COMMENTARY
HIGHER GAS PRICES - BEYOND JIT - THE OIL INDUSTRY EXPLORING NEW FIELDS OF STABILITY AND ECONOMIC GROWTH
07/05/96
Part 2 of 2
In the last article we discussed the oil industry's success in using Just-in-Time (JIT) technology to control production through out the world by arbitrarily lowering inventories while simultaneously raising gas prices at the pump.
Not only has the industry mastered this technique, but it has elevated it to a higher level by using and orchestrating current events to support their rationale. If we look at the latest headlines relating to Iraq and the bombing in Saudi, you can sense where prices will be by this fall.
With the expectation of Iraqi crude oil to enter the international market, prices were lowered to sell off current inventory so that Iraqui oil could replace it with their own production. This was scheduled for early spring.
However in the face of global resentment to higher prices, the Iraqui's could not get the price they wanted. And the oil industry partners were not able to help. As a result the timing was not right.
Currently negotiations with Iraq are curiously continuing at a slow pace, while their people are in dire need of food, medicine, and other major necessities of survival. The agreement was expected to be finished in May and now it is July with many issues to be resolved.
According to oil traders, the best guess for lifting Iraqi oil is late September. To date there have been five rounds of talks with more to come.
If they are not careful the diplomats and oil industry executives may coincidentally find themselves finalizing the Iraqi agreement in the fall -- when cold weather sets in and the demand for fuel increases thus creating a grand opportunity to both introduce Iraqui oil and the spectre of increased prices.
More recently the effect of the bombing that killed 19 Americans in Saudi Arabia, the world's leading producer of crude oil, has caused unrest in the market relating to the security of the region. The Middle East and particularly the Gulf continues to be a source of unrest and danger.
Unbelievably August oil futures jumped because of this tragic event. The oil industry reacted with higher prices not because of market demand but because of the "questionable reliability of future supplies".
This long history of instability has literally forced the strong entrepreneurship of the industry to pursue other avenues of economic growth and stability. New strategies are aimed at reducing the reliance on Middle East oil. Alternative energy technology has been put on hold so that oil remains a the major energy of choice.
Daily headlines such as those described below demonstrate this new philosophy.
Kuwait. Chevron Corp., under the terms of a contract beginning in 1994 has been providing Kuwait with technical assistance related to increasing crude output capacity. That contract is now being re- negotiated for a large equity position in lieu of revenue. Chevron thereby increases its influence on world prices and becomes a owner partner in the Middle East.
Seoul. Hyundai Oil, a division of The Hyundai Group, has been awarded a refinery contract to process oil from the Alaskan North Slope. This is the result of the rescinding of the U.S. oil export ban to certain Pacific and Asian countries including Taiwan. Instead of shipping the oil to Oman, it goes half the distance thus decreasing delivery costs.
The company that made the award is British Petroleum Co., one of the largest equity holders in the Alaskan oil fields. How complex can we get. And by the way, what happened to the Alaskan pipe line?
Detroit. Exxon Corporation's chairman issued a statement recently calling "for a new understanding of the need for energy, economy and the environment ... for the benefit of all society".
Remaining focused on oil, he elaborated on the technical advances that have led to discovery and economic recovery of oil throughout the world, while on the other hand he neatly downplayed the need for alternative fuels such as ethanol, saying they were not cost effective, had to be subsidized and they discriminated against oil- based fuels.
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Well their you have it. The oil industry possessing a new found production philosophy and using their extraordinary eco-political influence continues to control the economic fate of nations and to a very large degree the people therein.
What we now see is a gigantic effort to promote greater stability, exploration and technology. These momentous projects can be beneficial and rewarding to the parties involved, however they can also be expensive, costly and economically disastrous ultimately written off as bad international loans or as losses in the corporate annual reports.
Could it be that we the consumers as well as investors are paying for this progress ahead of time?
GERALD LEVINSON -- The Auto Channel