Publications: Notes at the Margin

Raising Rivals' Costs - The Unfortunate Consequences for Investor-Owned Companies (October 7, 2019)


Economic analysis in oil and gas markets is relatively simple. Most analysts and those calling themselves economists simply try to draw out forecasts of supply-and-demand balances from which they derive price forecasts.


There is another area of economics, though: industrial organization. The best practitioners earn large fees testifying on issues such as mergers.


One particular practice called "raising rivals costs" is about to become significant for investor-owned oil companies. Briefly, the recent announcements by Saudi Aramco will force these companies to divert significant cash from drilling to share repurchases and to strengthening dividends. This effect will further pressure the non-OPEC supply. At the same time, Saudi Arabia is carefully keeping prices from rising, adding to the pressure.


All of this fits under the rubric of raising rivals' costs. Over time, the private-sector oil industry could be forced to shrink substantially.


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