Big Oil, Small Oil…why are oil and gas prices so high?

by Willis Eschenbach

Theres a lot of misleading information out there these days about the oil industry and the high cost of oil. So I thought I’d provide a basic overview of the oil industry for context and understanding.
 
How do I know anything about the oil industry? Well, it’s because of following my motto, “Retire Early And Often”, the origin of which I discussed in a post called “It’s Not About Me”.
 
So c’mon in, sit down, it’s a sea-tale of business adventure.
 
In 1986, I was living with my gorgeous ex-fiancée in Honiara on Guadalcanal Island, north of Australia and just south of the Equator. Hey, the tropical ocean waves ain’t gonna surf themselves … I had my own business doing a variety of computer work and training for government, business, and individuals.
 

 
My mad mate Mike Hemmer told me that a job had come open on Liapari Island, a tiny coral atoll way out in the Western Province of the Solomons. The job was to be the General Manager of the Western Province operations of a local company, “R&R Limited”.
 

 
What were R&R’s Western Province operations? Well, it started with their ownership of Liapari Island, which contained a shipyard, a machine shop, a hundred-acre (forty-hectare) coconut plantation, a slipway for hauling out boats, a machine shop manufacturing aluminum boats and water tanks, a piggery, a trade store, a Postal Agency, and a couple of guest cabins rented out as needed. Plus housing for our about 40 workers and their families. We lived on the island.
 
Then there was running the Western Province operations of the M.V. Liapari, a 70′ coastal trading boat that moved people and freight around the western Solomons. Along the way, the boat was trading on the company’s behalf. So we had a copra wharf with scales to weigh the bags, where we both unloaded and stored copra from the M.V. LIapari and also bought copra brought to Liapari on small boats by the local islanders.
 
And finally, I oversaw the operations of the Gizo Fuel Depot, over in Gizo 17 miles across the tropical ocean from Liapari. That’s the depot tanks in the graphic at the top. It was run, and run very well, by my aforementioned friend, Mike Hemmer. I mostly just did the books for the business and oversaw the finances.
 
Here’s a photo that will help explain Mike’s strange position in these lovely islands … his wedding picture. There he is next to the Pastor, looking impossibly young and still in possession of his hair, with his equally young bride Grace on the other side of the Pastor …
 

 
And here they are today, with a couple of grandkids on their laps …
 

 
Even after my last tattoo, Mike still says that I’m woefully under-inked … next time I’m in Australia I’ve gotta do something about that. But I digress.
 
The Fuel Depot was the main (and pretty much only) source of fossil fuels in Western Province. We sold outboard motor mix by the 55-gallon drum, dispensed fuel into containers and tanks, sold kerosene and white gas for the lanterns, and had a fuel dock that fueled the small boats. Here’s the dock at the Fuel Depot. Outboard skiffs are the cars of the islands. Check out the lovely old lady in the bottom boat …
 

 
The fuel was provided to the Depot by large oceanic tankers, which came in periodically to refill the huge tanks.
 
And who owned the Gizo Fuel Depot?
 
Exxon/Mobil. The company that Mike and I worked for leased it from them.
 
So, time went on, and Mike, a very canny businessman, decided to see if he could buy the Depot from Mobil. He enlisted me on the project, and over the next couple of years we pulled off a remarkable coup.
 
We put together a contract where Mike would buy the operation from Mobil along with the hundreds of thousands of gallons of fuel in the tanks … and Mobil would lend him the money to do it. One of the slickest deals the two of us ever pulled off, and we’ve pulled off a few.
 
So … fast forward a few years. After living for four years in Fiji, I was back in the US. Mike got in touch with me. Seems the Shell Oil Company was going to pull out of their Pacific operations, and the main fuel depot and importing business was up for sale. Did I have a spare million $?
 
Sadly, I didn’t. But Mike wanted me to take a look at the books of the Solomon Islands Mobil representative, which were in horrible shape. So I did a one-month consultancy back in Honiara, beat the accounts into submission, told him he was right, it was indeed worth buying, and returned to the US.
 
So Mike bought the business. It was far and away the largest fuel-importing business in the country. And he hired me to be the Chief Financial Officer and Dive Team Leader. We were selling about US$40 million worth of fuel per year, the majority of it in the ubiquitous 55-gallon (200-liter) oil drums. The sheer volume of transactions was daunting.
 
In any case, I was the CFO for a bit over two years. During that time, I routinely signed million-dollar checks to and negotiated million-dollar contracts with the major oil companies. Or in terms of the global oil market … trivially small. As Mike once said,

We’re not Big Oil, like people keep accusing us of being. Heck, we’re not even Small Oil.
 
We’re Baby Oil

However, despite our relative size, we were the big fish there. We provided all of the fuel for the country’s only International Airport, Henderson Field. It was our trucks that pumped the JetA1 to refuel the big jets and the avgas for the inter-island planes. We delivered fuel to the wharves all over the country, fueling the fishing and trading boats with diesel, and selling premix to power the thousands of small outboard motorboats like those shown above.
 
And to return to the theme of this post, as with every job I’ve had, I was always reading about the field I was working in, and learning about it, and talking to the Shell guys, and the petroleum engineer, and the Mobil guys, and the guys we went to cut a deal with in the huge Korean refinery, and the men on the oil tankers … and I walked away with a pretty good understanding of the industry as a whole.
 
So … why are oil and gas prices so high?
 
The answer is, it’s because the oil business is an endless series of million-dollar and billion-dollar high-risk high-return gambling bets that will only pay off, if they do, in a decade or so.
 
First, you’ve got to get the government somewhere to lease you a tract for exploration, the beginning of a long series of money outflows. And not just any tract. You want a tract that looks good, so there will likely be other bidders, so before even bidding, you’ll have costs plus time for due diligence to pick a tract worth betting on.
 
Then you’ve got to explore your lease to find out if there’s any oil. Now, back in the day when most oil was found on land, this wasn’t too hard. Do your sonic exploration of underground geology from trucks and jeeps. Set up and drill a test hole, shift the rig, and drill another test hole. Rinse and repeat, you’ve determined if there’s oil to be extracted.
 
But now, almost all new oil is found under the ocean. So you have to have a big boat and a sonic cannon just to do your sonic exploration. And if it looks promising, you can’t simply hire a few guys to haul in a drill rig from Omaha and move it from place to place like you can on land. Instead, you need a giant floating oil rig that costs between a hundred million and a billion dollars, takes weeks and additional millions to move and re-site for every new well location … and you still don’t even know if your expensive lease contains even one barrel of oil.
 
Also, the process of moving those giant offshore rigs is slow and perilous. It takes years of drilling just to decide if an offshore oilfield is even worth developing, more money gone.
 
So let’s say the field looks good. Then you need to spend years and additional hundreds of megabucks drilling all the extraction wells, installing the backflow preventers and all the downhole gear, and running the pipes from each well to the central collection platform that you just built for another quarter billion or so …
 
And finally, at that point, well over a decade older and a billion dollars poorer than when you started your genius plan of “maybe I should start down the primrose oil path”, you finally get to sell your first barrel of oil … IF everything has gone well.
 
And if it hasn’t gone well? Smile, forget your losses, say bad words, shake your head, say “That’s the oil game”, and look for the next field.
 
Now, with that business model as a constant context, imagine the effect on the industry of the ascension to power of the Capo of the Biden Crime Family, the man with the street name of “10% Joe”.
 
His very first action upon assuming power, his first executive order, blocks the Keystone pipeline (although he doesn’t mind Russian pipelines). He suspends of new oil and gas leasing and drilling permits for federal land and water. He limits fracking. He puts the ANWR oil off-limits. He encourages the banks to not loan to the oil industry. In short, in thrall to his far-left masters, he goes to war against the oil industry in every way possible.
 
And he appoints our favorite entitled white elite New England patrician, private jet enthusiast, and golden-years hair model John Kerry, to be the “U.S. Special Presidential Envoy for Climate”, AKA the “Climate Czar”.
 

 
And our noble Climate Czar proceeded to tell the oil industry the following:

“You’ve got 6 years, 8 years, no more than 10 years or so. No one should make it easy for the gas interests to be building out 30 or 40 year infrastructure.”

I am somewhat inured to idiots in positions of power, but this, this takes a special kind of stupid. He is establishing a far-too-short drop-dead time in an industry where as I spelled out above, nothing happens in less than a decade or more, and it’s a gamble where lots of people have lost big money.
 
And what might you imagine that the oil “majors”, the Exxon/Mobil/Shell/Total/BPs of the world, are going to do when they hear that?
 
Well, you’re right. They’re not going to place the next bet, duh. What would you do, bet a billion dollars when a cranially-challenged geriatricat in the White House might wake up tomorrow and issue an Executive Order bankrupting you? He’s already said he’ll do everything to put you out of business … what would you do?
 
The answer is, you wouldn’t make the next bet. You’d leave the oil in the ground and wait for the madness to subside.
 
In addition, if you have the brains you were born with, you’d cut back on all operations, slow down your drilling and development schedules, maintain inventories, and start buying back stock and maintaining high profits to prepare for the upcoming storm.
 
Now, folks say “But oil prices have gone up worldwide, and the Capo is here in America only, how can that be 10% Joe’s fault?”
 
The answer is, it’s a global market, and one where supply and demand are in a fairly tight race. Here are the top producers. Suppose the Saudis cut production by 30% … will oil prices only rise in Saudi Arabia?

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