A Digression on the Structure of the World Oil Market.

        BELIEVE it or not.the following was requested.

Digression on the Structure of the Market  

                                                              

The oil price is not set in an atomistic competitive market but in a highly political Oligopolistic World. The market structure in early 20th century US,before JD Rockefeller burnt, bullied and murdered his way to controlling the entire US industry ,could be described as competitive. There were many producers and low barriers to entry.That pre Rockefeller consolidation era had great volatility at mostly low prices--driven down to the marginal cost of the last barrel produced.

This is very different from the current oligopolistic structure of the world crude oil market; heavily influenced by a single dominant state with objectives well beyond profit maximisation and concerned with sovereign survival.Rockefeller used price and customer discrimination not just to maximize profits but also to ruin competitors so as to maintain long term control .Saudi dominated OPEC tries to behave much as the industry behaved under Rockefeller’s control before Standard Oil was broken up by Teddy Roosevelt’s Trust Busters.

In 2014 & 2015 Total World Production was a little under 78 million bbl/day. Crude exports were about 42 million/bbl per day. OPEC exports were 60% of that,25 million bbl and Russian exports a little under 5 million or 12%.Within OPEC Saudi, UAE & Kuwait acting in concert accounted for almost 13 million bbl/day of the world crude oil trade-30%.

                                                               

If one could Imagine Saudi Arabia, UAE, Kuwait et al with a similar resource ownership structure as currently exists in the US natural gas and fracking industry we might envisage an oil price at under $40 indefinitely.Middle East oil reserves and production would be a multiple of today and tar sand, deep water, Arctic, Siberian and distance landlocked reserves would stay in the ground for a long time to come.

    

    

  Even today the natural gas market in the US is characterized by multiple large, medium and small drillers leasing the right to drill from both private and public mineral owners and operating under rules of a competitive regime [however dysfunctional].Some 40 different companies produce about 97% of US daily production with the largest producer, Exxon, less than 10% of the total.       http://www.ngsa.org/download/analysis_studies/Top-40-2015-4th-quarter.pdf

Each producer sells into a competitive market; the resulting low price is evident --at a calorie equivalent sometimes as low as 20% of the price indicated by the Oil Market. At $50/bbl the energy equivalent of 1000 cu. ft. of gas would be $8/1000 cu. ft.[just divide the barrel price by 6]The current US spot gas price is $2.So many producers and the allied  fracking revolution having a dramatic impact on reserves,there has been significant price volatility in the last five years –but with a significant downward trend.

In Europe the contract prices for Russian gas is much closer to the energy equivalent oil price -a monopsonist seller.In January this year when  spot prices for crude oil was $30/36 bbl the energy equivalent gas price would be $5-6/k cu.ft.  and Russian natural gas was just over $5/ k cu.ft.Giving those segments of US industry that are energy intensive or using natural gas as a feed stock a huge competitive advantage.