Gasoline Prices: To Trust or Not To Trust

One of the vexing parts of the runup in oil prices is Saudi Arabia. No, not that it has so much oil and the world is sending so much money over there to buy it. Instead, it's that almost the sum total of our knowledge that the Saudis can keep supplying the oil is that they say they can.

That's right -- the Saudis, unlike almost every other top-tier petro-state on the planet, won't let any outsider look over their detailed oilfield data. You can get the name of the field, and an estimate of reserves. But experts like to examine more arcane data on an oilfield to get a feel for how long a particular reservoir can keep flowing, and at what rate.

The oil markets like such transparency too. Then they know precisely how much oil to expect from where if there's a crisis, like an oilfield seized by Nigerian rebels, or the threat of war with Iran.

But with the Saudis -- the world's largest oil suppliers -- the world has little more than the Saudis' word for it. As Roger Diwan, a Saudi expert at PFC Energy in Washington told me, "We need to trust or not to trust. And nobody trusts."

Part of the outcome of this failure of trust is that oil prices have doubled over the last year. And you know what has happened as a result with gasoline prices.

I've got a story on this topic on the Business Week web site today. It turns out that some of the Saudi promises are doubtful.

As my colleague Stanley Reed wrote in Business Week recently, just two weeks ago King Abdullah gathered together the leaders of OPEC, the CEOs of Big Oil, and several world leaders in an effort to show that the kingdom would and continue to supply a safety margin of oil supply for years to come. Saudi officials said the kingdom would raise its current production of about 9.5 million barrels a day to 12.5 million barrels a day, and that, if need be, they could manage to increase to 15 million barrels a day.

But consider some field-by-field data for the Saudi fields that I was leaked yesterday. They cover the next five years -- through 2013. According to this data, the maximum production is somewhat less -- 12 million barrels a day. And that's the maximum.

It's equivalent to your car's maximum speed -- true, you can get it up to 120 miles per hour, but you can't keep driving that fast for a long time; setting aside the police, your car won't tolerate it. The sustainable speed, if you want to keep your car, is more like 70 or 80 miles an hour.

Well, in the Saudi fields, the sustainable level of production is going to be about 10.4 million barrels of oil a day, according to the person who leaked the data.

What does this mean? That the world needs to keep focusing elsewhere to reduce prices, mainly for the moment on lowering consumption.

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Rights: Creative Commons

The New World of Tumult

Here's the news today: Russian security officers have again raided BP's offices in Moscow. Nigeria has ordered Exxon and Shell to pay up $1.9 billion of their oil revenues. Exxon's Rex Tillerson is under mounting pressure to give up one of his titles, that of company chairman. And oil futures brushed up against $140 a barrel.

Welcome to the new world of energy tumult.

Taken separately, these events don't necessarily seem new -- the petro-powers have been flexing their muscles for some time; Exxon has put down previous attempts to appoint an independent chairman; and the surge in oil prices has seemed inexorable.

Yet the last two items merit attention.

The pressure on Exxon -- renown for going its own way regardless of attempts to influence it -- can no longer be put down to fringe dissidents. The more serious situation began with a push by the Rockefellers for an independent chairman and more attention to research on renewable fuels. And now, a growing number of investors are supporting the Rockefellers publicly ahead of next week's annual shareholder meeting in Dallas. Here is a piece about British investors posted by my colleagues at Business Week.

But today's $9.50 rise in oil futures, to $139.50 a barrel, resembles a panic. It looks like a tipping point in market sentiment about so-called peak oil -- traders seem convinced that indeed the tightness in world supply is a chronic problem, and not something to be overcome by added exploration and drilling.

Among the men of Big Oil, one of the most reasonable assessments is delivered by Christophe de Margerie, the chairman of France's Total. De Margerie says that the world has plenty of oil, but not the financial and technical means to deliver much more than it currently does to the market.

So the tightness in world supplies -- the fundamental reason behind this year's incredible runup in prices, and by extension the emboldened behavior of petro-powers like Russia and Nigeria -- is not going to lift any time soon, short of some economic debacle, or a dramatic public shift to the bicycle.

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Question: Who's As Seductive As Gazprom? Answer: Schlumberger

What is Big Oil’s default answer to periods of trouble? Merge. It happened during the $10-a-barrel oil phases of the 1980s, and again in the 1990s. That’s why we’ve got Exxon Mobil, Chevron Texaco, ConocoPhillips and BP-Amoco-Arco.

So why would it happen now, with oil around $100 a barrel? Because that price camouflages the industry’s deep, long-term crisis. Majority state-owned companies like Gazprom, Aramco and Venezuela's Pdvsa own between 80% and 90% of the world’s known energy reserves, and are quite content to develop them themselves. For the Big Oil companies, there's no visible, long-term growth under the current business model.

Think Detroit.

That leaves Big Oil the traditional option of merging itself into the future. Two of the likeliest courtship targets I see are Russia’s natural gas giant Gazprom; and Schlumberger, one of the only long-term growth bets in the oil industry. Business Week features a long, thought-provoking piece by Stanley Reed this week on Schlumberger.

The Big Oil companies are vastly enlarging their natural gas component. That’s where Exxon’s growth is, for example -- in the Qatari natural gas fields. So a merger with Gazprom would be a natural, providing any company instant access to the world’s largest gas reserves. For Gazprom, merger with a Big Oil giant would provide instant fulfillment of its ambitions to be accepted in the West, and to be both an oil and gas company.

Both Big Oil and Russia are notoriously egotistical. Could either get down to a serious discussion, or are we talking Ali and Frazier? One wonders. But the likeliest partnership would be between Gazprom and Italy’s Eni, which have a deep and close relationship in various strategic pipelines.

As for Schlumberger, here’s a company that’s profiting from Big Oil's decision in the 1980s and 1990s to slim down by jettisoning its talented geologists, its drilling operations, and much of its research function. Schlumberger took that trend the opposite direction by bulking up with these very same capabilities.

Now, with the national oil companies disinterested in partnering but only in using western oil giants' technology, it’s companies like Schlumberger that are welcome in all these countries. So if a Big Oil company actually owned Schlumberger, that would be a good foot in the door.

Who would merge with Schlumberger is anyone’s guess -- Shell, BP, Exxon, Total, Chevron?

And what about a merger of the giants themselves – Schlumberger and Gazprom? The Business Week story says that Schlumberger’s Russia business is growing gangbusters, and that it expects Russia to be as important to its bottom line as its biggest current venue of work, the U.S.

Let's watch.

Photo: Miguel Vieira
Rights: Creative Commons