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Are We Seeing the End of Big Oil?
Hugh Pickens writes "Cyrus Sanati writes in Fortune Magazine that up until now, it has been widely accepted that being bigger was better for oil companies, but the announcement that ConocoPhillips plans to break up into two separately traded companies, separating its exploration and production unit from its refining and marketing units, took Wall Street by surprise, raising uncomfortable questions about the future of Big Oil. 'That's because the exploration side and the refining side of the oil business have little to do with one another,' writes Sanati. 'Contrary to popular belief, Big Oil has almost no control over the price of oil these days. That power squarely rests with oil-rich nations that hold most of the world's oil reserves and the Wall Street banks and hedge funds that speculate and make markets in the oil trading game. So even though ExxonMobil pumps oil, it can't guarantee that its refining unit will be able to profitably process a barrel into gasoline or heating oil.' ... 'If the ConocoPhillips story is a success for shareholders, there will be calls to break up Big Oil just in time for the annual meetings in the spring. So by this time next year, it is possible that Big Oil will go the way of Rockefeller's once gargantuan Standard Oil — with the markets, not the government, forcing a break up this time.'"
Who would need to be bigger? Seriously huge profits, and most exploration is already done. These companies have been exploring for years now for deposits. It is probably just a crafty way to hide the hordes of money they are making...
Hydrogen as fuel. And its taking too long.
with the markets, not the government, forcing a break up this time
<sarcasm>Wait, the market is providing a better solution than the government? How is that possible?</sarcasm>
Taking guns away from the 99% gives the 1% 100% of the power.
to anyone besides investors?
What I got from the article is that one really big company is becoming two merely large companies for market purposes. How does this impact any of us down here?
I was however relieved that this wasn't another "year of the electric car" type article and it had a fair amount of substance!
And now comes some mysterious stranger who looks an awful lot like Big Oil but has a mask on.
Any conglomerate should be split up. It just make sense. Like modular programming does.
The output of any division of a conglomerate should be accessible to the whole market, not just the big encompassing company that holds the division.
Letting companies grow bigger and bigger only leads to near-monopolistic situations, and eventually less choice for the consumer. :)
If, for example, Apple were split into two companies, one for software, one for hardware, this would probably lead to a much richer variety of products. And, also important, more opportunities for users to tinker
If Pandora's box is destined to be opened, *I* want to be the one to open it.
Now that I know that energy prices are actually in the hands of a combination of shadowy capital funds and petro-kleptocrats, rather than 'big oil', I will definitely be sleeping better.
Size has become an economic liability. The large oil companies currently draw too much public criticism and blame, particularly for windfall profits, increasing gas prices and spills. Smaller companies are unlikely to be called en mass before congress and threatened with more taxes. In the event of an accident, liability would be conveniently limited to a smaller-sized company. Besides, breaking it up allows even more company executives to be paid as CEOs.
WTFE!! I don't believe an ounce of the "poor little oil company" line in this story. Sell that crappy story to someone else because I'm not buying it.
Sounds like a good way to limit exposure to unexpected costs associated with drilling. Sell the crude to the refining unit at cost of production and the drilling unit accumulates no profits that would be paid out as a result of a large spill. It would just go bankrupt, sell off any equipment it owns (if it owns any at all) and reform under a new corporate charter. Profit!
Wherever the market is being broken down you either find Big Government or Big Finance. Sometimes both, but we're seeing that Big Finance is as much a mortal enemy of the free market as Big Government.
I can't imagine exploration being the money maker; just as I can't imagine corporate research being a money maker.
If they break off their vital, but unprofitable pieces, then it is more likely that said piece will fail - because the profitable pieces aren't there any more to pick up the slack.
And the government won't like that - they'll have to save it - more tax breaks and bailouts to save domestic oil.
exploration and production unit from its refining and marketing units, took Wall Street by surprise, raising uncomfortable questions about the future of Big Oil.
The economist podcast discussed it some last week, as they discussed their previous weeks issue. I've noticed a disturbing trend where /. bifurcated around March and now some stories are fresh but the late ones are actually going further back in time as time goes on. Wasn't this a ST:TNG plotline?
Anyway, the ominous BS makes no sense. I've been following this market for, well, decades, now, and all it boils down to is the oil majors are extremely competent at exploration and production, both directly and indirectly by financing other companies exploration and production work. The refining operations are almost meaningless now because every nation either wants to shut them down to prevent pollution (although the hypocrites still want gas for their SUVs) or they want massive overproduction capability for strategic warfare reasons. So refining is a dead market. As for the marketing units, yeah, they're real geniuses alright, look how everyone loves BP, for example.
So all it amounts to is focusing on what makes a net positive on the income statement and casting off the deadwood that is a net negative to the income statement. Its the oil industry equivalent of joe average non-IT focused business outsourcing their IT department, just like they've outsourced their electrical production and (mostly) their "business standard uniform" production and maintenance.
The reason its spun as doom and gloom, is they have no empathy and only see the effect on themselves. The marketing unit sponged off the profits of the production unit to make CNBC commercials that were beyond stupid. Now they are cast off like the debris they are, so they won't have the cash to pay to CNBC... So, MSM is going to get less advertising bucks from the oil majors. Hmm, I wonder how they feel about that? Expect some attack stories in the near future along with the doom and gloom, and then the MSM will find someone else to attack and it'll all be ignored.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
So "Big Oil has almost no control over the price of oil these days. That power squarely rests with oil-rich nations that hold most of the world's oil reserves" is NOT the government (actually many foreign governments) controlling the price of oil?
So the power of governments of Saudi Arabia, Venezuela, and Russia becomes a triumph of libertarian free market ideology?
Yes, in the same world where the high economic growth of the communist-run, government controlled economy of the People's Republic of China demonstrates the triumph of "economic freedom"
If your children ever found out how lame you are, they'd murder you in your sleep
To me this sounds more like "we want to get rid of the expensive geologists and engineers" than a break-up of the vertically integrated players. And besides, there aren't that many places that are unexplored. As long as they can get oil from the middle east and third world (using third world labor prices) it makes sense.
"Well, good luck finding a judge that doesn't run a bestiality site."
While they may not control the cost of oil, their profits indicate that they aren't properly competing to keep the price of gas low.
This is about splitting the liability of drilling away from the company. I don't believe for a second they don't control pricing aka profit. 5 out of 10 of the world’s LARGEST and MOST PROFITABLE companies are oil companies... .this is a cover your ass move. Like the Catholic Church going through bankruptcy before getting sewed by the boys the padre’s boinked..
I'm sure the smaller companies with have common members of their respective board of directors, and common shareholders as well, so virtually not much changes.
There's probably less risk by dividing up the companies. If one company has a screw up, it's sister company can skate by unscathed. It will be more and more difficult for oil companies to find resources; as they take more and more chances, there's more opportunities for public blunders.
We always get mooned by big oil and frankly, I'm tired of seeing their "end".
Everything and its opposite is true. Get used to it.
We could probably run our vehicles on water soon and the electric car is already in action SO then end of oil is near overall
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Standard Oil is Exxon-Mobile, only by a different name.
Technology advances will unlock access to quite a bit more.
"and the Wall Street banks and hedge funds that speculate and make markets in the oil trading game." == "cheap credit from the Federal Reserve"
They should also mention one other cause: demand.
Except for ending slavery, the Nazis, communism, & securing American independence, war has never solved anything.
When the oil refiners and distributors have an interest in seeing the price of their inputs go down and they bid accordingly, the pressure will be for lower prices. Today, Exxon acquires leases, explores and extracts crude oil. Much of their market value (what Wall Street rewards them for) is the perceived value of their reserves. So the higher the price of crude, the better they look to investors. Meanwhile, Exxon refines and distributes products. That arm of the business is rewarded for volume times the difference between input costs and sales. So it would seem that cheaper crude would help their market share. In the final analysis, when crude prices go up, so does Exxon's share price. So currently the refining arm isn't motivated to push prices down.
The whole market is geared up to bid up crude prices. Much like the California energy crisis, everything is put onto the spot market and passed through as many speculators a possible. And much like 'sane' energy markets, once the players aren't sitting on both sides of each bid, I'd expect to see more fixed price long term crude delivery contracts. This will cut the speculators out of much of the market. This can only be good.
Have gnu, will travel.
There's no such thing as "Big Oil" in the West.
Entities like Aramco & Rosneft make Exxon Mobil look like a mom & pop heating oil outfit.
As the article explains, there are two ends to the process: 1) finding and producing oil and gas (upstream), versus 2) refining and distributing oil and gas (downstream). They've always been quite different. Upstream is very risky with massive capital required, very long times between exploring, finding and producing (10 years sometimes), and huge swings in success and failure depending upon whether you find deposits or not and the current price of oil by the time you start producing. Imagine going to your bank and asking for a billion-dollar loan for your business that won't have a cent of revenue for 5-10 years, and you can't tell them whether the main product will be sold at half or double the current price. Big risk. Big payoff. Or big failure. This is why the profits from oil companies look obscene at some times, but when the price of oil goes down (like in the 1980s), they get soaked. And if they don't turn most of that profit into investment in the next risky exploration cycle, they'll soon be out of business as their producing reserves naturally dwindle.
Downstream is less risky in some ways (there's always crude to buy and refined product to sell somewhere at some market price), but it has razor-thin margins. Growing the business at all still requires huge capital investments that take years to implement, and there are continual demands for better environmental controls that add costs. Volatility in crude price doesn't help either.
Some big companies are almost entirely upstream, while some are almost entirely downstream. Others are combined. It's hard to say whether it's optimal to be an "integrated" oil company that deals with both ends of the market, or whether there are advantages to partitioning the two ends, but it's easy to see why split-ups might happen given how different the equations for the two are. That, and the fact that it generally sucks to be in the refining market these days, because everyone wants more refined product, but nobody wants a refinery approved anywhere near them or expansion of existing ones. Generally speaking, the downstream side of the oil business has done poorly for years compared to the upstream side.
I kind of wonder if another aspect is in play. Big oil companies need to find big deposits. They have huge overhead, but they can afford to explore and develop in remote places (e.g., deep water) that smaller companies can't access. However, if there are fewer "big prizes" to find, or if you've hit technical limits in terms of the new territory you can explore for the remaining "big prizes", then it's going to be tough for a big company to survive. It would be the beginning of the end. Kind of like the whaling industry in the 1800s as most of the big whales got killed off. I don't think we're there yet, but it is something to watch for if the reserves of the big companies start consistently going down.
Um, the funny thing is Standard Oil has pretty much reformed under Exxon-Mobile. I think they have acquired almost all of the assets that the old Standard Oil had...
Big Oil is being replaced by Bigger Oil, namely the government-owned or -influenced entities like Gasprom/Rosneft/Lukoil/CNOOC/SINOPEC or other nationalized entities like Petróleos de Venezuela.
What we have now is a dreamworld compared to what's coming soon when nationalistic or patriotic tendencies mix in even more obviously than today.
And when technology advances far enough, someone will finally invent the metal detector that will locate the pirate gold buried in my backyard.
If you're vertically integrated you don't sell your oil on the open market, and you don't refine oil purchased on the open market. You simply pump it out of the ground, refine it, and sell it at the same prices everyone else does (including those who are not vertically integrated). Notice that Exxon/Mobil recently closed gas stations in order to get the balance right. Probably so they didn't have to buy oil at obscene prices. Production and refining/marketing are counter-cyclical in the sense that the "price" of oil determines which business is profitable. IMHO XOM is still looking to buy another company - not split itself up.
This story seems to forget the bottom line, many companies do what they need to make the biggest profit, in this case, split, and allow for a smaller part to take the bigger part of a debt, which they can declare bankruptcy for later....has nothing to do with the oil trends, trust me. no oil company will be going smaller any time soon.
They are obviously preparing for the future consolidation of the exploration and production functions as the cost of exploration goes up for everybody in the business. Also, the separation of the refining and marketing unit enables them to diversify quickly and with lower capital risk to the emerging bio-oils. In conclusion, it's a win-win for everybody.
Oil rich nations don't control the price of Oil. Supply and Demand controls the price.
Also, it isn't oil rich nations. It is Oil rich exporting nations. The USA is the number 3 producer of oil in the world (so one of the riches oil nations). We are also the number 1 consumer by a wide margin.
Apple is a software & device, R & D company. They make products.
There has never been a specialized hardware division. The Apple II series used CMOS 6502 chips, the original Macintoshes used Motorola 68000 series chips. Today IPod, IPad, & IPhone have Chinese made chips. Anyone can write new software to run those same chips.
of oil related news stories like this.
This link has the Big Oil article link and discussion on TOD: http://www.theoildrum.com/node/8214
http://www.theoildrum.com/
Uh, Linux geek since 1999.
The government of Saudi Arabia acquired a 100% interest in Saudi Aramco in 1980. That's when the US Big Oil firms ceased to control production. Since 1993, Saudi Aramco has controlled its own refining and marketing.
The author of the original article is way out of touch.
The Standard Oil business model may no longer make sense, especially if the oil exploration end of the company could potentially have a BP-scale accident that would have an obvious impact on the rest of the company. But the other question you forgot to ask is "What is big oil"? BP depended on 1 or 2 independent contractors that contributed to the disaster I'm talking about. The other question is how big does any company need to be in order to be profitable despite the risks that come with searching for and extracting oil while avoiding political BS (threats of nationalization from the likes of Chavez, etc)? Regardless, people who think we're on our way to a petroleum-free economy are smoking crack and are therefore a drag on our economy. As far as environmental concerns go, small oil could be even worse than big oil.
Gentlemen,
If we take the profits out of the search portion of the business by making it a separate guaranteed lose business. We can say we lose money each year and have the tax payer pay use billions to do the search and find portion. All the while we will hide our profits in an overseas bank account system based out of Dubai and funnel it through England, Ireland, and the Caribbean. This will allow us to keep our HUGE personal bonus checks growing each year. Making it easier for those paid for politicians to keep the free money rolling in as a subsidy because obviously we are losing money searching for oil. All the while we can decry the raising of taxes to the rate of other Americans. If we succeed in lowering corporate taxes along with our personal taxes we can repatriate our profits we took out of the country and never have to do another useful thing for at least 3 generations!!!
Its all about keeping that free tax money dumping into those corporate coffers and politicians getting those large campaign contributions.
The explanation for breaking into smaller groups is stop Big Gov from stealing $$ from the overall company. Placing losing sectors of business on their own cannot negatively impact the profitable ones.
I just thought of something: it appears possible to run communism (common ownership of the means of production) within capitalism. All the workers and consumers have to do is buy stock in the producers. This forms a mutual or cooperative organization.
Something that deserves more study is the question of why a large monolithic company can outcompete an ecosystem of smaller units in the first place.
Some business operations have increasing returns to scale. For example, some kinds of overhead have the same cost per firm regardless of whether a firm's output is small or large.
and most exploration is already done....
If geological experts are correct, there is likely more oil yet to be discovered than the entire existing stocks. We may well be at "peak oil" in the sense that politics may prevent us from further exploration, but there is almost certainly huge reserves of petroleum both in ocean areas and under the Arctic Circle, not to mention areas of Russian control that have never been explored.
Life is hard, and the world is cruel
Seriously, without competition, other nations control our future. As such, we are insane to remain on oil. We should be pushing not just electric cars, but also natural gas, as well as mocrobial (real bio fuels, not ethanol from corn).
I prefer the "u" in honour as it seems to be missing these days.
The nationalizing trend started in the 60ies, about the time Opec formed; many countries found out they could earn much more by controlling the business directly, and in many, the private (often foreign) companies paid very little (or none) of taxes/royalties for extraction/processing/distribution/export, etc.
That was the case of Venezuela, for a hundred years, US corporations extracted the best lighter Oil and burned immense natural gas reserves and even heavier crude in the way. In 1975 the whole industry was nationalized, but it was done to benefit the foreigners and corrupt politicians of the time, because their (many decades long) permits were about the expire a few years later and the nation would not need to pay them to leave.
The current Venezuelan oil is heavier, and less valued because it needs more effort in processing, which is why Venezuela has so many (not very profitable) refineries, even in the USA.
Venezuela opened foreign private and state owned corporations the chance to form joint ventures with PDVSA to extract the heavier oil in the Orinoco belt, with the State owning a portion of shares, and higher royalties per barrel export. Only 2 US corporations left the zone when a previous deal was made void, everyone else stayed and even more came (from Asia and elsewhere).
Big state owned oil corporations are nothing new and will not go anytime soon. It is far more lucrative for most countries to have it that way. Political tensions with Venezuela are a decision of US administration, in line with their global policy for domination clashing with nationalistic positions (daring not let US corporations milk away all the profits). Nothing new and widely know outside USA for decades, if not centuries.
Artix
Your Linux, your init.
"Contrary to popular belief, Big Oil has almost no control over the price of oil"
What? Next they'll try to tell us that farmers have almost no control over the price of corn.
at investigating corporate malfeasance, I'm sure they'll be all over it. And then our politicians will immediately hold the oil companies' feet to the fire. And Hell will open an ice rink.
Never let a lack of data get in the way of a good rant.
but the OP slept through Accounting 101. I'd say he has a good shot at landing a gig as a financial analyst for one of the major networks.
Never let a lack of data get in the way of a good rant.
The hatred for BP was very high after their big oil leak. Some in Congress wanted to sieze the American assets of BP. If voter anger against BP was small, some campaign contributions would solve the problem. Widespread public opposition and anger against a specific issue will trump extensive campaign contributions.
This is so obviously propaganda, if anyone was dumb enough to read past the first few paragraphs then I feel sorry for you.
You are being lied to. Big oil is about to take over the earth and the largest drilling has not even started look north for the newest black gold.
The distinction between "Big" and "Little" Oil exists so that US politicians can go after major oil companies without endangering such oil company interests as Al Gore's family (Occidental Petroleum) and the Kennedy family trust. (I'm not sure whether the Bush family still has such interests also.)
Bantam Dominique roosters crow a four-note song. Once you've heard it as "Happy BIRTHday" you can't NOT hear it that way
NO, now fuck off you environmentalist wankers.
Big oil makes for a stable market around the world.I have traveled around the world the big oil gas stations are their for you to fill up and go to on your merry way. Who do you want to run the gas stations, some foreign state like China, Russia. No matter what goes on you got gas everyday of the week. You stop that and big big trouble. You can store oil, not gasoline! Make traders hold their trades 10 days. Oil will not spoil, only the traders spoil the oil!