Publications: Notes at the Margin

Implications of Capital Starvation; Profiting Through Marketing (August 10, 2020)


BP's announcement that it would transform itself from an international oil company (IOC) to an "integrated energy company" ("IEC") probably marks a milestone in the oil industry's evolution. As part of its makeover, BP plans to expand its retail activities dramatically, especially in developing countries, while selling off swaths of the oil and gas reserves it believes will become stranded assets. The decisions suggest that future income will come not from producing or processing hydrocarbons but from providing mobility services to consumers.


BP's strategy reflects current market trends. Expectations regarding future oil prices are low. Refining margins are terrible and likely to remain depressed. Marketing margins, though, have held, in large part, because the industry at retail has become less competitive. The higher consumer prices will further limit the increase in use and accelerate the move off oil.


The shift in market power has long-term implications for crude prices. Cash-strapped refiners will offer less for crude, depressing the price of the raw material. Independent producers (frackers) will be forced to drill fewer wells for years, as the CEO of Pioneer Natural Resources admitted. The drilling and supply sector will shrivel from bankruptcies, shutdowns, and scrappage of rigs.


The foundation for another price spike is being laid.


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