A clash of titans coming to markets

The world crude market that cracked open so many national oil companies (NOC) continues to drive out expensive bureaucracies and force public companies to consolidate. A major contest of oil titans is developing. On one side are the NOCs that control reserves in the Middle East. On the other side are the super-major public companies that compete with NOCs for capital and market control.

Middle East oil producers have the advantage of in-place reserves and global crude shipments to established markets. The super-majors have the advantage of global spread, efficient operations, flexible personnel policies, and high-technology solutions at all levels.

Market control is the key. OPEC controls production (and thereby prices). Their weakness, on the part of some members, is the willingness to chase marginal profit over the price cliff and limited cost control of expensive social services.

Super-majors control refining, distribution, and secondary linkages to chemicals and related businesses. Their weakness is a long value chain with significant delays and frictions between the different segments.

Overall the super-majors have more flexibility and incentive to attack market opportunities wherever they occur. They are closer to the consumer and have a better track record of service to the ultimate user.

New oil "tribes" rising with communications

New technologies are facilitating a change from local people-discrete nations to global people-diverse "tribes." The term "tribes" is, in the largest interpretation, a group of people with a common linkage. Most tribes are linked by heredity or country, however, new global tribes are developing around different links.

Tribes exist in three major forms: local, causal, and commercial. Their purposes are different, but their structures are similar, and their ability to rally people and resources rely on instant communication.

• "Local tribes" are people linked in traditional nation-states. Their governmental entities are parasitic by nature. They extract resources by force, threat of force, or force of law. At best, the governments are symbiotic, returning value through services that meet their people's societal needs. Their constituencies are geographically limited, although most extend influence and garner support through treaties and other ties with other local tribes.
  These governments deal in lethal force, at best for the protection of the local tribe, at worst, for the protection of a local elite. Only the indigenous people or outside nations serve as a check on the local tribe's government.
• "Causal tribes" are people linked by political issues, seen most strongly with environmental issues. Causal tribes have passion and lobbying at their core, which is directed at local tribes and commercial tribes. As such, they have a limited, but vocal, constituency. Most have a limited life and generally dissipate as the linking issue is addressed. They then move into a watchdog role or become absorbed by the local tribe's government.
• "Commercial tribes" are people linked by business activity. These tribes have a long life and survive because they fulfill society's need for connecting consumers with natural resources. Commercial entities operate by contractual exchanges with generally clear relationships between the provider and customer.

The most recent compression in the global oil industry gave rise to very large super-major oil companies - much larger commercial tribes. Compression in many commodity businesses is creating global commercial tribes in communications, mining, and pharmaceuticals among others. These commercial tribes will vie against local tribes for control of resources.

All tribes require natural resources to exist. All serve constituencies either geographically limited or geographically dispersed. The constituencies of commercial tribes are very broad and include raw material suppliers, in-house employees, owners and shareholders, secondary resource and service providers (that help the business operate), and customers.

As the commercial tribes expand, they begin to need and assume some of the patterns and tactics of local tribes. Commercial tribes are restrained by global markets. If they do a good job, they continue to operate. If they do a poor job (charge excessive prices or deliver inferior products), they will be replaced by a more efficient entity.

On the issue of tribes, recent newspaper reports attribute Saudi Arabian Crown Prince Abdullah bin Abdulaziz al-Saud as saying that their state needs foreign investment. The sale of state-owned assets is an option. Thus, an exchange may soon be worked out that accommodates the needs of the local tribe with those of global commercial tribes.

Many governments have sold state enterprises with great success over the past few years. It has taken many years for the national governments to realize that they cannot be both effective governments and efficient commercial providers. The global marketplace will no longer tolerate government sinecures (posing as commercial entities) or inefficient commercial processors.

If a local tribe wishes to maintain political sinecures for security purposes, its' people will have to pay for it. The global marketplace will not support the higher product price such practices generate. Such commercial pressure forces governments into a proper symbiotic role and limits their natural parasitic character.

OPEC member morale critical for Y2K storm

The winds of cash flow are filling the corporate sails. It is even better when those winds remain firm and steady for a good long time. Dropping cash flow and luffing sails delay the progress of all corporate vessels and set the crews at each other's throats as they fight for dwindling stores. The cannibalization of companies has been fierce in 1999, and will continue into 2000 even if prices remain stable.

OPEC has done a yeoman's job of production restraint this year and is moving to fully balance supply with demand by early next year. Their big ship still has a feuding crew, but at least the crew sees the benefit of staying together through the Y2K storm as the year draws to a close.

One member, Iraq, recently received a $3 billion increase in its UN imposed quota. This extra supply expectation immediately dropped the market by $0.78 to $23.76/bbl. Prices softened but are recovering at the time of this writing.

"Steady as she goes," says OPEC's captain, as the storm passes.