Thursday, November 08, 2007


To understand global oil prices, it is not enough to simply look at factors that affect supply and demand. It is more important to closely scrutinize the structure of the global petroleum industry to grasp the dynamics of the forces that influence prices.

Historically, the global oil market has never enjoyed free competition. Since its birth in the late 1800s, the industry has been dominated by a few giant American and European corporations. In fact, US-based Exxon (now Exxon Mobil, the world’s largest oil company), once boasted that it was already a transnational corporation (TNC) 50 years before the term was invented.

Aside from Exxon Mobil, the world’s top oil firms also include Royal Dutch Shell (Britain-Netherlands), British Petroleum (Britain), Total (France), Chevron Texaco (US), and Conoco Phillips (US). Based on Fortune magazine’s 2003 list of the biggest 500 corporations in the world, these oil giants have combined revenues of US$788 billion, profits of US$34 billion, assets of US$619 billion, and employ more than half a million workers.

Just how powerful are they? Author Anthony Sampson, in his book the Seven Sisters, has offered the most graphic description: “Their supranational expertise is way beyond the ability of any government. Their incomes are greater than most countries where they operate. Their fleet of tankers has more tonnage than any navy. They own and administer whole cities in the desert. In dealing with oil, they are self-sufficient, invulnerable to the law of supply and demand and to the vagaries of the stock markets.”

Such unimaginable wealth and power stem from the control that these TNCs have on all the aspects of their business. The six largest oil companies can produce more than 80 million barrels per day of crude and refine more than 112 million barrels per day of various petroleum products.

Based on the estimates of the Washington-based nongovernment organization (NGO) Public Citizen, the major oil firms in the world (with the exception of Total) account for more than 14 percent of global crude oil production (pegged at 79.1 million barrels a day in 2003), which is nearly as much as the production of all Middle East members of the OPEC.

Thus, while oil and energy ministers decide production adjustments during the meetings of the OPEC Conference these officials still act closely with the oil majors for the mutual benefit of OPEC member-countries and the oil companies.

Oil companies’ strategic control of OPEC crude oil production is further strengthened by their domination in the downstream level of the global oil industry. The six oil majors own 186 of the 744 refineries in the world. As of 2003, they also account for 19 percent of global refining capacity of 112.4 million barrels a day and 16 percent of global sales of petroleum products of 79 million barrels a day.

The intense domination and control of the oil majors in the upstream to the downstrearn levels of the oil industry make them invulnerable to the effects of supply and demand. Such position allows them to dictate the price with which they want to sell their products independent of OPEC’s decision to increase or reduce crude oil production.

The competitive forces of supply and demand have never determined eversince the pricing of oil in world trade. According to Dr. Ibrahim Oweiss, writing in the 1970s, world oil prices have been actually “administered, controlled and manipulated” by international oil companies.

Oweiss wrote: “In my view, those companies having owned most of the oil in the world through oil concessions pursued an oligopolistic policy to maximize their profits. By keeping the price of oil low, they paid less royalties as they were usually a percentage of the posted price. Furthermore, they marketed their cheap oil to their parent companies, to their own refineries, and/or to their own downstream operations, thus widening the gap between the cost of the main input, namely crude oil, and the revenues from the sale of the final products.”

In fact, through mergers and acquisitions, giant oil companies have become even more powerful and influential in determining oil prices. In the US for instance, the multiple large, vertically integrated oil companies made the oil market uncompetitive. The five largest oil companies in the US (ExxonMobil, ChevronTexaco, ConocoPhillips and Royal Dutch Shell) control 48 percent of domestic oil production, 50 percent of domestic refinery capacity and 62 percent of the retail gasoline market.

Such concentration allows these companies to easily control gasoline prices in the US to rake more profits.

The Philippine Scenario
Some of the world oil giants are also the dominant players in the Philippine oil industry. Royal Dutch Shell, for example, controls Pilipinas Shell while ChevronTexaco owns Caltex Philippines. Petron Corporation, on the other hand, is jointly owned by the Philippine National Oil Company (PNOC), which has a 40-percent share and the Saudi Aabian Oil Company (Saudi Aramco), which also has 40 percent. The remaining 20 percent are owned by more than 500,000 individual subscribers.
ChevronTexaco and ExxonMobil used to own Saudi Aramco until it was nationalized in 1980. However, Saudi Aramco still maintains strategic partnerships with the oil majors. It has joint Ventures with Royal Dutch Shell and ExxonMobil in refining and marketing of petroleum products.
Pilipinas Shell, Caltex Philippines and Petron Corporation are the so-called Big Three of the local oil industry. Together, they account for 83 percent of the total number of pump stations nationwide, 86 percent of petroleum products sold in the domestic market and 100 percent of the country’s refining capacity. They are also among the 10 biggest corporations in the Philippines.
Like in most countries where they operate, the oil majors control as well domestic crude oil production in the Philippines such as the US$4.5-billion Malampaya Deep Water Gas-to-Power Project in offshore Palawan. A joint venture of the PNOC-Exploration Corporation (PNOC-EC), Shell Philippines Exploration (SPEX), a unit of the Royal Dutch Shell, and ChevronTexaco develops and operates the upstream component of the Malampaya project. SPEX and ChevronTexaco each have a 45-percent stake in Malampaya.
Oil is a highly volatile commodity--it is very vulnerable to price speculation, which is also among the reasons cited by Reuters for the high oil prices.
For the oil TNCs, wars and speculation mean more money. They welcome speculation brought about by political tensions because it artificially bloats oil prices and therefore fattens their pockets.
Speculation artificially increases oil prices because most oil in the world are not traded in spot markets or futures markets. Most of the oil is traded through long-term supply contracts between buyers and sellers. In the case of the big oil TNCs, they are both the buyers and the sellers (intra-TNC transaction) and thus do not need a spot market. However, prices in spot markets and futures markets provide a signal about supply-demand balance (which TNCs can distort at will) that influences contract prices.
Under deregulation, subsidiaries of oil TNCs operating in net oil importing countries like the Philippines refer to the spot market price (Dubai for crude and MOPS for refined petroleum products) to estimate and project domestic pump price adjustment, even if their oil purchases are actually under contract arrangements. This provides room for the local units of the oil TNCs to squeeze more profits by increasing pump prices when the spot market price go up even if their oil purchases have been negotiated long before and with lower prices.

Spot market prices are also used as a benchmark in computing local pump prices even if companies like Pilipinas Shell, Caltex Philippines, and Petron Corporation (which control 90% of the local market) have long-term supply arrangements with their mother TNCs or affiliates and thus have much lower production costs than what are reflected in the spot market. Besides, since these contracts are actually transactions of units under the same TNC, the production costs may even be lower than declared. Don’t we wonder why Dubai crude costs almost US$38 a barrel when the actual cost of producing a barrel of crude oil in the Gulf region is as low as US$2? Monopoly rule allows oil TNCs to manipulate prices and to impose high prices at whim.
Without state control, no thanks to oil deregulation, we have seen what these profit-hungry giants can do to us and our economy. TNC monopoly control also explains why nationalization of our oil industry is the only meaningful solution to exorbitant prices

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