US Oil Companies Borrow A Page From OPEC's Playbook

"Why would I invest in a refinery when you're trying to make 20% of the gasoline supply ethanol?" Sound familiar?

Just over a week ago, an almost identical statement was made by the head of OPEC, Abdalla El-Badri. When asked about future refinery plans, he said, “If we are unable to see a security of demand...we may revisit investment in the long-term.” The first quote? It was made by Chevron's vice chairman Peter Robertson.

Valero's (VLO) spokesman Bill Day apparently got his copy of the new playbook when he said, "That's not to say we've changed our plans, but it's fair to say we're taking a closer look at what the president is saying and what Congress is saying" about biofuels.

Okay, so we now have the U.S. oil majors like Exxon (XOM), Chevron (CVX), Valero (VLO) and BP plc (BP) parroting the same sentiment as OPEC? This is just possibly one of the most simple-minded acts I have seen in a long time. Just step back and look at it. Let's put aside oil prices and resentment that they always illicit towards big oil. Let's also put aside whether or not gas prices are justified, and assume they are. We also need to ignore the unfathomable profits oil companies make and just accept it is purely a function of scale, and there is no market manipulation happening. Assuming all those things are true (they may or may not be - I am assuming they are for the point of the post), then why would any business ever align themselves philosophically with OPEC?

Are they just trying to make themselves hated even more than they are now? Is it some twisted masochistic urge the industry just cannot ignore? Why not put Bin Laden on its marketing materials? At a time when you have the Democrats, who hate oil companies only slightly more than they do Republicans, in charge in congress, and the White House is up for grabs, why would you give them more of a reason to vilify in the eyes of Americans?

Renewable fuels are being trumpeted as a national security issue. Whether or not you feel they are is irrelevant; the fact is that they are being marketed this way is what matters. The less we rely on OPEC for oil, the safer we are. Period.

So, now both OPEC and the U.S. oil majors are going to take their ball and go home? After years of telling us biofuels were a pipe dream and would never amount to anything, why are they suddenly so threatened that they are going to refuse to add refining capacity? This is their solution? To pout? Jesus, even my four year olds know that is not the way to get what you want.

This is a colossal mistake on the part of the oil companies, and they are going to be doing some heavy damage control after this. Here is the question they will have to answer before congress, and yes, they will end up there: "Why are you and OPEC colluding to keep oil prices high by threatening to refuse to invest in more refining capacity. Are you aware your actions are undermining the security of our nation?"

Can't wait to hear the answer.

Comments

[Tom B:]

I'll say it again: just nationalize the oil companies.

2007 Jun 19 08:29 AM

[Mmarrkk:]

Another oh so logical post!! Can't wait to see what the good ol' government can do to oil refining! It is doing so well with Social Secuity, the Post Office and other border control! I'm sure there will be unlimited supplies of dirt cheap gasoline!!! good one. ha ha

And how do you nationalize a company that has over 75% of its assets located outside of your borders? And I'm sure in the constitution you can find something that gives this legal standing??????

2007 Jun 19 08:43 AM

[Mmarrkk:]

Todd: did you sleep through economics class? "Why are you and OPEC colluding to keep oil prices high by threatening to refuse to invest in more refining capacity." Do you really not see the lack of logic? If there is a shortage of refineries to use the raw product crude oil, how is that going to keep oil prices high? If there aren't enough refineries, doesn't that mean that there will be no place for the crude oil to go?? And if there is no place for the crude oil to go, then what happens? It sits in storage or it sits in tankers or it sits in the ground. In all cases, the demand for crude oil goes down. And what happens when demand for a commodity goes down? The price goes down.

Thanks for taking pot shots at the oil companies. But by including that comment in your post you reveal yourself to be lacking in credibility.

2007 Jun 19 08:38 AM

[gpcooper3:]

I believe that the lack of logic is on your side. A shortage of refineries results in a shortage of supply. There will be no shortage of demand in this country or especially in the Chinese market. And what does a shortage of supply cause? Certainly not a decrease in price!

Looks like you skipped economics class altogether!

2007 Jun 19 09:13 AM

[DPazz:]

No a shortage of refinaries would cause a shortage of refined products like gasoline. Crude oil supplies would build up because there is simply not enough refining capacity. The correlation between gas and crude would decouple. Gas would continue to rise, oil would fall or level off.

China's a different story. They don't have the envrionmental regulations around refinaries and will continue to build them as their demand grows. They will have the capacity to refine all their needs.

2007 Jun 19 09:25 AM

[gpcooper3:]

That simply proves my point. Decreased supply of refined products contrasted against an increasing demand of refined products will only cause prices to go up.

If and only if the supply of alternatives to refined products exceeds the increased rate of consumption of energy will the demand for refined products reduce and cause a decrease in the price of gasoline. I don't see that happening anytime soon, especially in the face of reduced refining capabilities.

The decoulping of crude prices and gas prices means that profit margins will increase. So wouldn't this qualify as artificially induced inflation since there is an intentional effort to not invest in production capabilities? I think they have become accustomed to the higher margins.

2007 Jun 19 10:06 AM

[Mmarrkk:]

I think we're still talking past each other. My original issue was with the claim that oil companies are colluding to keep OIL prices high by not building refineries. Again, how can a lack of refining capacity keep OIL PRICES high?? Not refined products, but OIL! your points and counterpoints are all talking about the price of gasoline and other refined products. We can agree that with a limited refining capacity, gasoline prices will stay up. But I still need you to explain how a limited refining capacity can result in keeping oil prices up. That doesn't click!

2007 Jun 19 11:36 AM

[Mmarrkk:]

I believe DPazz properly addressed your missed efforts! Shortage of refineries = shortage of gasoline + glut of crude oil = higher gasoline prices and lower crude oil prices.

So, Mr. Cooper, what say ye??

2007 Jun 19 09:56 AM

[DPazz:]

So BP has a profit margin of around 8% and Citi has a profit margin of around 25%, but BP has "unfathomable" profits?

Ethonol is a way for politians to buy more votes in the big farm states (I say this as I drink my liquid corn, aka Pepsi). Without subsities, we need gas prices to be around $4 a gallon wholesale to make ethonol viable. If it wasn't a grab for votes, then we would be using sugar cane, which contains about 7 times the energy as corn.

With all the regulations and EPA permitting required, a new refinary requires gas to be about where it is now (which is why companies were looking at building them again). The government steps in and says, you have to use 20% ethonol in your mixture. That 20% decrease is enough to offset to viability of a new refinary. If you want more refinaries, tell your representitives to quit buying votes.

2007 Jun 19 09:19 AM

[Mmarrkk:]

DPazz, don't try using logic in this argument!! Everyone wants a scapegoat and Big Bad Oil is "it". Yes, profit margins at Big Oil are very small relative to most all other businesses in the US, but that won't stop the money and vote hungry politicians from rambling on about how "obscene" the profits are. Quite frankly, I'd prefer if all US oil companies just pulled out of the US completely and focused all of their efforts internationally. Then, maybe the nimrods here in the US would come to grips with reality. But with the Dem's in charge of congress, I'm sure we'll keep getting hearings and logic-challenged statutes. Oh well, at least we're still making money!!

2007 Jun 19 10:00 AM

[gpcooper3:]

I have to agree with you here. The energy coefficient for ethanol definately does not make it a viable choice for a fuel alternative to fossil fuels. We can only hope that the higher profits of the day result in a larger R&D budget that will make for a more realistic fuel source.

But how else would democrats gain support in the typically red farm states? I think we are returning to the days of farm subsidies.

2007 Jun 19 10:12 AM

[markj:]

Why suspect collusion between OPEC and the major integrated companies, when the answer to your main question is grounded in fundamental economics? If ethanol usage ramps up as much as the idiot politicians are pushing then the case can be made that, with current US refinery capacity, the US will be a gasoline exporter in (say) 15 years plus.

2007 Jun 19 10:14 AM

[Saildog:]

The article doesn't make sense.

The fundamental problem underlying all of this is faltering oil supply. Read www.businessweek.com/m....

OPEC are lying about their ability to raise production. They most likely can't and this is a smoke screen. The oil companies know that production growth has stalled. Why invest billions in new plant if production growth has stalled?

They would prefer to take the heat on all of this nonsense rather than admit the truth: Global production cannot increase. They know they are going to take heat anyway, so they prefer to blame it on the president. He is an unpopular idiot, so it doesn't matter.

2007 Jun 19 10:21 AM

[jack2:]

$15 a gallon is on the horizon; will we Still be blaming the oil companies? as for Congress why listen to those trying to tell people the truth about our impending energy disaster. no combination of energy alternatives will ever run the American way of life; "don't bother me with the facts I have already made up my mind." s.f.r. allentown, penna.

2007 Jun 19 01:11 PM

[Jrbarnes:]

Let's see, the Senate says it is going to take $29 billion out of the oil companies' pockets to use to subsidize the production of ethanol and biodiesel, and one wonders why the oil companies are reluctant to pony up a billion dollars or so per new refinery and fight nearly impossible to get around environmentalists and laws which enable them to stop the building of refineries essentially forever, to produce a product that is made from a substance that is currently producing at its peak level ever, to compete against something that is being subsidized with their money. Could that have an impact on their decision. The Senate Democrats can pass a tax, but they cannot outlaw intelligence any more than they seem to be able to exercise it for themselves.

2007 Jun 20 08:05 AM

[Frankenstein:]

I would think that as gas prices rise, more and more incentive is given to the developers of fuel efficient transportation and alternative fuel. So in turn gas companies are only digging their own grave through higher gas prices. The question is how high should gas prices be for the wheels of innovation to start clicking in full? This is probably something the oil companies have considered because when they do see a threat to their business, they can easily throw their huge profits to increase production/lower prices and pinch of innovation. As long as fuel and oil price increases above the rate of inflation, all else equal, demand for fuel should decrease as the automobile industry churns out fuel efficient cars to satisfy an increasing market for them.

2008 Mar 22 01:58 PM

[Bearwire:]

People the oil company's are just raising the price of oil as high as they can before the baby bombers die. The future of oil will die. Watch the rat race as governments across the world switch to nuclear energy and cars turn to electric. Japan got out of the rat race for oil in the 70's and started to make electronic products. US Government needs the make more nuclear plants like Iran, lol. OPEC or oil is a negative market that can place oil embargoes aka cut production like that in 1973. Place the money in the governments greedy hand to develop more nuclear plants for national security and help Israel build one nuclear plant and watch OPEC show its true colors.

2008 Jun 11 12:01 AM