Via
Patrick Appel, Howell Raines has a
piece about how only energy specialists should cover the oil company beat, because generalists ask the wrong questions. He amply supports his thesis with a non-specialist's profoundly shallow, misleading, and downright ignorant commentary. Here is some of Raines' brilliant dissection of oil company reportage:
Then there’s the problem of letting general-assignment reporters, rather than energy specialists, cover gasoline prices mainly as a story of consumer suffering. About 40 percent of U.S. oil is produced domestically, and Washington has declined to regulate auto fuel as an essential commodity. That’s where the vertical integration of a giant like Exxon Mobil creates market leverage. It owns oil fields, processing plants, and retail outlets, creating some monopoly-like advantages in controlling supply and fixing prices in the U.S. market.
No wonder this guy ran the
New York Times; his insight is incredible. The government should regulate auto fuel, as Richard Nixon did so successfully (alternatively, we could let price signals impact consumer behavior, as I've noted
here.) Exxon Mobil must fix gasoline prices because of its monopoly-like advantage in the petroleum value chain. After all, only 13 companies in the world produce more oil than Exxon Mobil, so it pretty much operates in an independent market vacuum. And since EM manufactures a commodity fuel with basically no other U.S. competitors except for Citgo, BP, Sunoco, Chevron, Koch, Motiva, Valero, ConocoPhillips, Total, Marathon, Tesoro, Shell, Western Refining, Murphy Oil, and several smaller refiners, it can clearly price gasoline at whatever level it chooses. The fact that EM only owns about 2000 of the 12,000 Exxon Mobil branded stations, and is
selling the ones it does own because margins in the business are terrible (as I've discussed
here), is not a point worth mentioning.
Alternatively, perhaps Raines doesn't know a crack spread (the price of a barrel of gasoline minus the price of a barrel of oil) from any other type of crack, so the idea that expensive oil is not necessarily good for refiners and retailers may not have occurred to him.
Raines also notes:
Oil-friendly members of Congress like to blame environmental regulation for the lack of refinery capacity. But the oil companies themselves choked supply by closing more than half of their 300 U.S. refineries in the past 25 years. (Business Journalism 201: You can reinvest in manufacturing capacity or ride the demand curve to higher profits.) Studies by Cambridge Energy Research Associates, a respected, oil-friendly consulting firm, indicate that even if all environmental regulations were removed from refinery construction, few would probably be built right away because of a 75 percent rise in construction costs since 2000, largely driven by the increased fuel cost of transporting building materials.
1. Not to burst Raines' bubble, but total U.S. refining capacity has
increased by about 4% since 1983. It's true the total number of refineries has
decreased from about 300 in 1982 to about 150 in 2008, but then, there were only about 160 operating in 1998 when gasoline was around $1 per gallon (I tanked up for $0.79 per gallon one memorable day in San Antonio). The vast majority of plants that closed were tiny independents who failed after Ronald Reagan revoked small refiner price subsidies, not corporate behemoths monopolistically restricting supply. These small plants were on the order of 2,000-15,000 barrel per day capacity, nothing like Exxon Mobil's massive 562,500 barrel per day Baytown, TX refinery. In fact, the major refiners have invested in increasing capacity in two ways: first by debottlenecking and brownfield expansion of existing plants, and second by investing in extremely expensive capital equipment to make gasoline out of the heavier, more sulfurous crude oil that is available today (instead of the light, sweet crude of earlier years). Even if all of the smaller plants were still operating today, there simply wouldn't be enough light, sweet crude for them to economically make gasoline (light, sweet crude is much more expensive than the benchmark West Texas Intermediate or the heavy Mexican or Venezuelan crudes most of the large Gulf Coast refineries typically process).
2. A company called Arizona Clean Fuels has been
trying to build a greenfield refinery in Yuma since the late '90s, only to be stymied by NIMBYism, lawsuits, and permitting issues. Of course, costs have increased dramatically in that time (the latest estimate is $3.7 billion to build a 150,000 bpd refinery; initially costs were around $2 billion), as they have for every major construction project as the price of building materials has spiked along with every other commodity (probably due to Exxon Mobil's monopolistic scheming). But ACF's experience is not exactly encouraging for other investors seeking to build new refineries.
3. Implicit in all of this is that the oil majors schemed to reduce supply in order to raise prices. Even setting aside everything I've stated to the contrary, there's still the fact that $4 gasoline doesn't mean refiners actually make money, as I indicated above. The gasoline crack spread has been extremely thin as oil prices have spiked. Retailers everywhere are bemoaning the worst market environment in decades, as I've noted
before. Pity the poor independent gas station owner-- he's probably hurting worse than you, and has to deal with your misplaced anger, to boot.
Raines started his piece by approvingly discussing Dan Bartlett and Jared Steele of TIME, two of the "specialists" Raines seems to like:
[Bartlett noted:] “The most chilling statistic is Exxon Mobil’s. It spent twice as much last year to buy back stock as it did on exploration.”
As for shallow journalism that helps Big Oil, Steele makes the point that the newsrooms that were once staffed by the redistributionist children of the New Deal and the A.F.L.-C.I.O. are now populated with the children of Reaganomics: “Younger reporters come out of a mind-set that the market rules, taxes are evil, and government ought to let these people in the oil industry go about their business.”
It's a common habit of business journalists to tell companies what they should do with their shareholders' money. Of course, Bartlett probably did an exhaustive analysis of Exxon Mobil's current investment options-- all the areas with proven or probable oil reserves, with lifting costs sufficiently below the long-term oil price to cover the company's cost of capital, and that are not controlled by national oil companies or other competitors. He undoubtedly has a clear understanding of how EM will maximize shareholder dollars by investing in these properties rather than retiring outstanding stock (thereby increasing the value of shareholders' equity). However, EM's consolidated capital expenditure has declined from $3.43 per share ($8.4 billion) in 1998 to $2.76 per share ($15.4 billion, with more than double the shares outstanding) last year. During this time the price of oil has spiked ten-fold, from a 1998 low of around $10 per barrel. So shouldn't we criticize them for profligate over-investing in the risky late '90s, when oil was cheap and abundant? What does Bartlett believe is the appropriate level of investment, and how does he decide it? Or possibly, just possibly, EM has a sensible risk assessment program, and when they it doesn't see good uses of company money-- e.g., because the available opportunities with low lifting costs are not plentiful-- it returns money to the shareholders. (Also, just maybe, when a company makes long-term investments with an expectation of sub-$20 oil, it shouldn't surprise anyone that said company makes ridiculous amounts of money when oil spikes to historic highs. I'm not a business journalist or anything, but I'm just saying.)
As for the latter quote: is Steele seriously complaining that a government intervention bias has been replaced by a free market bias in newsrooms, and this is a bad thing? What kind of statement is that? I thought the point was to be even-handed arbiters of truth... but then, I'm not a business journalist.
And just in case it seems that I mindlessly defend oil companies, let me add that they shouldn't be subsidized either; they operate in a ruthless commodity market and should be allowed to succeed or fail within the limits of the law and (especially) environmental regulations. But EM should only work to maximize profits for its shareholders (legally!), and it's been one of the most successful at doing so for over a century. Raines believes oil companies should be investing in alternative energy; if shareholders want to make such investments, let them do so. (I'll wager that the overwhelming majority of institutional investors in every single cleantech and alternative energy investment fund in Silicon Valley also owns stock in one or more major oil companies.) The government should not get a vote, and neither should business journalists.