Jock
McCardell:
"If this merger is based (as claimed by
the respective CEOs) on
rationalisation of producers because of declining consumption of oil how
does this affect the timeline on the 'tank is empty' equation?"
rationalisation of producers because of declining consumption of oil how
does this affect the timeline on the 'tank is empty' equation?"
I believe that its a decline in the
price of oil that's at issue, not a decline in consumption. To the best of
my knowledge, consumption continues on its upward trend.
As far as price is concerned, this
morning's Globe and Mail says "The January contract for the benchmark West
Texas intermediate oil fell 9 cents to $11.13 a barrel on the New York
Mercantile Exchange -- its lowest close on the futures market since mid-1986 and
down 50 percent in the past 14 months." In the US, the price of
gasoline is said to have fallen to about 97 cents a gallon from $1.15 a year
ago. The price of aviation fuel is also down.
So why is this happening? I can
think of two reasons. One is that OPEC is no longer in a position to
exercise control over price and output. The other is that governments have
become very dependent on royalties generated by oil -- the more that countries
pump, the more revenues their governments get. (These reasons may actually
be one and the same: governments don't want to cooperate because of the revenues
they get.) Given this, the creation of large near monopolies, like
Exxon/Mobil, might be beneficial. In economics 101, monopolies are
supposed to raise profits by raising product price and restricting output.
If the central issue is conservation of the resource, this might not be a bad
thing. However, the merged Exxon/Mobil will still only be one of several
big players, none of which can dominate to the point of determining industry
output.
What may be driving the merger, then,
is prospective efficiency. If price and output cannot be controlled, costs
can. Cutting duplicate staff and rationalizing production will lead to a leaner
single company, a company better able to compete and remain profitable, given
the continuation of low energy prices. It would therefore seem that the
merger is based on the expectation of continued low prices (but also greatly
increased profitability if prices were to rise).
Expect more mergers. There
already are some others underway (e.g. BP/Amoco).
Ed Weick
