Category Archives: Economics – Energy Prices

Oil and gas markets react to Rita

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rig offshore2.jpgWhoa, Nellie! Oil prices surged yesterday in anticipation of Hurricane Rita plowing through the Gulf of Mexico as OPEC ministers meeting in Vienna conceded they have no real means to cool red-hot petroleum markets that have become roiled by successive hurricanes in the extensive Gulf of Mexico production region.
The price of U.S. benchmark crude-oil futures for October delivery shot up $4.39 a barrel on the New York Mercantile Exchange and settled at $67.39. That was the highest one-day rise in nominal terms since Nymex began trading oil futures in 1983. Moreover, the storm’s approach is slowing down efforts to fix Gulf production infrastructure that was damaged by Hurricane Katrina. The U.S. Mineral Management Service reported yesterday that 44% of the daily output of oil and natural gas remained off-line from the earlier storm.
Folks, hang on to your hat because it’s going to be one wild ride this week in the oil and gas markets.

Markets at work

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gasoline pump.jpgA funny thing happened in response to the recent run-up in gasoline prices resulting from Hurricane Katrina — demand for gasoline dropped dramatically.
Clear Thinkers favorite James Hamilton puts it all into perspective.

Lee Raymond announces retirement as ExxonMobil CEO

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exxon.jpgExxon Mobil — the world’s largest company in terms of market capitalization — announced yesterday that chairman and CEO Lee R. Raymond, who is 66, would retire at the end of the year after 12 years on the job. As is typical of ExxonMobil’s conservative management style, the company also announced that Mr. Raymond will be repaced by native Texan, Rex W. Tillerson, who is 53 and, as ExxonMobil’s president, has been a longtime company insider being groomed to replace Mr. Raymond. Here is the company’s press release on the change, and here is an earlier post about an interesting interview with Mr. Raymond.
Mr. Tillerson — who is from Wichita Falls and is a University of Texas at Austin alum with a degree in civil engineering — has the quintessential tough act to follow. Mr. Raymond managed ExxonMobil into a more successful company in almost every respect, including the successful 1999 merger with rival Mobil Corp. Probably the biggest problem that Mr. Tillerson will face is the sheer size of the type of exploration projects in which ExxonMobil invests. Over the past decade or so, the cost of those projects — often hundreds of millions — has grown quickly as producers seek to tap formerly uneconomic reserves. As the increased price of oil justifies even larger investment, the price of those projects will likely grow into the several billions over the next decade. Laying off a large part of projects that size to hedge risk is no easy task.

A great dialogue on energy prices

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oil_well9.jpgClear Thinkers favorite James D. Hamilton and Robert K. Kaufmann, professor in the Center for Energy & Environmental Studies at Boston University, are the participants this week in the Wall Street Journal’s excellent Econoblog series (it’s free!). The topic is the notion of “peak oil” and exploring the economic ramifications of a drop in oil production, and the discussion between these two experts is insightful and informative.
By the way, both men share a disdain for the recently-passed Energy Bill, to which Mr. Kaufman comments:

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Daniel Yergin comments on energy prices

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oil_well7.jpgDaniel Yergin — energy economist and author of the 1992 Pulitzer Prize winner, The Prize: The Epic Quest for Oil, Money, and Power — writes this sensible Washington Post op-ed in which he reminds us that the current relatively high prices of energy do not mean that the end of the oil age is right around the corner:

Prices around $60 a barrel, driven by high demand growth, are fueling the fear of imminent shortage — that the world is going to begin running out of oil in five or 10 years. This shortage, it is argued, will be amplified by the substantial and growing demand from two giants: China and India.
Yet this fear is not borne out by the fundamentals of supply. Our new, field-by-field analysis of production capacity, . . . is quite at odds with the current view and leads to a strikingly different conclusion: There will be a large, unprecedented buildup of oil supply in the next few years. Between 2004 and 2010, capacity to produce oil (not actual production) could grow by 16 million barrels a day — from 85 million barrels per day to 101 million barrels a day — a 20 percent increase. Such growth over the next few years would relieve the current pressure on supply and demand.

Read the entire op-ed, and then recall Exxon/Mobil CEO Lee Raymond’s observation during a Wall Street Journal interview earlier this year regarding Chevron’s bet of continued high energy prices that underlies the high price it is paying for Unocal:

WSJ: What do you think of ChevronTexaco’s decision to acquire Unocal?
Mr. Raymond: I can never remember an industry consolidating at high prices. But I can remember an industry consolidating at low prices.
WSJ: Some people think prices will keep going up.
Mr. Raymond: Maybe. I’ll bet they’ll be lower at some point.

Chevron trumps CNOOC on Unocal bidding

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unocal8.gifChevron Corp. has increased its acquisition offer for Unocal to about $63 a share and Unocal’s board is supporting that offer over the competing bid of the China National Offshore Oil Corp. Here are the previous posts on the bidding for Unocal.
Inasmuch as Chevron’s initial offer was valued yesterday at about $60.51 a share, Chevron increased its offer before a Unocal board meeting yesterday by about $2.50 a share in cash, bringing its total offer for Unocal to about $17.5 billion. Chevron increased the cash portion of the bid to 40% from 25% and raised the per-share value of the cash to $69 from $65, besting Cnooc’s offer of $67 a share. The ratio of Chevron stock to Unocal stock in the bid has not changed. Chevron can afford to toss in the extra cash into the bid as it currently has about $11 billion in cash reserves and is adding to that amount by about $1 billion a quarter as a result of high energy prices.
Meanwhile, Cnooc’s board has already authorized an increased offer by as much as two dollars a share, but it remains unclear whether Cnooc will make that play. Given the Unocal board’s endorsement of the modified Chevron bid, and the political and regulatory obstacles confronting its bid, Cnooc may elect to fold at this point.
Interestingly, investors did not react all that well when Chevron announced that it had won the bidding for Unocal in April as the price of Chevron’s stock declined out of out of concern that Chevron was buying at a peak price was ignoring financial returns in favor of increasing oil and gas reserves. However, since that time, energy prices have continued to climb and there is now greater market consensus that such prices are likely to be sustained over the long term.

Professor Hamilton reviews the week in oil prices

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oil_well5.jpgEven before he started his smart blog recently, Professor James D. Hamilton of the University of California at San Diego was one of my favorite experts on the economics of energy prices (previous posts here).
In this post, Professor Hamilton reviews several interesting tidbits of information that affect oil prices, which declined 5% last week. Of particular note — the futures market currently allows for a purchase of oil for delivery in December, 2011 for under $55 a barrel.

The risk of rising U.S. debt

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foreign debt.gifAwhile back, this post made the point that, rather than focusing on CNOOC’s bid to overpay for a second tier U.S. oil & gas company such as Unocal, the real issue that needs to be addressed is that American society is currently impoverishing future generations of Americans by accumulating more debt.
Picking up on that issue, James D. Hamilton provides this insightful analysis that explains why the issue is not the amount of debt that foreigners hold, but the low U.S. saving rate. As noted earlier, the effect of Unocal’s bid on Chevron and Unocal is a much narrower issue.

The Robertsons of Houston

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crobertson.jpgThe late Corbin Robertson, Sr. was a bright business mind when he came to Texas as a young man from Minnesota in the 1940’s. After marrying Wilhelmina Cullen — the daughter of famous Houston wildcatter Hugh Roy Cullen — Mr. Robertson ultimately became the brains behind the investment of the Cullen Family oil and gas fortune, a role that Richard Rainwater successfully emulated decades later for Ft. Worth’s Bass Family. Houston benefitted greatly from Mr. Robertson’s business acumen as both the Cullen and Robertson families became among Houston’s greatest philanthropists, contributing huge amounts to institutions such as the University of Houston and the Texas Medical Center.

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Chevron’s pitch to Unocal shareholders

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chevron_logo.gifIn this WSJ ($) op-ed, Chevron Corporation CEO David O’Reilly makes the case to Unocal Corp. shareholders for choosing Chevron’s lower bid for the company over the China National Offshore Oil Corp.’s higher bid (here are the previous posts on the Chevron and CNOOC battle over Unocal).
Mr. O’Reilly does a reasonably good job in making his case. His main point is that Chevron’s bid is a sure thing that is much further along in the approval process than the CNOOC bid. In short, he advises Unocal shareholders to take the slightly smaller Chevron bird in the hand rather than the bigger CNOOC one in the bush.
But in making his case, Mr. O’Reilly veers off course with his second argument:

The second critical issue is in the arena of public policy. For the U.S. government, the proposal by Cnooc presents fundamental questions about fair trade that have profound implications for all U.S. businesses. Contrary to claims by Cnooc, the company’s offer is simply not a commercial transaction. The company is 70% owned by the Chinese government and is relying on large subsidies in the form of government loans at below-market rates to finance its $18.5 billion offer. A conservative analysis shows that the value of these subsidies is at least $2.6 billion or $10 per Unocal share. These terms are simply not available to commercial companies operating in the open market. If Cnooc were to finance its offer on truly commercial terms available to most non-government owned corporations, as Chevron is, it simply couldn’t make a competitive bid.

Stated another way, Mr. O’Reilly reasons that Unocal shareholders should reject the higher CNOOC bid because CNOOC’s bank (i.e., the Chinese government) is willing to loan the company too much money.
My sense is that this argument might work on U.S. Congressmen, many of whom tend to gravitate toward dubious mercantilist policies. However, arguing to Unocal shareholders that they should reject the CNOOC bid because CNOOC’s bank is willing to loan CNOOC so much money that the company can overpay the Unocal shareholders strikes me as a reason for Unocal shareholders to embrace the CNOOC bid, not reject it.