OPEC's necessary pain

Finally, the economic pain threshold was crossed in March and individual OPEC countries relented on their production levels. The sad part is that their economic pain must increase for a time (through lower output and cash flow) before the supply/demand balance is reestablished. The OPEC agreement to pull an additional 2.1 million b/d off the market, appears to be effective. Early reports show that true reductions are occurring, but over 300 million bbl remain in storage. The true solidity of the

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Finally, the economic pain threshold was crossed in March and individual OPEC countries relented on their production levels. The sad part is that their economic pain must increase for a time (through lower output and cash flow) before the supply/demand balance is reestablished. The OPEC agreement to pull an additional 2.1 million b/d off the market, appears to be effective. Early reports show that true reductions are occurring, but over 300 million bbl remain in storage. The true solidity of the effort will not be seen until July or August.

War premium price
The Balkan war is turning oil traders' heads toward higher prices even though the fuel volumes used are not that high. It is the uncertainty of the conflict's duration and its possible expansion that pushed the price above $16.00 per barrel. Recent reports indicate that there is as much as a $2.00/bbl premium being paid because of this uncertainty factor. Death and destruction are not the preferred tools for balancing the oil markets. Renewed economic activity is the best medicine. One side benefit of the price rise is that OPEC's economic pain is eased slightly.

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Crude oil futures jumped to over $18/bbl based on the OPEC's production restraint and on the uncertainty generated by the Balkan war.
Click here to enlarge image

Economic renewal
Southeast Asia is up on one knee after the collapse of financial markets there in the 1997-1998 period. South Korea and Thailand continue to recover and are gaining strength. Malaysia is improving, and investment is just beginning to flow back into Indonesia. Indonesia must still make significant changes in its business practices, and social unrest is still a concern.

The major financial player in the region, Japan, is achieving modest gains in overcoming its own problems, and beginning to help with the recovery. Though its banks are restructuring, projections are for meager growth this year. China's gross national product has slowed from last year's pace, but it continues to grow.

Business privacy with modern conveniences
Modern conveniences - email, cellular phones, and public transport - make life and business very convenient. However, they come with a price - privacy. Business security requires that care is taken on how these tools are used.

  • E-mail: The recent and ongoing Microsoft legal dilemma demonstrates the mixed blessings of e-mail. Most companies with e-mail systems record and retain the messages for future reference. Treat each message as if it were going directly to your competition. Important or sensitive messages should never go through e-mail. Computer-generated messages are copied from server to server and are subject to interception at any point.
  • Cell phones: Mobile telephones are everywhere in the developed world and are the preferred form of telephony in the developing world due to the lower cost of installation. However, mobile telephones use public airways and are a form of radio. The signals can literally bounce around the world. Users must assume that someone is capturing and recording transmissions, even if such recording is illegal. Industrial espionage is a constant and major concern.
  • Public transport: For professionals traveling and working in the US, the Supreme Court has recently removed Fourth Amendment personal privacy protection for passengers. Police are free to search everything in a vehicle, given probable cause. This means if you are traveling in a bus, cab, or private car driven by someone else and are stopped by the police, your briefcase, sample cases, and luggage are subject to search and possible seizure.

For secure business operations, sensitive negotiations should be done in face-to-face meetings or over a hard-line telephone. Legal working documents should be sent by hard-line fax or on paper by courier, never by e-mail. Sensitive or potentially dangerous materials should be sent by bonded transport. These slower, reliable working processes are still privacy-protected. The world can be a risky place to conduct business if security precautions are ignored.

Conservation's fruit
The oil shocks of the 1970's created a new conservation ethos in US business which continues to affect the oil and gas industry. For the US economy, oil is less important because efficient processes have allowed businesses to produce more using the same or less energy. According to The Wall Street Journal, natural gas has made significant inroads into electrical utilities, displacing both coal and oil as the fuel of choice for new facilities.

The US economy's move into service-oriented work is increasing the use of computers and telecommunications, which run on electricity. Transportation is still the primary use for petroleum. This use continues to be implemented with increasing efficiency, leaving oil sector growth dependent on general economic growth, especially in the developing world.

Oil is like dirt, is like glass
The oil industry needs to take a close look at its primary product - crude oil. It is abundant, available worldwide, and produced on every continent. It is common - common as dirt. Dirt is of some value in its raw state, but it becomes valuable when it is separated into its parts: sand, clay and organics. Let us examine a simple comparison and a corporate example.

One component of dirt is sand. Sand grains are made of many different minerals: quartz (most common), feldspar, hornblende, etc. Separating the sand into its component parts adds value because of the different properties of the minerals.

The ceramics and glass industries use quartz sand. Corning has made a business of making glass into useful products. Glass, like dirt, is common in the public's perception. Corning's products become commodities and this challenged them (our present problem).

Corning fought this aspect by adding value to glass: color, style, and especially new properties. One product, Corningware™, entered the market as specialty dinnerware and cookware. It went from the refrigerator to the stove without cracking. It was tough and did not break during normal use. It would bounce, if dropped instead of breaking. It added safety value to the family kitchen.

When Corningware became a commodity, Corning found new properties and uses for its basic input - sand. One new use is fiber optic cable, where higher bandwidth, lighter weight, and flexibility are helping it replace copper in many communication systems.

Oil contains molecules of many sizes, shapes, properties, and carries valuable minerals. The industry already separates crude oil into motor fuels, lubricants, and road materials, and produces specialty chemicals as basic inputs to other industries.

While the oil business is providing a necessary commodity, it needs to take a fresh look at the properties of oil and find new uses for this rich brew of molecules. The industry needs to create new high-value products based on oil's components to grow new businesses and increase profits.

Correction:
The graph in the May 1999 M&E column had two incorrect dates. The 10/21/98 line (blue) should read 3/5/99 while the 3/5/98 line (green) should be labeled 10/21/98.

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