General · 23rd February 2016
Capitalism, with its deviously creative ingenuity, may have found a solution to our dual problem of being addicted to oil and of emitting huge amounts of carbon dioxide into the atmosphere as greenhouse gases. Eric Reguly (Globe and Mail, Jan 16/16) explains how it could accomplish this nearly impossible task.
Oil companies are suffering currently from extremely low crude prices, with little likelihood that the value will rise any time soon. Iranian production is entering the market just as the world is glutted with oil, and the OPEC cartel has forced down the price by collapsing into a jumble of competitors. Operation and exploration costs for Western producers are high, while the strong American dollar is adding to their financial burden.
This is devastating for small oil companies — they are beginning to collapse. It's even serious for integrated oil companies such as Shell, BP and Exxon. Even though they can produce, refine and distribute, their stock values and profits are still dropping.
As they have traditionally done, they are trying to maintain stock value by replacing their pumped oil with new reserves. Although, as Reguly notes, they have terminated about $380 billion in projects since 2014, the largest 75 companies are still spending about $500 billion per year on exploration and development.
Meanwhile, sitting on the sidelines are the “corporate raiders and hedge fund bosses,” the so-called “raiders” and “hedgies” who know how to make considerable money from distressed situations. And the oil companies are becoming prime targets because they are extremely valuable — they just aren't profitable in the current situation. But vast fortunes could be wrung out of them with a different strategy.
So, the corporate raiders and hedgies buy the oil companies and then begin a long and gradual process known as self-liquidation. First, they end all exploration and development, thereby freeing billions of dollars to pocket as profits. Then they “liquidate the proven reserves.” As Reguly notes, an oil company would, in essence, be operated “as an income trust by paying gorgeously plump dividends as it funnels almost all of its profits to shareholders.”
“The lack of capital spending, of course, would put the oil company into a slow-motion suicide mode.” The lower the reserves, the higher the price of oil, and the greater the dividends for shareholders. The end result would be no oil companies, no reserves and an increasingly strong incentive for alternate, clean energies to replace oil.
Will this happen? Reguly refers to a British economics writer, Anatole Kaletsky (see Project Syndicate) who has noted that this self-liquidation route was used very successfully by tobacco companies, and that the idea is beginning to circulate as an investment strategy. It is being encouraged, too, by a slowing global economy which is making profitable ventures harder to find. Liquidating the oil companies would represent one of the greatest wealth opportunities in economic history.
Some of the more reputable investors think of the raiders and hedgies as vultures circling the economic landscape looking for injured and dying victims. However, if these carrion eaters should dispose of a carcass that's polluting the atmosphere and causing innumerable other environmental problems, they might actually be doing something quite useful.