
Big Oil Companies Should Adopt a Self-Liquidation Strategy - jseliger
https://www.project-syndicate.org/commentary/marginal-pricing-end-of-western-oil-producers-by-anatole-kaletsky-2015-12
======
hughw
The article ignores some realities. 1) The major OPEC producers need to
recover far more than their lifting costs. Their oil revenues subsidize the
rest of the economy and is their bulwark of social stability. Some estimate
that Saudi Arabia needs $90/bbl. 2) Technological adaptation to the low price
regime is happening as we speak. The years of $100/bbl oil developed expensive
innovations, and now we are seeing _those_ prices reduced to their marginal
costs. 3) Almost no other country can use these new technologies as profitably
as the US and Canada can. The US and Canada have a private mineral ownership
regime, as well as a production and refinement infrastructure no other country
will be able to match soon.

The US has a LOT of small- and intermediate-sized oil companies competing
actively right now, on all these dimensions, to lower their costs so they can
continue to operate profitably even in the current price environment. Most are
succeeding.

~~~
tankenmate
The break even price is estimated at current pumping rate vs gross profit; but
Saudi Arabia can relatively easily increase their pumping rate. The cash cost
for the Saudis per barrel is sub $5. So they can up their production rate to
handle the difference; they are incentivised to do so if they truly believe
that their reserves will become a stranded asset.

In contrast after running and royalties cash costs in the US are up towards
$30/bbl and Canadian oil sands towards $40/bbl. But, the size of wells using
these technologies are smaller. And, those wells cost more to discover, and
tap. This means US / Canadian oil is more affected by marginal cost, both in
terms of price flexibility and liquidity (both cash and oil).

And the biggest threat, in the medium term, to oil prices is some of the range
of alternative energy sources. Solar costs are coming down quite rapidly. Wind
is coming down but more slowly (a chunk of this is in real rather than nominal
terms; depending on currency). And nuclear in time will probably come down if
increasing investment leads to predicted efficiency gains.

Oil isn't going to disappear overnight, but it does have a bordering on
existential threat in the medium term. The only largely protected part of this
market I can see here is large scale transportation, i.e. sea and air
transport.

~~~
nimos
Oil, even at current prices, is significantly more expensive than natural gas
and coal for generating electricity. Apart from remote communities oil isn't
really used to generate electricity. Oil is valuable because of gasoline.
Solar/Wind/Nuclear are competing in a completely different market.

The real threat to the medium/long term value of oil is a good battery.

~~~
netcan
It's a problem to consider these separate. All energy and certainly all carbon
fuels are fungible to a degree. Oil is easier to transport and bottle. Gas is
more location and infrastructure dependant.

If Gas prices rise or oil prices drop, we'll use oil for electricity
generation too.

------
caseysoftware
It feels like the author hasn't read The Innovator's Dilemma.

In it, the author talks about a number of "stable" industries that had
existing product lines with the R&D, customers, and sales processes to back
them up. They were so invested in those structures that as innovations in
their industry came along, they missed the innovations. It wasn't because
those innovations were bad - many were great - but they didn't fulfill their
existing customers' requirements. And so instead of trying to develop new
markets (hard!), they ignored the innovations.

As a result, new entrants - without the cash cows to worry about - applied
those innovations in new areas, building new markets. As those new products
caught up with the requirements of the older products, those old customers
switched to the new products.

I think the next great innovations in energy aren't going to come from the oil
companies.

It's nothing nefarious, just the simple realization that most of their
customers can't use [choose: solar, wind, nuclear, etc] for a variety of
reasons. As those other energy sources change, improve, and simplify, those
customers may be able to change but we should be looking for the new entrants
building the new markets first.

~~~
tempestn
It seemed like he understood that to me. This quote basically covers it:

> Yet, as one BP director replied when I asked why his company continued to
> risk deep-water drilling, instead of investing in alternative energy: “We
> are a drilling business, and that is our expertise. Why should we spend our
> time and money competing in new technology with General Electric or
> Toshiba?”

I think that's why the primary argument is that they should cease R&D entirely
and just distribute profits to shareholders until they run out.

~~~
ghaff
The argument being made is really Levitt's marketing myopia argument which at
least used to appear in pretty much every Marketing 101 course. [1] The
argument is that you should define yourself as a transportation company rather
than a railroad (or an energy company instead of an oil company).

The problem with this argument is that it doesn't always apply very well. Yes,
Kodak had distribution channels for photographs. But very little about the
company gave it any particular advantage for digital photography from a
technology perspective.

Somewhat ironically, Fujifilm--notwithstanding some recent success in
relatively niche camera products--has largely weathered the post-film era by
applying its technology to medical products and the like.

[1]
[http://academy.clevelandclinic.org/Portals/40/LHC%20Myopia.p...](http://academy.clevelandclinic.org/Portals/40/LHC%20Myopia.pdf)

~~~
dagw
_Yes, Kodak had distribution channels for photographs. But very little about
the company gave it any particular advantage for digital photography from a
technology perspective._

Yet they completely owned the pro digital camera space in the early 90s. Their
problem was that they chose not to build on this lead since they didn't want
to cannibalize their more profitable film business.

------
vardump
The author should have done some basic fact checking.

From the article:

> "more sophisticated than nineteenth-century “nodding donkeys.”"

That type of fields are getting rare. EOR [1] techniques are being applied
everywhere. Although, AFAIK, some countries, such as Venezuela are somewhat
backwards in their application of EOR. They wanted to nationalize oil fields
and not invest in them, and look what happened.

> new technologies such as hydraulic fracturing (“fracking”)

Fracking [2] is now 40 years old "new" technology. The only reason it became
popular in last 10 years was high oil prices.

[1]:
[https://en.wikipedia.org/wiki/Enhanced_oil_recovery](https://en.wikipedia.org/wiki/Enhanced_oil_recovery)

[2]:
[https://en.wikipedia.org/wiki/Hydraulic_fracturing](https://en.wikipedia.org/wiki/Hydraulic_fracturing)

~~~
tahssa
Well let's be clear.

1\. What he said was true about nodding donkeys. OPEC countries are starting
to use EOR, but most of their fields do not require it. Some countries like
Saudi Arablia do have heavy oil and they are starting to invest in these
areas, but that does not invalidate the authors point - that the U.S./Canada
can help with that shift.

2\. re: fracking being new. almost all reporting calls fracking "new", but
they really are referring to the new form of fracking where it's done
horizontally through shale. It's a minor misconception that can be forgiven
considering the intent is really "new fracking technology".

Edit: here's a good video showing horizontal fracking ->
[https://m.youtube.com/watch?v=O0kmskvJFt0](https://m.youtube.com/watch?v=O0kmskvJFt0)

~~~
vardump
1\. 19th century well implies at most a few hundred feet depths. There just
aren't spots left on earth where such a well would still yield meaningful
amounts of oil.

2\. Principal driver behind those horizontal wells is money. Those wells cost
2-3x more to complete. Horizontal tech has advanced, but in the end that
advancement has been dollar driven. Expensive oil made it economical.

~~~
tahssa
The distinction being made is in the technology required for OPEC wells.
Conventional oil fields (most OPEC Wells) require the same tech that 19th
century wells did. Just because you go a little deeper doesn't change the
tech.

I agree oil price played a major role in developing horizontal tech, but it's
become more about the cost being driven down and is why the U.S. is still
doing it at $35 a barrel (which is, on a relative basis, the same as 10+ years
ago). Either way I don't think your point #2 works against anything I've
mentioned.

~~~
vardump
> is still doing it at $35 a barrel

They'd still be doing it at _any_ loss figure above operational costs to
maintain cash flow. The cost to drill the well is already sunk. So it makes
sense to operate the well at heavy loss. Some money is better than no money.

> Either way I don't think your point #2 works against anything I've
> mentioned.

My point was the economic reasons were why horizontal drilling became
feasible. It could have been done in the eighties if oil prices were high
enough back then.

~~~
tahssa
The cost to drill a well is not sunk when they haven't drilled the well yet.

Well some companies are in fact drilling wells at a loss, but only because
they have to pay bills while they pray for oil prices return and potentially
survive this supposed rough patch. However, that says more about their debt
situation than it does the cost of horizontal drilling.

Bottom line is that some companies are in fact making a profit drilling
horizontal shale wells @ $35 barrel.

------
MichaelGG
I don't know anything about oil, but it seems unrealistic to claim to be able
to predict markets. Liquidating all your reserves at current price is unlikely
to be seen as a wise move. (And wouldn't selling more oil than the US uses
annually impact prices somehow?)

If you magically had knowledge of the range of prices over 10+ years you could
do all sorts of money making things.

Edit: Looked into this a bit. Futures on oil 2 years out are already over $50.
So "the market" is far less certain then the author. I'd also imagine quite a
bit of damage to oil producers if the price stays low. After they shut down,
why wouldn't the price rise?

~~~
ryanjshaw
> I don't know anything about oil, but it seems unrealistic to claim to be
> able to predict markets.

The author's position is less about predicting markets than it is about "if
you're operating a horse & buggy business in 1885, you're best off winding it
up". The debate here seems to be about whether 'today' is 1885 or 1855 or
1825, so to speak.

~~~
lsc
Eh, I would argue that it's different from buggy whips, because there is a
(somewhat) limited supply of oil.

The idea being that if it turns out you are off by a few years (or a few
hundred years) in the buggy whip vs. car situation, and buggy whips are a
thing for a while longer, well, it's not that hard to ramp up buggy whip
production. I mean, you've got some training effort, sure, but there are more
buggy whips to be made.

The idea is that oil is different, simply because there's only so much of it.
If it turns out you planned wrong and have to come up with a few more year's
worth of oil, and you are out? yeah, you have a serious problem.

As an aside, the hole in my argument is what was shown by oil shale. There is
a _lot_ more oil available at $100 a barrel than there is available at $20 a
barrel. but the point is that at some point, we'll actually run out of the
stuff, and even before then, we won't be able to make more oil the same way we
had made more oil in the past; to get more oil, periodically, you need to come
up with new ways of getting oil, usually at great expense.

------
graeham
The article is calling for a "sell low" strategy [0]. The author is mistaking
low oil prices as from lack of demand. This is part of the story, but a small
part. The major factor is high supply, mainly from Saudi Arabia [1]. The
motive is not entirely clear. Most think its a fight for market share, with
Saudi hoping Russia, Venezuela, US fracking, Canadian oil sands, or other
middle east players blinking before the Saudi's.

They are probably right, that other players have high expenses, less cash on
hand, and will have to fold first. Certainly US shale is hurting, and
practically no new oil sand projects are starting in Canada. In fact, this
probably signals a good time to _buy_ new assets, for companies prepare for
this.

What I think Saudi/ OPEC is missing from the equation is that market share is
not something that can be won long-term. US shale may have to cut back this
year, but I think the time scale to turn production back on is about one year
once prices return. Oil sands are a longer-term investment, but this also
means that low prices don't cut production - the expensive investment has
already been made.

Another major thing the article is missing from the equation is the demand
side. Decrease in demand at the moment has come from efficiency investments
that were economically driven by high oil prices. People bought smaller cars,
took fewer road trips, and invested in home insulation. With oil prices lower,
many of these things become less economical. Demand will increase, prices will
go up.

[0] - [http://www.nasdaq.com/markets/crude-oil-
brent.aspx?timeframe...](http://www.nasdaq.com/markets/crude-oil-
brent.aspx?timeframe=10y) [1] - [http://uk.businessinsider.com/saudi-arabia-
has-no-plans-to-c...](http://uk.businessinsider.com/saudi-arabia-has-no-plans-
to-cut-oil-production-2015-11)

------
rubyfan
Aren't OPEC essentially trying to starve out the competition (shale, fracking,
solar, wind, etc.)? They are basically flooding the market with cheap oil and
thereby making all the alternatives economically unattractive?

Western oil interests are probably right to spend on discovery then, since
they'd believe OPEC can't pump forever and non-OPEC sources will be profitable
in the future and will take years to develop. This is probably where the
author and oil executives differ in their belief, that there will be a market
for oil in the future.

However the author doesn't present any evidence to suggest non-oil sources
will be sufficiently more profitable, less expensive and widely available in
the future. Further, there is no evidence presented that a non-binding climate
change agreements will destroy the oil market.

~~~
mschuster91
> since they'd believe OPEC can't pump forever

In 50 years, OPEC will still have oil even at current consumption. But
consumption is shrinking as energy production is already shifting to
renewables and cars will have converted to electro/hydrogen by then.

~~~
ams6110
Cars won't convert in large numbers if oil-based fuel is a cheaper option.

~~~
derekp7
Doesn't it take something like $5 of electricity to "fill up" a Tesla (250
miles or so?) That would be like buying gas at $0.50 a gallon. The other side
of the coin is the high cost of the battery pack (something like $30K), but
that should come down drastically once the Gigafactory is online.

~~~
Spooky23
Everyone prefers to pay more over time vs make a larger capital investment.

~~~
justincormack
No. That's why we have credit markets because some people like the opposite.
These can then be converted to rentals.

------
atburrow
There is a potential flaw I spot in this piece. The author likens the self-
liquidation strategy to what the big tobacco companies did. The problem I see
with this is that tobacco is a luxury item. For many, oil is an every day
necessity.

This leads into the liquidation issue. If companies such as BP were to
liquidate, what would happen? The author mentions that non-oil countries
should focus on providing resources and knowledge on oil extraction, but would
that be enough to prevent price gouging? If there are no competitors selling
oil, I could see the prices skyrocketing once the competition has liquidated
all of their reserves. Would our knowledge, tools and "know how" be enough to
prevent a monopoly on oil? Our only fallback would be to charge more on the
services the author suggested we offer instead of oil.

~~~
lostlogin
If I were to stereotype smokers I wouldn't call the a group of luxury item
buyers. I know tobacco isn't a necessity but the anacedata point from me would
be that poverty and tobacco use are closely correlated.

~~~
setpatchaddress
Luxury traditionally means "optional" in this context. People can generally
live and work without tobacco. Industrialized countries currently require oil,
although this is changing.

~~~
crdoconnor
Industrialized countries will require oil for a long time yet but it does seem
that it is in the process of losing its special status as a lynchpin commodity
and turning into "just another commodity" like aluminum or iron ore.

------
fauigerzigerk
OK, here's the question: Who will buy all those supposedly worthless assets
and provide that "tsunami of cash" to the shareholders of oil companies?

A fire sale of assets of questionable value is only going to prove their
worthlessness and they will have to be marked down very quickly on the balance
sheets of oil companies.

The result will not be a tsunami of cash but a tsunami of bankruptcies.

~~~
Narkov
From TFA:

> If a consortium of private-equity investors raised the $118 billion needed
> to buy BP at its current share price, it could immediately start to
> liquidate 10.5 billion barrels of proven reserves worth over $360 billion,
> even at today’s “depressed” price of $36 a barrel.

Their oil reserves alone are worth nearly 3 times the market value of the
company. The other assets you talk of could even have a negative value of
$100b and the equation still works.

~~~
fauigerzigerk
It just doesn't add up. If their reserves are actually worth that much to a
private equity investor, why are they supposed to be so worthless to BP (and
Shell and Exxon ...) that it should liquidate itself?

These assets are either profitable or not. If they are profitable, why sell
them? If they are not profitable, why buy them? It can't be both. Not for an
entire industry that is.

~~~
lmm
Yahoo has been trading well below its book value for a while. If you believe
that the company is about to destroy a lot of money by spending it on
unprofitable R&D then it makes sense to value it at less than its current
assets. (Obviously current management will spend on R&D because they believe
it will ultimately produce more value than it costs, but maybe the market
disagrees).

~~~
fauigerzigerk
I have no problem with the "investing too much in exploration" part of his
argument. But avoiding overinvestment is not what unleashes the tsunami of
cash he's talking about. It's asset sales that should bring on that tsunami of
cash.

What is the break even of oil companies' proven reserves after not
overspending on investment? That is the all important question. If that break
even is below future long term oil prices, as he seems to suggest, then these
assets are worth exactly $0.

------
amelius
We will still need oil for things like polymers (e.g. plastics), drugs, and
thousands of other applications.

~~~
vardump
Oil is generally not used to make plastics.

That said, nearly everything else is, at least indirectly.

[http://www.eia.gov/tools/faqs/faq.cfm?id=34&t=6](http://www.eia.gov/tools/faqs/faq.cfm?id=34&t=6)

~~~
dredmorbius
Distinguishing NGL from petroleum is fairly disengenuous, and it's one of
several games that's played with NGL reporting in US fossil fuels reporting.
They're treated as oil where convenient to do so, as _not_ oil otherwise (much
of the touted increase in US domestic "oil" extraction in recent years has
been NGL, where it's treated as "oil", but here for plastics, EIA treat them
as "not oil").

No, NGL isn't the fraction of crude oil that's synthesised into motor fuels
such as gasoline, kersone (jet fuel), or diesel. But it _does_ come from
petroleum extraction, and if you're not extracting petroleum from the ground,
you're not getting NGL -- dry up one source, and you're drying up the other.

That leaves natural gas, and I'd have to do some conversion to sort out what
fraction of plastics production is represented by the billion cubic feet or so
of gas EIA mentions. And yes, other carbon feedstocks, including ag waste or
captured / segragated carbon could conceivably feed plastics.

------
harwoodleon
One of the stark realities of climate change is that as the effects get worse,
there will be increasing oil and fossil fuel divestment. Makes no sense at all
to me to be investing mid/long term in a source of energy that everyone
ultimately wants to see removed. Short term, until we create a credible
alternative, oil is still a good investment to work with.

------
ArkyBeagle
The present price regime isn't remotely sustainable. Pretty much full stop.
Never reason from a price change.

Once you dismantle industrial capacity on a large enough scale, it's never
coming back. See also the circumstances surrounding the last oil boom/bust in
the 1980s.

This headended in the SNL crisis.

------
diafygi
> _Mark Carney, Governor of the Bank of England, has warned that the stranded-
> asset problem could threaten global financial stability if the “carbon
> budgets” implied by global and regional climate deals render worthless
> fossil-fuel reserves that oil companies’ balance sheets currently value at
> trillions of dollars. This environmental pressure is now interacting with
> technological progress, reducing prices for solar energy to near-parity with
> fossil fuels._

I'm very interested to see some medium term outlooks (10-30 year) from the oil
industry recently. Anyone have any? The stranded assets problem is already
starting to wreak havoc on utilities[1]. If we can only burn about half or
less of what currently exist in reserves[2], why isn't there more chatter
about it on the medium or long term?

[1]: [http://www.thestreet.com/story/14661/1/electric-utilities-
st...](http://www.thestreet.com/story/14661/1/electric-utilities-stranded-
assets-in-a-competitive-world.html)

[2]:
[https://en.wikipedia.org/wiki/Carbon_bubble](https://en.wikipedia.org/wiki/Carbon_bubble)

------
jofer
Whoever wrote this seems to be predicting the present while having no
awareness of how the petroleum industry works. Yes, they've outlined what most
majors are doing to different degrees in different areas. However, you're
stupid not to keep your ability to operate when oil prices come back up.
(Caveat: I'm an exploration geologist at a "western major", so I do have a
somewhat slanted view.)

First off, let's get something out of the way. The current price environment
is every bit as artificially low as $120/bbl oil was artificially high. Saudi
Arabia is deliberately producing at very high rates to keep their market share
and drive companies that can't operate at $40/bbl out of business. They want
to be able to maintain their control over global oil markets in the future,
and they're in a geologically unique position of having huge reserves that can
be produced at high rates and are economic at very low oil prices. Therefore,
they've flexed their muscles with the knowledge that unconventionals can't
keep up.

Most majors are operating on the assumption that oil will be back in the
~$60/bbl range within two years.

This is reasonable for several reasons.

1) Unconventional oil production _will_ decrease significantly over the next
year. Unconventional wells have very rapid decline rates.

2) It's not clear that Iran's production coming onto the global markets can
offset the decline in unconventional production. Iran has huge reserves in
what should be a relatively cheap operating environment, they they also have
aging infrastructure.

3) Saudi Arabia is likely to drop production once US unconventional-focused
companies are no longer a threat.

Next, yes, they've outlined a strategy that all of the majors are following,
albeit to less of an extreme. To be precise:

> For Western oil companies, the rational strategy will be to stop oil
> exploration and seek profits by providing equipment, geological knowhow, and
> new technologies such as hydraulic fracturing (“fracking”) to oil-producing
> countries. But their ultimate goal should be to sell their existing oil
> reserves as quickly as possible and distribute the resulting tsunami of cash
> to their shareholders until all of their low-cost oilfields run dry.

The first half is exactly what every major, non-national upstream oil company
does. We provide the know-how to 1) find, 2) develop infrastructure to
produce, and 3) efficiently recover hydrocarbons to countries who don't have a
national oil company with the know-how or capital to do it on their own.

Next, most of the equipment and services portion of that isn't provided,
developed, or controlled by oil companies. It's done by service companies
(e.g. Halliburton, Schlumberger, etc). The in-house knowledge oil companies
have is mostly around geology and managing huge infrastructure projects. (I'm
biased towards exploration and I'm dramatically oversimplifying there.)

Finally, yes, most companies are selling a lot of assets right now. However,
you only sell what you don't think you can operate economically in the current
price environment. You're typically selling it to someone who can operate it
more efficiently or who has a different idea of the potential for enhancing
reserves. At any rate, finding a buyer for the stuff you'd want to sell most
is difficult, and a lot of the rest is currently profitable.

"Wasting money by seeking new reserves" is just a silly statement. If we don't
keep exploring, we'll wind up in the same boat we were back in the early 00's.
It takes decades to go from exploration to first production. You cut back on
major capital expenditures for exploration, but you don't stop entirely.

~~~
ksec
I think this is pretty much what he said in his previous article on pricing
going lower.

[https://www.project-syndicate.org/commentary/oil-prices-
ceil...](https://www.project-syndicate.org/commentary/oil-prices-ceiling-and-
floor-by-anatole-kaletsky-2015-01)

Basically saying future pricing will stable at ~$50, anything higher will
create opportunity for US Shale Oil companies, anything lower they will not be
able to sustain their own economies.

( I actually said something similar / if not the same and got downvoted >< )

Which got me to think, why aren't countries buying lots of cheap oil now and
store them somewhere if they know prices will bounce back to $50+ in two years
time? Or do setting up the infrastructure cost more then then $15 oil savings.

~~~
velik_m
Maybe because most countries are running deficits - they would have to take
out additional loans. I guess it's the same reason poor people buy crappy
shoes instead of investing into quality long-term footwear - too many current
problems to think of long-term solutions far in the future.

------
nextweek2
I'd be interested in seeing a breakdown of the lifespan of oil using
transport. A car might have a 15 year lifespan so we can't see a massive
change in petroleum use until that time.

However boats, trains and planes have at least double that lifespan.

Because of capital investments, surely an alternative to oil is still 20 years
away?

~~~
ams6110
Trains are feasible to run on electricity, since they run on fixed tracks and
you can have overhead cables or 3rd rail configurations. There is no realistic
chance that ships and planes will not use petroleum fuel for the foreseeable
future.

~~~
MichaelGG
That's pretty much political though. Nuclear powered cargo ships have already
worked, and Russia says they're putting theirs back into service in a bit.

Although if foreseeable future means obvious stuff, then yes, the huge number
of non-nuclear ships means it'll take a long time even if everyone liked the
idea tomorrow.

~~~
nradov
Nuclear powered civilian ships are not going to be generally viable in our
lifetimes due to real safety and security concerns that go beyond mere
politics. Operating a nuclear reactor requires more, and more highly trained,
crew members. Plus you need constant armed security on par with what land-
based nuclear power plants have. Those additional costs outweigh any possible
savings on fuel. Russia operates only a few of them on limited service in
areas where security isn't a major concern, and they don't really try to make
a profit.

The long-term future of merchant shipping will probably be larger, more
efficient ships running on liquid fuels (biofuels or direct chemical
synthesis), plus automated auxiliary sails.

------
maxharris
As a human being that needs inexpensive, reliable energy to live a good life,
I hope they don't do this!

------
RockyMcNuts
Up until the fracking boom, oil companies were adopting that strategy, they
weren't replacing reserves through exploration as fast as they were depleting
them, and they were using cash to buy back stock, and other companies that had
reserves that could be acquired cheaper than drilling for them.

[http://www.houstonchronicle.com/business/energy/article/Oil-...](http://www.houstonchronicle.com/business/energy/article/Oil-
companies-face-difficulties-replacing-reserves-6562231.php)

I think the big change in the market is fracking, some lifestyle change toward
less driving and energy intensity, not so much alternatives yet. But it could
happen.

------
nickff
This author seems to be confused as to the realities on the ground, and
engages in over-simplified analyses of the actions of various parties. If he
really believed what he was saying, he would be shorting oil stocks and
futures; but this piece really seems to be more like a Thomas Friedman
prognostication (, which is to say a simplistic faux-intellectual self-
indulgent scribbling).[1]

He seems to be reading what can only be described as 'the worst microeconomics
textbook known to man' if he believes the quote below. All economists I have
ever heard of believe that people (countries, and companies) should diversify
their portfolios and hedge against risks, and that even if that were not true,
politicians are largely mercantilists.[2]

> _" Of course, the real world is never as simple as an economics textbook.
> Geopolitical tensions, transport costs, and infrastructure bottlenecks mean
> that oil-consuming countries are willing to pay a premium for energy
> security, including the accumulation of strategic supplies on their own
> territory."_

Then he proceeds to read the minds of oil company executives, which is
interesting, because I'm betting they know a lot of things this author does
not, and they are no fools. In addition, an oil executive would have to be
deaf, dumb, blind, and ignorant to believe in constantly rising oil prices
after the last 10 years, and most of them seem quite intelligent and aware of
reality.

> _" That is precisely the strategy of self-liquidation that tobacco companies
> used, to the benefit of their shareholders. If oil managements refuse to put
> themselves out of business in the same way, activist shareholders or
> corporate raiders could do it for them. If a consortium of private-equity
> investors raised the $118 billion needed to buy BP at its current share
> price, it could immediately start to liquidate 10.5 billion barrels of
> proven reserves worth over $360 billion, even at today’s “depressed” price
> of $36 a barrel. There are two reasons why this has not happened – yet. Oil
> company managements still believe, with quasi-religious fervor, in
> perpetually rising demand and prices. So they prefer to waste money seeking
> new reserves instead of maximizing shareholders’ cash payouts. And they
> contemptuously dismiss the only other plausible strategy: an investment
> shift from oil exploration to new energy technologies that will eventually
> replace fossil fuels."_

TLDR; This article is just click-bait, and we should all disregard it. This
man is no Andy Grove.[3]

[1]
[https://en.wikipedia.org/wiki/Thomas_Friedman](https://en.wikipedia.org/wiki/Thomas_Friedman)

[2]
[https://en.wikipedia.org/wiki/Hedge_(finance)](https://en.wikipedia.org/wiki/Hedge_\(finance\))

[3] [http://watercoolernewsletter.com/the-revolving-door-test-
how...](http://watercoolernewsletter.com/the-revolving-door-test-how-intel-
overcame-fear-by-gaining-an-outsiders-perspective/)

------
oli5679
From a financial standpoint, this is poor advice. Reserves and equipment
represent real options, giving big-oil the right,but not the obligation, to
extract in the future. Even if these costs cannot be recouped at the current
market price, this has value because of oil's volatility (just like stock
options with exercise prices above current prices). The fall in oil price (and
expected future prices) reduces the quantity of profitable real options, but
plausibly not to zero.

------
oilthrowaway
Question for those who might know: Is analysis that the oil price depression
will result in a significant economic recession just FUD, or is it grounded in
truth?

~~~
bjterry
With proper monetary policy, there is no reason to expect it would cause a
recession in America. The reason people in the business press are concerned
about it is because deflation is associated with recessions. But usually
recessions are caused by demand-driven deflation (people demanding less goods,
which leads to the prices of goods decreasing), while this is a supply-side
deflation (suppliers providing more goods, which leads to prices decreasing).
As you can imagine, when people demand less, fewer goods are created, which is
a recession, but if people are given more for the same price, MORE goods are
created, which is not a recession.

Scenarios where a fall in the price of oil triggers a recession are possible.
For example, with bad monetary policy from the Fed you can always get a
recession if they do the wrong thing, and drastic changes in oil prices could
make that more likely by leading us into a more volatile environment, where
past trends could be broken. More likely is that it could lead to deflation in
the Eurozone, and since the European Central Bank isn't very good at monetary
policy, it could lead to a further Eurozone recession because of sticky wages.
If that recession were bad enough it could cause failure of the economies of
one or more European countries and trigger global recession.

It's also possible that one or more oil-exporting nations could default on
their sovereign debt (Russia, Venezuela), which could cause a panic-driven
global recession.

------
kriro
"""In a normal competitive market, prices will be set by the cost of producing
an extra barrel from the cheapest oilfields with spare capacity."""

This seems wrong as the marginal price is determined by the utility of an
extra barrel of oil for the consumer not by production cost. Sounds like a
fall back to the labor theory of value (aka classical economics and/or
Marxism) to me.

------
ftwynn
I find it very difficult to take a shareholder seriously when his advice is
for a company is to give up, sell all their assets, and give them to...
_ahem_... shareholders.

Sure, there are reasons to do so, but they better be unassailable... like
bootlegging equipment in 1933, or horse and buggies in 1908.

------
golergka
> strategy of self-liquidation that tobacco companies used

Does anyone have a source for that?

------
ape4
Doesn't seem so crazy. If your industry isn't viable any more: liquidate
rather than hang around. We all know what Alphabet (Google) would do if it
owned some company that was in decline.

~~~
rubyfan
That the business is in decline is the bone of contention here. The author
doesn't present evidence that the market for oil is in decline. He suggests as
much referring to projections of long term low oil prices but ignores
realities. Low prices can be fixed on the supply side as well as demand.

I don't believe there is compelling evidence to suggest clean energy is making
substantive inroads against oil. Short term analysis seems to suggest oil
consumption will increase[1]. Past actuals suggest renewable energy as a
percent of total energy had declined over the last 50 years[2].

At the moment OPEC are essentially overproducing and are telegraphing that
they will cut supply in the future[3] as they expect prices to rise. This is a
vote of confidence for higher prices and economic growth in the future which
is hardly a reason to start selling off reserves now.

[1]
[http://www.eia.gov/forecasts/steo/report/global_oil.cfm](http://www.eia.gov/forecasts/steo/report/global_oil.cfm)
[2]
[https://en.m.wikipedia.org/wiki/Renewable_energy_in_the_Unit...](https://en.m.wikipedia.org/wiki/Renewable_energy_in_the_United_States)
[3] [http://www.wsj.com/articles/opec-report-suggests-oil-
price-r...](http://www.wsj.com/articles/opec-report-suggests-oil-price-
rebound-supply-cut-1450864802)

