was a completely stupid comment to make.

Nomad said...

Doesn't drilling for new oil equate to R&D for any other corporation? Saying "We couldn't drill for $200 a barrel oil, because we knew eventually we'd get up to $200 a barrel oil" is like saying "We couldn't develop the new version of Windows until we were SURE Apple was coming out with the next version of theirs."

quizwedge said...

Finding the oil is part of R&D. The actual getting it out of the ground for the purpose of resale is part of Cost of Goods Sold.

Based on the article on the oil bubble posted previously, the price of a barrel of oil in the world market is based on the cost to pull the most expensive barrel of oil out of the ground, plus a little for profit. So, when oil was $50 / barrel, having them drill $70 / barrel oil would have driven up the price to $70 / barrel. That is where it would seem they messed up. They didn't anticipate demand (or didn't want to anticipate demand or feared raising prices would not be met by demand to keep profits at least level) in order to have everything in place so they could quickly add more oil into the market. Yes, oil prices would have gone up, but instead of being $135 / barrel, it would have been $70 / barrel because we would have had the supply to meet the demand.

Of course, while I think the Oil companies are at fault for not properly planning for increased demand, from what I've heard, even if we did double the amount of oil coming out of the ground, it still wouldn't help because we wouldn't be able to refine it. We've got the refineries running at a level that they don't really have time to stop for maintenance. Don't have the facts handy, but heard it on a radio show.

Anonymous said...

Oil prices are high because there's not enough of the stuff. The USs 3rd largest supplier won't be able to send the US *any* oil in 2-4 years. We could discover three North Slopes, and it would not appreciably change the picture, so dreaming that there are vast reservoirs of oil that those pesky enviros have thwarted the exploitation of is delusional thinking, again. Oil might come down to $80-100 US/bbl by 2009-11, but two to four years after that lies $200/bbl oil and beyond. $4.00 gasoline is laughably cheap -- it's almost maddening that a resource that is so valuable could be priced with such shortsightedness. No amount of magical thinking will get around the facts that a) the earth is not a tender nougat with an oil filled center, and b) the impossibility of exponential growth continuing for all but breathtakingly brief periods.

Homer Simpson said...

Mmmm... Oil filled center...