Are We Seeing the End of Big Oil? 230
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.'"
With profits like these... (Score:4, Insightful)
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...
Markets?!? (Score:2, Insightful)
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>
Re:Yes but not because of that but (Score:5, Insightful)
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.
Re:logical (Score:2, Insightful)
Where do you draw the line? Do you allow Apple to tie firmware in with the hardware? What about operating systems? Does the operating system include the interface?
Re:Markets?!? (Score:5, Insightful)
How about:
<sarcasm>Wait, the market is providing the exact same solution as the government. How is that possible?</sarcasm>
Re:With profits like these... (Score:5, Insightful)
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.
Old news? (Score:5, Insightful)
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.
Re:With profits like these... (Score:5, Insightful)
"with the markets, not the government"????? (Score:4, Insightful)
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"
Re:logical (Score:5, Insightful)
I don't think making all 25K employees 1099 contractors is gonna help anyone but the tax lawyers.
Re:With profits like these... (Score:2, Insightful)
Your comment shows how little you understand about the market. They do have massive profits but the article is about how they are breaking up to separate the finding, drilling, and production of crude from the refining of that curde into usable products. They're doing this because exploration and production is currently very profitable while refining and marketing is have trouble with shrinking margins due to the price of crude, increased regulation, etc. They're getting smaller not to hide profits but to dump operating costs.
The more interesting question for these companies is what happens when they dig too many dry holes or the price of crude tanks etc. etc. One of the reasons that a huge integrated oil company is a good idea (from a business point of view) is that when production business are having issues, refining is traditionally going well, and when refining is having issues then production is usually going well.
Also, to defend the industry on the economics side a bit (though they deserve little defense from an environmental standpoint), what they do is expensive like almost nothing else so by default the companies are going to be large. It's the only way to be able to fund the production and refining without risking the entire company every time you dig a hole. What results from that size is poor on-the-ground efficiency, confused decision making, poor accoutability, a bad environmental record, massive profits (especially if you look at the number in a vacuum and don't consider at the amount you had to risk to get those profits), and the ability to actually produce enough hydrocarbon products to meet world demand. It is definitely a double edged sword but the "big companies are evil" mantra is naive and frankly just stupid. They're dangerous and need to be watched because of their scale and the effect they can have on economic and environmental systems but they're not evil.
Regardless of whether they favor a big integrated approach that insulates you from various risks related to changing markets or they favor putting your eggs in the basket that is currently doing well and adjusting when the market changes I assure you they're not trying hide profits...they're trying to increase them or reduce risk of ruin depending on the approach you take.
If you really want to do something about big oil, quit using (or reduce) your car, electricity, and commercial mass produced products then convince another 5 billion or so people to follow suit. Or perhaps you could make renewables economically viable through innovation. The problem is that that R&D requires investment levels that only large companies can provide the most common of which in the renewables space comes from big oil. They invest at a rate to keep them out ahead of demand not at a rate to get to renewables the quickest but they still invest alot more than anyone else. LIke I said it's a double edged sword.
Re:logical (Score:5, Insightful)
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.
Re:I feel so, so, much better. (Score:4, Insightful)
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.