The business of oil is a game of the giants that cuts across big words like geopolitics and climate change with, often, you at the receiving end.
Ever
wonder where the gasoline that you pump into your car comes from? Why
fuel prices go up? When they do, spare your neighborhood gas station the
glaring eye. If paying for gasoline is hard,
selling it to you is even
harder, according to a Forbes report. The retail margin is thin, if not
in the red, and most gas stations are just community businesses under
license to sell petroleum products. If someone is earning big time it is
Big Oil, the ruling government of oil-producing countries in cahoots
with the world’s few billion-dollar multinational companies that drill
crude oil from the ground and process them into petroleum products
including gasoline. It pays to understand the business of oil, so next
time you feel blurting out an F-word upon hearing a fuel hike, it is
aimed at the right party.What drives you
Crude
oil is so important, it is hard to think which part of your life is
free from it. It doesn’t only make your car run, it runs your life.
Medicines, plastics, clothing, furniture and energy to run industries
including the Internet so you can read this piece are all dependent on
petroleum, which is the overall term for crude oil and its byproducts.
The bad news is the United States buys 45% of its oil from other
countries, which means we are vulnerable to outside events. The good
news is, surprisingly, we get the imports mostly from our friendly
northern neighbor, Canada.
But
we still buy 160 million barrels every year from Saudi Arabia, and some
more from Mexico, Venezuela and Nigeria, countries we are not exactly
on first-name basis. And even if we cut our imports by 10%—it is at
45%—the US will still be affected by a supply cutback, said Mark Zupan,
Dean of the William E. Simon Graduate School of Business Administration
at the University of Rochester, New York.
In
short, our government may still need to kowtow with the oil sheikhs so
you can turn up the heat or air-conditioning at home. Yes, a sheikh who
spends ₤20,000 just to send his Lamborghini from Qatar to Heathrow for
an oil check or carve his name in the sand for a fortune—it’s so huge
that you can read it in space—still needs your tax money. These
billion-dollar Arabs own the world’s biggest petroleum reserves that run
global industries. Heck, they own the world maybe.
Oil countries
Oil
is a limited resource even if the planet has hundreds of billions of
barrels of it in reserves. That’s a lot of dead dinosaurs that will soon
run out. Actually, oil is made mainly from microscopic plants and
animals that died in the ocean millions of years ago before the
dinosaurs and subjected to earth’s extreme heat and pressure. Saudi
Arabia just happened to be sitting on the right spot. It has around 260
billion of barrels in oil reserves, the world’s biggest, while the US
has about 20 billion, which is peanuts when you consider our energy
consumption, the world’s highest.
Oil-exporting
countries, mainly the Organization of Petroleum Exporting Countries or
OPEC, own the reserves. Although Arab countries dominate the top eight
biggest oil reserves, Venezuela and Canada come at second and third,
respectively. The United States? A little far behind at thirteenth spot.
Read more: 10 Most Expensive Sunglasses In The World: Cartier, Dolce & Gabana And Other Fancy Brands
Expectedly,
these countries have the biggest voice in the supply chain and the
biggest factor for your diminishing wallet power. According to the US
Department of Energy, 65% of the price you pay to fuel the car goes to
the crude oil supplier, namely, the oil-exporting countries.
It’s
tricky how these countries, mainly OPEC, can manipulate prices. In
general, they can dictate how much barrels of oil to produce in a day.
They can create an artificial low to drive up prices, or flood the
market with oil to pull down the rates. But it’s not as simple as
cutting on supply to increase demand to make more money.
Cutting
down oil supply is risky even for OPEC. Cutbacks drive prices up in the
short term, but it also attracts more investors—more money to be made
with high prices—resulting in more drilling in non-OPEC countries. In
the long run, oil prices may actually go down with too many barrels
being churned out elsewhere.
But
the reverse can happen, too, in favor of OPEC. Between 1985 and 1986,
Saudi Arabia increased its production, driving prices to $10 per barrel.
It was way below the $15-per-barrel cost to extract oil from the North
Sea. As a result, many investors withdrew from the North Sea, leaving
OPEC with a bigger market but smaller margin. The business of oil is
also governed by geopolitics especially in the Middle East, that hotbed
of political and military strife. But it’s another matter best explained
on another day.
Oil refineries
Petroleum
is extracted from the ground by big companies that own the refineries,
derisively called Big Oil because of their cartel tendencies. Oil
refineries can be state-owned or publicly traded corporations, such as
Exxon Mobil and Royal Dutch Shell. In the Middle East, most refineries
have been nationalized because of geopolitics and they are run by oil
sheikhs, the stereotype of an ultra-luxury life.
Saudi
Aramco, the biggest in the world, can extract 12.5 million barrels per
day. It is so big that it has its own fleet of oil tankers. Wholly owned
by the Saudi government, interestingly, the company can trace its
American roots when the Saudi royals, still emerging from their nomadic
tents, granted Standard Oil of California a concession to explore the
oil reserves in the 1930s. In fact, the “am” in Aramco is supposedly a
contraction of American, while the “Ar” is Arabia.
Gasoline and more
Did
you know that for every barrel of crude oil pumped from the ground,
only half turns out as gasoline? The rest are processed into various
petroleum byproducts, the “oil” that you see in grocery shelves or gas
stations. The refineries can create these products at different levels
of tinkering with crude oil.
First,
crude oil is heated to emit different chemical chain vapors. Like a
barista mixing different coffee blends, a refinery can mix and match the
vapors to produce different results. Depending on the blend, refineries
can come up with gasoline, kerosene, diesel and other fuel oils.
Second,
the remaining oil that doesn’t vaporize is processed into lubricants.
This can be engine oils that exhibit degrees of volume from light to
very thick. Petroleum jelly is extracted at this stage.
Lastly,
the solid residue is turned into paraffin wax, tar or asphalt, which
you probably have seen in road pavements. Paraffin wax has numerous
uses: from candle-making to sealants and rocket propellants. Tar, on the
other hand, is used to seal roofs, ship hulls and as a binder for
asphalt.
Shipping
Oil
is the most important traded commodity and it reaches the world’s four
corners via the ocean tankers, gigantic merchant ships registered and
regulated by a largely different set of countries called flag states. To
scale business, these tankers are often run, not by the oil company,
but shipping magnates with easy access to major ports where the ships
can be maintained more easily. Panama has the largest fleet with 528
tankers, with Liberia (464), Singapore (355) and China (252) not far
behind. In comparison, the US has 59 registered oil tankers. An
exception is Saudi Aramco, which operates 25 oil tankers for the sheer
volume its country produces daily.
An
oil tanker called a VLCC or Very Large Crude Carrier costs around $100
million and can be run by just twenty-five people using state-of-the-art
equipment. VLCC-class ship owners can make around $60,000 net profit a
day depending on the daily oil supply and demand. But shipping oil is
riskier than refining it. Many of the infamous oil-related environmental
disasters were caused by a tanker spilling oil to the sea. This puts
them in media spotlight more often than any other players in the supply
chain. They are, rightly or wrongly, the “enemy giant” perceived by the
public when oil and environment are in the same sentence.
Oil depots, gas stations
Refined
petroleum is shipped to regional oil depots owned by the Big Oil
companies, where they are distributed by fuel trucks to your
neighborhood gas station. Despite the “Shell” or “Chevron” or “Mobil”
signs in these stations, only 2% are owned by the Big Oil companies.
Most gas stations are just licensed to use the brands to sell their
products. And most of these stations are community businesses that rely
on the neighborhood to generate income. In fact, an NBC article reports
that the margin is razor thin, by a few cents at most.
It’s
no secret that the real business in gas stations is not the fuel you
load into your car, but the food or coffee you load into yourself.
Gasoline is a “loss leader,” a non-earning commodity that can pull in
customers for, say, the station’s convenience store or the coffee house.
It’s safe to say that gas station owners are not out to rip you off
with fuel hikes. As for that 3-dollar cup of coffee, well, that’s
another story.
CONCLUSION
Gasoline
is passed down from the hands of oil sheikhs to Big Oil executives to
the shipping magnate and to the neighborhood gas station owner and,
lastly, into your car. It’s the world’s most important commodity, the
big business that runs big businesses, the singular factor that
increases almost everything that you pay for, and it’s fast running out.
It’s easy to blame one sector for this greasy mud that we’re stuck in,
but talk about shooting oneself in the foot, isn’t that your car at the
tail-end of the supply chain?
It is
believed that the world has reached peak oil, the apex from where our
oil reserves drastically slide down to the last drop. It begs the
question:
EmoticonEmoticon