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Archive for November, 2012|Monthly archive page

Running the world: The surprising reality behind global oil

In Finance on November 13, 2012 at 10:48 pm

Black gold runs through the veins of industrial civilisation. A US Energy Information Administration estimate for 2011 placed world consumption at 87.42 million barrels of oil each day. As such, oil accounts for 32% of Europe and Asia’s energy consumption, 53% of the Middle East’s needs and is used to meet around 40% of Africa and North and South America’s energy requirements.

Majid Jafar, CEO of Crescent Petroleum predicts that gas and oil will play a dominance role in energy for at least the next half century. The importance of oil is unquestionable, so why is it so hard to determine who is in control?

Changes in the industry have reverberations which touch almost every level of our lives. To take an obvious example, when the world crude-oil market tightens and lowers inventories, petrol prices increase. When their behaviour has such a direct bearing on our everyday concerns, it is unsurprising that the titans within the field are well-known, if not well-loved. BP, Shell, Exxon Mobil are household names.

Yet, the reality is more complicated than the Fortune 500 would suggest. The multinational enterprises we view as being “Big Oil” are downright diminutive when compared with state owned firms.  National oil companies hold 70% of world oil reserves and an even greater proportion of remaining reserves of “easy oil”.

Oil companies controlled by kings, presidents and democratic governments enjoy privileged access to the natural resources of their countries. This provides an essential competitive advantage for companies like the Chinese Sinopec and China National Petroleum, the 4th and 5th largest oil and gas MNEs. Protectionism has made it difficult for privatised MNEs to gain a foothold in the Middle East, South America and Africa.

One of the largest producers of oil is Rosneft, Russia’s state-controlled oil company which is in a “strategic global alliance” with BP. Rosneft’s relationship with BP is set to be consummated with the Russian titan’s purchase of TKN-BP, placing Roseft in charge of more than 4 million barrels of oil production a day. The interaction between BP and government-controlled business under President Putin is indicative of the future, which might see MNEs entering previously forbidden territories as partners of the national government.

The protection afforded to nationalised businesses makes them uncompetitive internationally. When Saudi Arabia nationalized its oil industry in 1980, the country was producing more than 10 million barrels of oil per day. Within five years, production had fallen by more than 60%. Putin hopes to avoid strategic laziness, by using the expertise and experience of BP to tap Russia’s massive reserves.

In addition to political leaders who could strangle oil supply and raise prices, the market is hostage to fortune in a myriad other ways. For the past decade, world politics has had a cumulatively negative impact on the oil industry. The US military (the largest consumer of oil which isn’t a country) has been at war in Iraq and Afghanistan. Iraq’s production has been disrupted and the countries of the Arab uprisings face an uncertain future. Venezuela and Nigeria have suffered because of production problems. NATO has intervened in Syria and Libya and Israel threatens Iran.

The commodity markets gamble on the price of crude oil. With the household names of MNEs presenting a comforting illusion, the true numbers of variables should be recognised. The oil industry is affected by innovation, mergers, wars and state leaders. It is time we understood who controls the capacity to keep the world running.