Common Cents

Texas tea

Ralph Murphy

(6/2016) A meeting was held in Doha, Qatar this April between OPEC and non-OPEC nations to cap world output of oil at January supply levels. It appeared an attempt to shore up flagging prices. The accord officially failed to reach an agreement as OPEC member Iran refused production cuts insisted on by Saudi Arabia. The Saudis and Russians had worked together in an unusual public, diplomatic effort to set a price level closer to the $105 a barrel commission they received in mid 2014. In recent months the price was at a low of about $26 and despite the government accords the controlling issues may be linked to private sector companies affectionately known as the "Super majors" or "Big Oil".

If it were just an economic issue, the actions of the six American and European-based, corporate giants would probably go unnoticed beyond the political establishments they support. Oil earnings are by far the largest commodity earner as 101 nations have measurable and accessible product reserves.

At issue now is a cartel or price rigging scheme that affords nations such as Russia- through the state owned Rosneft company, Saudi Aramco in Saudi Arabia, Petrobras in Brazil, Iran's National Oil Company, Norway's Statoil and China's CNPC (National Petroleum Corporation). There are numerous others that appear to produce and bargain price levels. The United States obviously doesn't have an equivalent as the private sector firms such as ExxonMobil and Chevron seem to "run the show". The Texas- based Exxon company leads them by far as the world’s largest producer with a reported $496 billion earnings in 2015. Chevron was next and earned $245 billion in their worldwide operations.

The earnings and range of influence may be far higher than reported although their dealings are probably legal - depending on their ledgers. "Big Oil" concerns such as ExxonMobil, BP Plc (British), Chevron (US), Royal Dutch Shell (UK, Netherlands), Total (French) and Eni (Italian) were the result of almost panicked response to an oil drop in the late 1990's that led to mergers that resulted in the current alliances. By 1999 the cartel's offshore or foreign operations had regrouped" due to effective price fixing, though competing internal interests kept the European Continent contingent in the price scheme. They probably would have dropped out due to standard competitive pressure without the Big Oil affiliation.

Russia "flirted" with private sector reforms in the oil industry but the attempt to merge Yukos and TNK-BP with state and BP- controlled Rosneft ended in 2006. Exxon kept a relatively low profile but may be far stronger than it appears depending on how "ownership" is described and profits taken. When various US and European sanctions were imposed on Russia in 2014 following the Ukraine attacks, Exxon drilling exposure actually increased from 13.5 million acres to 63.7 million acres. The drilling and export of oil were covered by the sanctions though Arctic and deep- sea efforts were stopped. Petrochemicals accounted for over 70% of Russia's export earnings since 2012. The government accounts include a Reserve fund directly tied to oil earnings and a Welfare fund subsidized by the west for pension aid that are now about empty as the oil price has remained low.

What worked as price rigging in 1999 may not be effective now as factors that produced the low prices in recent months haven't changed. Iran resumed production after United Nations sanctions were lifted last summer, and the nation was deemed Nuclear Proliferation Treaty (NPT) compliant. Meanwhile one or more private companies appear to be taking cuts to include the Big Oil group. This six-member alliance is probably able to manipulate the levels as the state companies projected to world press are just too primitive to effectively undertake that level of production. ExxonMobil is the strongest market influence in the group and may play a similar role as to policy formation.

Until recently, the United States was the top producer of fracking or shale-access as well as uncapped, domestic well output. Russia and Saudi Arabia followed with output well over 11 million barrels a day. While a key industrial market in service oriented America, this revenue is simply a survival issue abroad. It does appear that Big Oil can manipulate the price levels and related politics to such a degree that they play a de facto foreign policy role here and domestic governing role overseas. If it were a matter assessing price levels based on standard supply and demand criteria, the levels would be relatively predictable. Cartel pricing as defined and practiced introduces artificial price levels and are very unpredictable affecting political policies as well.

When confronted with the political issue Exxon CEO Rex Tillerson explained "We don't take sides in any geopolitical events". The strength of that company on the market may actually create the events they are then forced to work with. Big Oil decisions affect most all industrial economies and associated systems. Claims, for example, of China to be a top four producer in an industry that only emerged there since 2000 is possible, but unlikely given the necessary tech levels and communist party politics. Much the same applies to Russia and the Persian Gulf states - the state concerns may just gain taxes and duties but again the infrastructure is too costly and high tech to produce and operate at home. The nations have large production volume but need western financial aid.

Big Oil appears to dictate internal pricing as well as host nations politics if the countries are highly dependent on the resource - as many are. When international forums such as the Doha are publicly announced - they appear largely symbolic. The real dealings may simply be meeting projections of Big Oil wherever they occur. At the present time their range of options as to price levels and production cutbacks are far less clear, although the objective is a higher price - not market share. If possible, it might be better to review corporate profits within the Big Oil Group, rather than state corporations, as a sign of systemic strength.

Ralph Murphy is a former member of the CIA Headquarters Staff in Langley, VA.