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Free Market Economy, Monopolies, or Both?

by John Brian Shannon | May 13, 2016

Should developed nations favour a free market economy? Monopolies?
Or a
regulatory framework that strengthens the macro economy?

  1. The entrepreneur in me likes Perfect Competition in a free market economy.
  2. The businessman in me likes Monopoly because of the opportunities afforded by economies of scale.

Monopolistic economies of scale allow corporations to:
[a] provide more services or products for the same cost,
[b] provide the same services or products for less cost,
[c] provide decreasing services or products to improve the corporate bottom line.

Unfortunately, monopolies are becoming the norm in America these days and one of the reasons for this is due to the emergence of the activist shareholder who demands higher dividends — no matter the burden this places on the corporation.

Eventually it ruins the corporation as higher profits (gained by cost-cutting and lowering standards in the rush to keep shareholders happy) are directed up and out of the corporation, and sometimes out of the country.

In simple terms, today’s activist and powerful shareholders are taking huge corporate fortunes and creating small fortunes out of them — in exchange for higher personal returns.

When they bleed one corporation dry they simply migrate to the next corporation. That’s not the way to build a strong country.

How to Strengthen the Macro Economy via new Corporate Ownership Regulations

The regulation we need is that no more than 50% of any corporation’s total value should be available to shareholders.

By law, the other 50% would always remain founder-owned or corporation-owned shares.

This would prevent the most egregious profit-taking damage to corporations — and C-suite executives could then lead the corporation according to what works best to gain higher customer approval ratings and improved market share — instead of what works best to meet shareholder demands.

By keeping 50% of the value of the corporation within any combination of the corporation or its founder(s) it helps to prevent excessive profit-syphoning to shareholders and it allows for rock-solid collateral when (re)capitalizing the corporation during expansion, for example.

One immediate bonus would be a much larger investment pool available to corporations that are looking to offer up to 50% of their value to shareholders.

I’d expect a NASDAQ boom if such a regulation were passed. A small and mid-cap renaissance would finance a new bull market from one profound regulatory change.

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Crude Oil or Value-Added Oil Products?

by John Brian Shannon | May 8, 2016

For decades, easy access to crude oil powered the global economy and this is especially true in developed nations where the huge investment pool allowed governments and industry to capitalize on cheap energy costs. Cheap and easily available crude oil was a very necessary building block for the Western economies.

But the world is changing and although we aren’t yet at the end of the ‘Age of Oil’ we’re starting to see that day from afar.

We’ve come from $2 per barrel of crude oil (less than the cost of production at the time) to $125 per barrel and every price in between. On the supply side, we’ve seen the world’s largest oil consumer (the U.S.) increase domestic production from 10% of its demand to meet almost 100% of its demand — an unprecedented change in the global oil industry.

Due to that farsighted U.S. policy, the world became mired in its own crude oil glut and correspondingly, crude oil prices fell in recent months, only now rebounding after visiting the $26 per barrel netherworld. As of this writing, crude oil is hovering around the mid-$40 range and looks set to end 2016 in the low $50’s assuming the geopolitical paradigm remains stable.

Crude oil refining: Motiva Enterprises refinery, Port Arthur, Texas

Cheap crude oil was a necessary building block in building the world economy. Saudi Aramco through its wholly owned Saudi Refining Inc. subsidiary and Royal Dutch Shell plc. announce they’ve signed a non-binding Letter of Intent to divide the assets of Motiva Enterprises LLC. The Motiva joint venture was formed in 1998 and has operated as a 50/50 refining and marketing joint venture between the parties since 2002. Photo caption and image courtesy of; Motiva Enterprises refinery, Port Arthur, Texas

How to Change the Oil Industry into a ‘Win-Win’ Proposition

Like many industries, the oil industry has evolved over decades of time and from humble beginnings. Had it been planned the oil industry wouldn’t have its present structure and there wouldn’t have been a need for a ‘crude oil price’ — as refining crude oil into finished products would’ve been the norm.

Evolution of the World’s Largest Oil Producer

For decades the Saudis pumped and sold oil to the Allied Powers for less than the cost of production as their contribution to the massive Western effort against Nazi Germany and later against the West’s Cold War competitor, the Soviet bloc nations.

Until the Arab Oil Embargo in 1974, the only money the Saudis made from oil was where they competed against every other oil speculator in the commodity market. They certainly didn’t make anything on the extraction of the black stuff.

The Speculators in a Supply/Demand World

From the time each supertanker left port in Saudi Arabia until the moment they tied up at an oil refinery in the United States, speculators made huge sums or lost huge sums of money playing the crude oil supply/demand equation as each supertanker made its way from a Saudi port to an American port.

After some initial horrendous errors, the Saudis learned how to play the markets as well as New York’s best oil speculators, and in that way many individual investors and Saudi Aramco (the largest oil company in the world by a significant margin) saw some amount of wealth created from their resource.

Prior to the Arab Oil Embargo the Saudis didn’t make anything on the extraction side, but made it on the margins (speculating) by making educated guesses about the daily oil supply/demand equation of the United States. That’s no way to run a railway!

The Rise of OPEC

By 1974 the Saudis and the other OPEC nations had had enough and via the Arab Oil Embargo were able to get a reasonable price for their crude oil and not be forced to rely on notoriously unreliable oil price speculation to finance 80% of their economy.

Since 1974, the Saudis (along with every other oil producer, including the United States) have been making money on (1) the extraction side, and (2) on speculation, and (3) on the refining side of the oil business.

Too many middlemen! You can plainly see that where there are three steps with each having its own profit, there should’ve only been one.

Had the oil business been planned-out from the beginning, we would’ve seen Vertical Integration — where one oil company owns its own oilfields and extracts its own oil, refines their own oil into useful products, and only then offers those value-added fuel products as commodities in the world marketplace.

What we have now is a paradigm where gross total demand sets the wellhead price on crude oil (which has a profit attached to it) and the speculating of oil-in-transit (which is where big profit gets attached) and then more profit is attached by an oil refinery — which are usually owned by a third party. No wonder they call it black gold!

In a suddenly very competitive oil world, how to cut ‘fat’ and add profit?

By creating vertically integrated oil companies where only one company extracts the crude oil, transports it to a refinery, refines it into useful products, and then sells those products as commodities, we cut out the middlemen while raising profits for oil companies and lowering costs for consumers. Perhaps by a significant margin.

How to ‘Win-Win’ in the 21st-century oil industry: Don’t ever sell crude oil!

Sell finished petroleum products exclusively

Saudi Aramco is transferring to a Vertically Integrated business model — buying-out it’s partner Royal Dutch Shell in a multi-billion dollar deal at it’s massive Port Arthur, Texas oil refinery (the largest in the U.S.) which can process 600,000 barrels per day.

Saudi Arabia is already the largest single oil producer in the world (presently pumping just under 11 million bpd, but with the ability to pump 12.5 million bpd) and have been in the crude oil business longer than any other country, and own more supertankers than any other organization, business, or country, and are now purchasing oil refineries to complete the vertical integration of their business model.

This will allow the Saudis to lower their concern about wellhead price, and the speculation factor, and concentrate on supporting their best player — which is the refining stage. That is where the entire oil industry is going, some faster than others.

By concentrating on end products, Aramco and others will create new thrust towards the Vertically Integrated business model where resource extraction and transport are geared towards supporting their star player, their own oil refineries — wherever they may be located in the world. Profit at each step of the way will no longer be necessary nor desirable, cutting costs throughout their supply chain and adding profit to their value chain.

In a perfect world the Vertically Integrated business model will sweep past the existing ‘multiple middleman’ business model over the next decade and leave it in the dustbin of history.

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BONUS GRAPHIC

Average annual OPEC crude oil price from 1960 to 2016 (in U.S. dollars per barrel)

OPEC crude oil price from 1960 through 2016.

OPEC crude oil price from 1960 through 2016.