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It’s a whole new world of high oil prices, says van Meurs Why oil companies aren’t reacting to high prices as they did in the energy crisis of the 1970s
Kristen Nelson PNA News Editor
The reactions to today’s high oil prices are very different than the reactions to the energy crisis in the 1970s — both on the supply side and on the demand side, energy economist Pedro van Meurs, of Van Meurs and Associates Ltd. of Calgary, told the International Association of Energy Economics in Anchorage Oct. 19.
Van Meurs said changes both in the structure of the oil industry and in consumption taxes account for the differences between reactions then. The result, he said, may be that high oil prices are here to stay for a while.
As a result of the energy crisis in the 1970s, very large new non-OPEC supplies were brought to the market, van Meurs said: the North Sea was pretty well developed in the 1970s and early 1980s and most offshore areas out to about 200 meters of water depth were developed in the last 20 years.
“So what we saw as a reaction to the first energy shock, the energy shock of the 1970s, was an enormous development of a non-OPEC supply side and a very strong development of non-OPEC supplies. We also saw a very strong impact on demand, as you well recall, and of the development of alternative energy resources. Really, natural gas came to the fore in the early ‘80s as an important energy resource as a result of the energy crisis.”
But today, van Meurs said, both the supply and demand reactions to high oil prices are remarkably different. Consumption taxes mute demand response On the demand side, he said, a large number of consuming countries have put very high consumption taxes on gasoline and diesel since the energy crisis, and as a result, even a doubling in crude oil prices does not translate into very significant changes in consumer prices in Europe, Japan and some Latin American countries.
But the surprising thing, van Meurs said, is that the supply response to high energy prices is equally muted.
“And why is this? The major oil companies learned a lesson. During the energy crisis (of the 1970s), there was only one smart major oil company. And that was Shell,” he said.
“During the energy crisis, the oil companies bought the theory that there was going to be an energy crisis and invested in all kinds of alternative and expensive resources. Shell did not. Shell hoarded cash. And when the price dropped, Shell used all that cash to buy everybody up.”
Everybody now knows that Shell did, van Meurs said, so the major oil companies are now being very careful in their response to high prices. The average major oil company is still testing investment opportunities against $15 a barrel oil.
“They all say, we are only investing if it stands the $15 (a barrel) price — we’re not believing in this $30 price. We’re only investing if it meets the $15 price test. Which means, really you’re not going to invest any more than you did before, whether it’s $30 or $15.” Picking the raisins Companies have merged and acquired other companies and gotten bigger with the goal of providing better value for shareholders, van Meurs said.
“And how do you provide better value for your shareholders? By picking the raisins out of the investment cake and only going for the better projects, rather than for everything that may have been on the table.”
The result? These changes may benefit OPEC, he said, “because now OPEC increases prices and if there’s no supply response and if there’s no demand response, then maybe the prices can stay high.” The five sisters, 10 brothers The oil industry now has five sisters, van Meurs said: ExxonMobil, Shell, BP Amoco ARCO, ChevronTexaco and TotalFinaElf.
The seven sisters who used to dominate the industry were destroyed when reserves were nationalized by OPEC in the 1960s and early 1970s.
As a result of very low prices, van Meurs said, “the majors have been grouping together, have been merging and taking over and what we have seen now over the last two years is that we have recreated now five sisters.”
“Most of the world’s reserves, most of the world’s production, is still controlled by the state companies. And actually the largest state companies, I think it’s appropriate that you call them the 10 brothers,” van Meurs said, have combined reserves many times that of total company reserves. They include Mexico and Venezuela in the Americas, Indonesia in the Far East and the major Middle Eastern producers. The 10 brothers, together with smaller national oil companies including the oil companies in Russia, control almost 10 times the volume of oil held by all private companies combined.
In combination, the five sisters and the 10 brothers control almost 80 percent of the world’s oil reserves. Further polarization possible Van Meurs said there is potential for further polarization. TotalFinaElf may be looking at the Italian state company as a takeover target. It even looked at Statoil for a while, he said, but the Norwegian government blocked that takeover. And private companies — Phillips, Conoco, Occidental, Unocal — all could be potential takeover targets of the five sisters, he said.
“What is important is to realize that the growth of the five sisters may not necessarily stop at those currently being looked at ... Russia is an enormous reservoir potentially of further expansion” with a very strong production base and a very weak economic position, “and consequently most of the major oil companies are continuously looking at the possibility of further acquisitions in Russia.”
More privatization of state companies, not always very efficient, is also possible, continuing a process that has gone on over the last 10 years, van Meurs said. As governments consider privatizing state companies, there is considerable scope for further expansion of major oil companies by acquiring those assets, he said.
As a result of all of these things, van Meurs said, “there is quite a bit of scope for the five sisters still to grow.” Government take going down On the government side of oil, van Meurs said, regressive fiscal systems — the norm in the world — mean that as prices go up, the percentage of government take of total divisible income decreases.
“Which means the corporate take actually goes up.”
Alaska, he noted, is a good example of a regressive jurisdiction. Van Meurs tracks these trends worldwide, and he said on the average, worldwide, at $12 per barrel, the corporate take is 27 percent of the divisible income, while at $24 per barrel, the corporate take rises to 34 percent of divisible income.
And since 1986, he said, governments have actually reduced their take because a lot of new exploration acreage has come on the market.
In 1980 investment was pretty much restricted to North America, Europe, Indonesia and some parts of Africa. The communist block and most of Latin America was closed to investing.
“That has changed completely. All of the world, the world is now open for business. And consequently what you see is a very sharp increase in acreage,” van Meurs said. And because there are too many exploration properties on the market, government take has gone down. The most spectacular example, he said, is the United Kingdom where the government take in the late 1970s was 90 percent of total divisible income; today it is 30 percent.
So despite higher oil prices, governments are coming in with even lower government takes, because there is still too much acreage available for exploration.
The extremely strong cash position of the five sisters could be the jumping board for further expansion — two, three or fours years out — and could include purchasing Russian positions or participating in privatization of state companies.
“Given this mute supply response on the part of the world oil industry, and if there is a mute demand response on the part of the consumer, you may well see the oil price stay high.”
Van Meurs said he thought new sources of energy, like gas to liquids, would be unlikely to come on stream fast enough to impact prices in the next five to 10 years. A general hydrogen economy, he said, is probably in the 15 to 30 year timeframe.
“So when I talk about oil prices maybe staying high, I’m talking about the next decade,” van Meurs said.
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