International oil companies - US companies in particular - are an important indicator of the future of the petroleum industry. Last week, despite the losses of ExxonMobil (XOM), the company announced that it is optimistic about the future, predicting a surge in profits surpassing that of OPEC.
ExxonMobil expects global demand to reach 111 million barrels in 2040, which will raise its production of fossil fuels by more than 30 percent over the next four years, despite the global shift towards other energy sources, and despite the company's poor financial status.
The strategic significance of these companies can be attributed to several factors. Firstly, they are long-established companies that have been operating for over a century, and have gone through various booms and crises, since the energy sector was the largest in its market value and until the seventies. This long experience in the field enabled them to develop accurate methods for studying the market and predicting its future. Secondly, these companies have dabbled in diverse fields around the world, which has given them unmatched technical and research capabilities that allows them to know the limits of technology and production capabilities.
Thirdly, and most importantly, the diverse nature of these companies especially among developing countries such as Iraq, Russia, and Nigeria, has enabled them to gain a solid understanding of geopolitical risks and how to deal with them. This explains why the income of the CEOs of companies like ExxonMobil or Chevron are three times the income of the CEO of Aramco (according to a study by Bloomberg in 2016), despite the fact that Aramco’s oil production is double these companies combined. The reason behind this difference can be attributed to the diplomatic and political efforts these CEOs undertake.
For instance, how did former Exxonmobil CEO Rex Tillerson manage to keep ties with Russia strong to the extent that the company continued to operate even after violating US sanctions in 2014 on the pretext of technical reasons? Doubts arose regarding this issue, which led to the company receiving an inconsequential fine which the company responded to with a counter-suit.
If Biden wins, he promises to stop fracking on federal lands, and this will be reflected in a three percent annual decline in production. What is even worse would be taking a decision to rejoin the Iran deal, which will result in a drop equal to 1-1.2 million Iranian barrels in 2021 according to estimates by JP Morgan-GS. This will certainly increase and complicate short-term challenges, and in the long run, this will have various unprecedented implications.
Meanwhile, BP, the British multinational oil and gas company announced plans to exit the petroleum industry in order to become a renewable energy powerhouse.
BP is similar in size, age and number of reserves to ExxonMobil and Chevron, which drives us to ask, what is the reason behind this strategic difference?
First of all, we all know that American oil companies have a much greater presence and influence in developing countries, especially if there are any disputes with the US government. For example, unlike ExxonMobil, Shell was forced to sell its assets in the Russian ‘Sakhalin’ fields. Second of all, in the United States businessmen are much more involved in politics.
Finally, and most importantly, for the United States, the main driving force is the trade volume of commodities, including oil, which gives the US dollar more weight in global trade, since it accounts for 45 percent of the world trade. This is what strengthens the dollar’s global presence. I recall one of the critics of environmental policies in a developing country saying, ‘it is not oil that we hate, but rather the US dollar.’ The currency that nourishes the US economy.
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