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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.'"
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!
we do use hydrogen as fuel. It just currently brings carbon along for the ride. you want to pay extra to separate the two first? go right ahead. you can't get it for free.
How about we allow success.
Monopolies are not in and of themselves bad.
Only when they use their position unfairly should the government step in.
Why is it so hard to only have politicians for a few years, then have them go away?
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!
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 :)
Much as I hate apple, the tie in that have with software and hardware is one of the advantages they have over PC from (most) consumer perspectives. The operating system works nearly perfectly with the hardware because they define the hardware. They don't have to deal with a bazillion unique configurations.. only a few that they've chosen.
Apple splitting up this way would be a mistake on their part.
And I think what we draw from this is that in a lot of cases (especially cases where things are evolving) there is an advantage of being a big blob. I think where it makes sense to split something up is when the components stop evolving significantly (which may at this point be the case with oil). When a widget just becomes a widget, it makes sense.
How about:
<sarcasm>Wait, the market is providing the exact same solution as the government. How is that possible?</sarcasm>
Fanatically anti-fanatical
Exactly my thoughts as well. It also appears to move them one step further away from potential spills and the bad publicity that follows. The exploration units wont be household names. BP tried to hide that it basically owned that platform in the Gulf by outsourcing it IIRC. So this looks to possibly be another layer to hide profits and more. This isn't free markets creating competition and innovation, this is shell games and accounting tricks. It's also ridiculous to think ExxonMobil is somehow powerless at the behest of Wall Street traders when it was the #1 most profitable company in 2010. They dont tremble when a barrel of crude hits $100+, they laugh all the way to the bank.
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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
Not just hiding profits, also splitting liability. BP is going to be paying a lot for the oil spill. Wouldn't it be so much more convenient if they didn't own or operate the rig and could just blame it on a small company, which could then pay its entire $1M capitalisation in compensation and then go bankrupt?
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Not just hiding profits, also splitting liability. BP is going to be paying a lot for the oil spill. Wouldn't it be so much more convenient if they didn't own or operate the rig and could just blame it on a small company, which could then pay its entire $1M capitalisation in compensation and then go bankrupt?
You write as if you don't know very much about the oil business, at all. BP did not own nor operate the rig, TO did.
One problem you have not considered is your solution would probably have saved the gulf. TO and BP are multibillion dollar companies, and as such every interaction between them is handled almost lawerly, with infinite levels of ass covering and record keeping. As anyone who has ever worked in a situation like that knows, that leads to horrendous paralysis. Which is unfortunately exactly what you don't want on a drilling rig hovering over a 3 mile deep gas filled hole.
In your scenario, Mr Million dollar company says F U guys I'm hitting the big red switch and pumping the heavy kill pill downhole. Its only a million bucks not a billion. What actually happened was a lot of "you don't wanna be the guy who broke the billion dollar contract relationship" and "who is authorized vs who is liable to declare an emergency or not to" and "who gets to push what button when and why". Which is fine if you have all the time in the world, but if you don't then the platform blows up, everyones killed, and the gulf is flooded with oil, because you can sue individuals but you can't sue oil spewing out of a well.
Basically we have a super monopoly / ogliopoly situation now. That doesn't work so well. A bunch of little companies, even if a little artificial, would provide more efficient and safer operations overall.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
I don't think making all 25K employees 1099 contractors is gonna help anyone but the tax lawyers.
"Science flies us to the moon. Religion flies us into buildings." - Victor Stenger
Any conglomerate should be split up.
I agree that conglomerates should (at least in most cases) be split up, but not by the government. Most conglomerates were formed when various factors favored centralizing everything. What made that economically efficient was the cost of communicating information from one place to another. It was more efficient to put all of the decision makers in close proximity to one another and send the necessary information to them at that central location since much of the same information was necessary for making decsions about disparate business entities. When the cost of transmitting information was high, this was the most efficient way to organize things.
However, as a result of this centralization, a lot of information that was only significant to one of the business entities was "lost" to the decision makers. This was not critical because the savings of only having to transmit the other information to one place made up for it. Now, as the cost of communicating information to various locations has fallen, the cost savings of centralization have diminished to the point that much of that "lost" information is now more valuable than the savings from centralization. This will gradually lead to the breakup of conglomerates along the fault lines of information.
Of course, not all conglomerates will voluntarily break up. But as their various divisions are less able to compete with the now independent divisions of their competitors, all of their divisions will suffer. If the refining side of an oil conglomerate, must get all of their oil from the exploration side they will not be able to take advantage of cost savings from dealing with outside exploration companies that are at the moment more successful than the in-house exploration division. If the exploration side must sell all of their oil to the refining side, they will be unable to maximize profit by selling to outside refiners who at the moment have a need to pay higher prices to obtain oil. If both sides are free to deal with outside competitors of the other division, the advantages of having both in the same company diminish.
The market is perfectly capable of sorting this out. If I am correct, the new companies of the ConocoPhillips split will be more successful than they were as part of one company and other companies will follow suit. Those that do not will gradually fall behind in the market until they either do so, or they go out of business.
The truth is that all men having power ought to be mistrusted. James Madison
100 billion in profits on 1 trillion in sales means you have 10% margin out of that 90% is overhead. And you are making 1% profit. Only billion dollar companies can live with that. Even Dell makes 15%, and Apple makes 30%.
Record profits only have meaning when you think like a small minded idiot.
Not to defend exxon but wall street speculators cause more price swings than any other force, from the big oil companies to the country oil cartels. Pass a law that says you must hang on to futures trades for 24 hours and watch the price stablize.
i thought once I was found, but it was only a dream.
And yet, Federal tax revenues increased by 30% from 2000 to 2007 (and then began dropping in 2008 as the Housing Bubble burst).
And this in spite of the recession immediately post-9/11, which saw tax revenues drop 10% over a two year period.
Sorry, the Bush tax cuts are not a good example of the idea that tax cuts supposedly lead to greater revenues.
First, adjusted for inflation (2005 dollars), revenues were about $2.3 trillion in 2000 and $2.4 trillion in 2007. That's only 5% growth, less than 1% annually. If we hadn't cut taxes, revenues would have grown much more.
Second, most economists don't credit the Bush tax cuts with more than a small part of the growth in GDP. There's a lot more going on in the economy than tax rates. The total revenues collected over that time period would have been much greater without the tax cuts. And our national debt would be trillions of dollars less.
Finally, why stop in 2007? That's an arbitrary number that you picked because it fit your argument best. Inflation-adjusted tax revenues in 2009 were BELOW levels in every year since 1997. 2010 was only slightly better.
I'm all for reducing budget deficits, and for tax policy reform. Almost everyone should be paying higher taxes right now.
Source: http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Docid=200