Thursday, May 26, 2005

Thomas P.M. Barnett :: Weblog: The other culprit on high oil prices

Thomas P.M. Barnett :: Weblog: The other culprit on high oil prices

I never know quite what to make of Thomas P.M. Barnett. On the one hand, his Core/Gap theory set out in ‘The Pentagon’s New Map’ was an inspired synthesis of Gramsci’s reading of hegemony and Wallerstein’s world system theory, repackaged for the US military. On the other hand, he seems to be milking the idea for all it’s worth, which leaves something of a bad taste in my mouth – it was a better idea when there wasn’t such an air of self-congratulation about it. Still, that’s my personal opinion.

Anyway, he picked up on this WSJ front page from May 24 - Oil Industry's Refining Squeeze Limits Prospects of Price Relief
By Bhushan Bahree and Thaddeus Herrick (sub only) – which is actually more than a little behind the curve. Its basic argument is that oil prices will stay high until 2007/2008 because there isn’t enough oil refining capacity to go around. Saudi Arabia has actually been saying exactly this since April 2004 – at a speech (pdf) at CSIS in Washington Saudi Oil Minister Ali Naimi said:

“In the U.S. a plethora or state and local regulations have vulcanized the gasoline markets placing increasing strains on refiners to meet local demands.

On this occasion let me state emphatically that Saudi Arabia is willing and ready to invest in two new 500,000 barrel per day refineries and their associated marketing facilities in the U.S. to help alleviate some of the bottlenecks in product availability.”

Noozz.com also covered this in January 2005 in a round-up of OPEC policy at the time of their Cairo policy.

The WSJ gets something quite wrong in their analysis, too – they imply that all refiners are enjoying huge profits. The ones that can only run light sweet crude aren’t – Valero, the refiner they take as an example, is making money hand over fist because it can process heavy sour crudes, which means it can buy heavy sour at a discount and sell at a high market price set by the scarcity of light sweet crude.

Barnett says:

“What's interesting about this is that it's really a self-fulfilling prophecy: the oil companies resist sinking the big bucks because they fear oil is receding in importance in coming years and decades as we shift to hydrogen (e.g., British Petroleum becomes Beyond Petroleum), and so by eschewing these investments, they create persistent high prices that accelerate that shift.”

Cart, horse… Oil majors and national oil companies (NOCs) didn’t invest in refining capacity when oil was $10 a barrel because they didn’t really have enough money. They didn’t spend as much on E&P either during that period. The alternative fuels thing is an important part of their long-term game-plan and also a strong PR strategy to re-cast themselves as future-oriented, environmentally friendly companies rather than polluting remnants of early 20thC imperialism. Now the NOCs are investing heavily in refining because they have realised that they need to guarantee throughput as well as supply if they are not to encourage diversification of the world’s energy mix away from petroleum. Hence Saudi Aramco’s investment in refineries both on the Peninsula and in Asia.

The oil majors aren’t likely to invest as much in refining because their role in the market is changing. There was a fear that they were being hollowed out to become oil services firms like Halliburton and Schlumberger, it doesn’t look like they are any more – instead they’re becoming more like project managers, the people who come in and help set a strategy for a field while the state retains overall control over production and the services firms sink the holes and lay the pipes. In that role, they don’t need to worry so much about the relationship between production and processing – that’s the role of the much more cash-rich NOCs.

(NB – African production tends to be sweet and light so although there aren’t NOCs there in quite the same way as in the Middle East the same logic doesn’t apply to refining capacity).

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