The Oil Market In The 1990s

Challenges For The New Era

Robert G. Reed III, Fereidun Fesharaki

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781000304060
• Edition: 1
• Topic: Politica e relazioni internazionali
• Subtopic: Politica

This book reviews some of those changes that have occurred since the early 1970s. It examines how the efficient use of energy, particularly of oil, can help to create and smooth a transition beyond oil. The book sketches basic elements of the "supply curve" of available oil savings.

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Structural Adjustment in the Oil Industry: Evolutionary Change and an Information Revolution

Guy F. Caruso

The world's largest industry—international oil—has undergone profound changes since 1973. Change has occurred in all sectors of the industry, from the upstream where crude oil is discovered and produced to the downstream areas of refining and marketing. International oil has gone from an industry dominated by relatively few large, fully integrated, multinational oil companies to one in which governments in both producing and consuming countries play important roles and a large number of smaller buyers and sellers have entered the market. Nevertheless, large oil companies have maintained a central role in exploration and development, investments outside the Organization of Petroleum Exporting Countries (OPEC), and in the refining and marketing of refined products in Organization for Economic Cooperation and Development (OECD) countries.

This chapter reviews some of those changes that have occurred since the early 1970s. Most changes in the industry's structure have been evolutionary, with reasonably smooth adjustments having taken place. There is one area in which change has been revolutionary: oil market information. Information available to industry participants and analysts has proliferated since the mid-1970s.

Some, if not all, of the information explosion was stimulated by governments—both consumers and producers. In 1973-1974 OECD governments found themselves in the unacceptable position of not having adequate, timely, and accurate information on oil supply, demand, and prices. The experience of 1978-1979 showed that although oil information had improved, much work remained. Since 1981, during a period of declining crude oil prices, governments of oil-producing countries became increasingly interested in better information as OPEC countries sought to set and enforce production quotas.

Role of Major Oil Companies

The role of the large international oil companies—the so-called majors (Exxon, Royal Dutch/Shell, Chevron [formerly Standard Oil of California and Gulf Oil], Texaco, British Petroleum, and Mobil Oil)—has changed substantially during the past decade. There are both myths and realities about the structural changes that have occurred and their implications.

The nature of access to crude oil for major oil companies has changed. In the period leading up to 1973-1974 almost all of their crude was acquired through equity ownership, including that oil lifted under longterm concessions in OPEC countries, with effective control over production levels. By 1988 most equity ownership by companies in OPEC countries had been sharply reduced. The majors now acquire most OPEC crude through transactions with unaffiliated parties (i.e., arm's length purchases). There are, however, continuing special relationships, such as that between the former Aramco partners (Exxon, Chevron, Texaco, and Mobil) and Saudi Arabia (although the volume lifted by the partners has shrunk considerably), continuing equity portions in Nigeria, and production sharing in Indonesia. The majors have increased equity production outside OPEC, particularly in OECD countries. Since the early 1970s, major oil company investments have increased sharply in the North Sea, in North America, and in non-OPEC developing countries.

As a result the majors—and other oil companies, large and small—continue to have access to large volumes of oil at well below OPEC official prices: in North America, the North Sea, and many non-OPEC developing countries. Indeed the importance of lost concessions in OPEC countries has diminished as the proportion of OPEC production in total supply has shrunk.

The disposal of crude oil by the majors has also changed drastically. In the pre-1973-1974 period the majors were virtually the only crude oil marketers, selling crude to their affiliated companies, and in term-contract sales, to third-party buyers. The sales of crude oil on the cargoby-cargo spot market was then very small and limited to balancing unexpected changes in supply and demand. In today's market, most of the former third-party customers of the majors deal directly with producer governments or national oil companies, with independent oil traders or have developed their own production. Also, affiliated companies in a number of cases buy oil from sellers other than the parent company.

As a result, there are many more buyers and sellers active in the international crude oil market. Because of the large overhang of unused productive capacity, access to oil on a long-term contract basis has become far less important. Indeed, in recent years, the persistent downward pressure on spot-market prices has led many crude-buyers to rely increasingly on spot purchases or contracts with spot-price-related indices.

Nevertheless, the major oil companies have maintained a central role. None has diversified outside energy to any large extent; the vast majority of their investments continue to be in oil. They still account for about 40 percent of the crude oil refined in OECD countries and just over 40 percent of product sales (compared with about 70 percent and 60 percent in 1973). They continue to be the main link between producers and consumers. Major oil companies' cash flow provides the bulk of worldwide investment in exploration and production. The majors retain a substantial interest in oil price stability, since a sharp decline in crude oil prices would adversely affect the value of their assets, their return on capital invested, and their cash flow.

Role of Producer Governments

Governments in most large oil-exporting countries have taken effective control over their crude oil production and marketing since 1973. In some cases, former concessionnaires such as the Aramco partners retain a special relationship under service contract or through reduced equity ownership such as in Nigeria, Libya, and Abu Dhabi. In other countries equity-like arrangements such as production-sharing contracts in Indonesia have been adopted.

Governments of some large oil-producing countries (e.g., Kuwait, Venezuela, and Saudi Arabia) have also become more involved, through state companies, in downstream operations at home and abroad. The primary objective is to ensure outlets for crude oil at a time when the demand for crude is growing very slowly. Experience so far would seem to indicate that the producer governments concerned recognize that lower produce prices could undermine the price structure for crude oil, which will continue to provide the largest share of their revenue, as well as that of other oil-exporting countries.

Developing countries as a group are eager to find economically recoverable oil and gas reserves as one means of acquiring foreign exchange to pay for imports and debt service. Some countries, such as Brazil, India, and Mexico, have used their national oil companies to develop oil and gas successfully. Apart from the Middle East and Mexico, where the proven reserve base is large relative to foreseen demands, most other governments recognize that further exploration and development efforts require the technology and risk capital of foreign oil companies (whether majors, independents, or national oil companies). The terms and conditions (including taxation, and production-sharing elements) must provide a level of after-tax rate of return remittable in convertible currency sufficient to attract the level of exploration effort appropriate to the geological potential of each country. Great emphasis is also put by oil companies on contract stability, which can be achieved by negotiating a fair balance in clear terms at the outset, with both parties recognizing the value of preserving a long-term relationship.

TABLE 1.1 World Refinery Distillation Capacity, 1960-1987 (MMB/D)

Downstream Developments

The highly competitive downstream sector of the oil industry has witnessed substantial change both in capacity and in technology. Adapting to a rapidly changing market environment, refinery capacity in OECD countries first increased by some 25 percent and then decreased by about 25 percent in the 1973-1987 period. During the same period, the typical refinery became more complex through the addition of upgrading facilities to adjust to the changing product mix.

Crude oil distillation capacity for the world (excluding centrally planned economics) doubled in the 1960s in response to an equally sharp increase in consumption. This considerable growth of world capacity (see Table 1.1) was mainly due to the rapid expansion of the industry in OECD countries, a trend that continued throughout the 1970s as refineries that had been planned on the basis of oil-consumption projections of continued strong growth came on stream.

Following the oil price increases in 1973-1974 and 1979-1980, declines in oil consumption and changes in consumption patterns led to considerable adaptation. This took the form of refinery closures—OECD countries' crude oil distillation capacity in 1987 was 23 percent below its 1981 peak—and construction of upgrading or conversion capacity, which grew from 9 MMB/D (million barrels per day) in 1977 to about 13 MMB/D in 1987, enabling refiners to enhance flexibility and to convert fuel oil, the demand for which has almost continuously declined, into lighter products.

The economic advantages anticipated when large conversion capacities were installed to improve downstream flexibility have been reduced by a combination of higher feedstock costs relative to light product prices and narrower price differentials between light and heavy finished products, both of which have been caused in part by the existence of conversion capacity. These factors may gradually become less important as construction of new conversion capacity slows down and as the share of heavy fuel oil in total consumption continues to diminish. In addition, further closure of excess distillation capacity will contribute to downstream efficiency, therefore tending to improve refinery economics. Other important factors will be future developments in crude oil and product prices, consumption growth, and net oil product imports. The near-term market outlook is for slow consumption growth and a continued need for refinery closures. Refiners will also have to continue making some investment in the light of new environmental regulations in many countries.

Market Structures

International oil market structures have also changed significantly over the past ten years and continue to evolve. Much of the change is the result of market forces operating on both demand and supply. The outcome has been a significant shift in market share away from OPEC, as consumption fell and refiners sought to reduce average crude costs by maximizing acquisitions from non-OPEC countries, where the acquisition costs were lower than OPEC prices during much of the period. Demand, supply, and price developments since 1974 have also altered the way oil is traded internationally, with an increasing emphasis on short-term transactions (largely throu...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Tables and Figures
• Preface
• 1 Structural Adjustment in the Oil Industry: Evolutionary Change and an Information Revolution
• 2 Long-Range U.S. Oil Security
• 3 Oil Refining: Planning Long-Term Strategies in a Short-Term Market
• 4 The Changing Structure of the Oil Industry
• 5 Medium- and Long-Term Energy Outlook
• 6 World Oil and U.S. Imports: Is the Past Prologue?
• 7 Drill Rigs and Battleships Are the Answer! (But What Was the Question?): Oil Efficiency, Economic Rationality, and Security
• 8 The Oil Market and Production Control
• 9 The Future of Independent Oil Refiners in the United States
• 10 Oil Trading: Yesterday, Today, and Tomorrow
• 11 Stabilizing World Oil Prices (SWOP): A Security Strategy
• 12 The Future of "Futures"
• 13 Oil Companies as Multinationals: The New Environment
• About the Contributors
• Index