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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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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.


‘Free Riders’ or ‘A New Hope’?

by John Brian Shannon | April 27, 2016

In a recent interview, President Barack Obama called some U.S. allies “free riders” in regards to perceived American largesse, but supposedly “cleared the air” while meeting with King Salman of Saudi Arabia at the April 20th Gulf Cooperation Council meeting in Riyadh, Saudi Arabia.

Now that one side has ‘cleared the air’ let’s allow the other side to share their grievances publicly — except they won’t because there is danger in that for them — and also because ‘it’s just not done’ diplomatically-speaking.

FACT: From 1932 through 1973 (in almost every year) the U.S.A. purchased Saudi oil at a price lower than the cost of production.

Yes, you read that correctly. For most of 41 years, Saudi Arabia massively subsidized the American economy by selling it’s oil for lower than the cost of production. (“Otherwise, the West will lose the Cold War.”) Does everybody understand how that card was played?

I’d call that a very big debt.

(Yes, such treatment ultimately led to the Arab Oil Embargo, although events surrounding Israel were cast as the publicly-stated reason for the Embargo. ‘Those in the know’ at that time are very well aware of this and it’s an open secret among historians and the people who were present in the halls of power in that era)

FACT: During the Cold War, Saudi Arabia mounted more Cold War operations against the former Soviet Union than all other countries combined. (Let that one sink in for a moment!) Saudi Arabia’s Cold War operations against the Soviets were second only to the United States — and countless operations were joint U.S./Saudi operations.

I’d call that a very large debt.

FACT: During the massive Soviet invasion of Afghanistan in the 1980’s, the CIA, Pakistan’s ISI, and the Saudis combined forces to evict America’s #1 enemy the former Soviet Union from Afghanistan. (See the movie, ‘Charlie Wilson’s War’ which isn’t far off the truth — except it misses the point that Saudi Arabia paid for the whole effort)

The CIA provided a dazzling array of options (technical support, 3rd-rate new or refurbished weapons, realtime satellite intelligence to designated ‘advisors’ on the ground, and cover) while the ISI provided transport, shelter, fighters, and other logistical capabilities.

(In retrospect, in exchange for *being allowed* to get a reasonable price for their oil, it almost looks like Saudi Arabia was expected to shoulder the entire cost of the Soviet/Afghanistan war. Which probably removed most of whatever profits they had hoped to achieve from the new, post-Embargo oil price that the Saudis were *allowed* to charge)

Another big debt to Saudi Arabia.

FACT: “Saudi Arabia has *executed* more terrorists than the U.S. has ever *captured*.” (That was true until 2004, but it was a common refrain until then)

Yes, in Saudi Arabia, when they catch terrorists, they generally execute them with little fanfare. Good riddance!

Saudi Arabia has passed onto the United States intelligence agencies more information about terrorist individuals than any other country.

Of course, U.S. intelligence agencies and some law enforcement units are only too happy to take the credit for apprehending such terrorists, rendering them abroad, incarcerating them without trial, and then casting vague aspersions at Saudi Arabian culture for (possibly) creating them.

Which works quite well, I must say. It has kept the Saudis busy trying to dig themselves out of a contrived hole — a hole contrived by some Western intelligence agencies in order to keep the Saudis quiet about all the free riders Saudi Arabia has given the West since 1932.

I’d call that a moderate debt to the Saudis.

It’s interesting that there was little ‘Islamic terrorism’ prior to the Soviet/Afghan War. And what there had been, was tiny bits of terrorism scattered around Asia and the Middle East. (Usually it was a case of personal attacks — one warlord against another)

But there is a reason for the rise of Islamic Terrorism and we in the West, helped create it.

Instead of castigating people for being ‘free riders’ — trying to keep them ‘down’ and ‘on the defensive’ — we should be meeting every country ‘where it is’ and helping them to destroy terrorist networks and individual terrorists wherever they may be on the planet.

That’s the difference between managing a problem on the one hand and scoping out a much broader, more inclusive, and cooperative vision on the other hand — one that has an infinitely better chance of success.

Finally, terrorism didn’t suddenly just happen. We in the West helped to create it during the Soviet/Afghan War with CIA training, the ISI’s training, and Saudi money.

When our allies the brave Mujahadeen sometimes called the West’s freedom fighters returned home to places like Yemen, Saudi Arabia, Iraq, and other Middle Eastern nations, their particular indoctrination did not simply vanish…

A New Hope

We need a better vision — one that is at least one order of magnitude better — for dealing with what is probably going to become a widespread problem in this world, with many Western-educated young people joining such groups.

Yes, thousands of Western non-Muslims are joining ISIS and other groups — and in the future it’s likely that other groups will arise with even more tantalizing ideologies (at least to easily-swayed and ‘out-of-place’ young people) who feel they haven’t a real chance at fulfilling their potential in our world.

Every one of our young people who leaves to join such a group represents a massive failure on the part of our society.

And we will only have ourselves to blame for what comes after — whatever that may be.

Therefore, let us put our efforts into providing real opportunities for our young people, and with some urgency, create employment opportunities in the Middle East where the youth unemployment rate ranges from 29% (Saudi Arabia) to 24.8% in Egypt and worse, in rural areas.

Young people from any country with a promising future ahead of them, do not run away from their communities to join groups like ISIS. Providing the opportunity for a real future for young people is where we must put our best effort — and we can’t afford to waste a moment in support of that important goal.

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Spratly Islands in the Spotlight

by John Brian Shannon | October 27, 2015

The Spratly Islands are a hodgepodge of islets that sometimes appear above sea level in the South China Sea

At high tide, only a few islets are visible above the waterline, while at low tide most of the islets are exposed. Which is concerning enough for ship Captains sailing in perfectly clear midday weather — but can be downright terrifying at night, or during a storm or typhoon with the ship being tossed around by waves as it is simultaneously pulled along by the incredibly powerful and deep currents in that waterway.

The Spratly’s are also located in the centre of a typhoon corridor, which means there are frequent distress calls during the annual storm season. Depending upon local weather conditions the islands can vanish under the waves by a few feet, or they can appear above the surface of the water.

South China Sea dispute October, 2015

South China Sea dispute October, 2015

Until now, the Spratly Island chain was merely a complex navigational challenge for ships to navigate around, especially at night or in inclement weather

Recently, China began a dredging/island reclamation project on one of the Spratly Islands to turn one or more of the islets into air bases, presumably to serve as a refueling station for their long range patrol or military aircraft, or possibly for civilian airliners in distress.

Military planes aircraft are notoriously thirsty aircraft — either because they are long range patrol aircraft of significant size and weight and therefore use a lot of fuel, or are lightweight, high-performance fighter aircraft which use even more fuel per hour. Having a nearby refuelling station/landing strip can lower the stress level of military pilots to put it mildly.

And for ships that have encountered rough weather or have had mechanical difficulties, the Spratly Islands are located perfectly should China decide to maintain a Chinese Coast Guard presence there. It is the logical place to deploy from in order to rescue passengers from ships in distress or aircraft crashed in the water.

Finally, in the case of combatting at-sea piracy and to conduct anti-terrorism inspection of suspect ships, the Spratly Islands are well-positioned to host the necessary aircraft, ships and anti-terror personnel.

IF that is what China is planning, they are doing a good deed for all of the shipping and aircraft that pass through that waterway and smart nations that regularly travel through the region might consider contributing funds or other assistance to that noble endeavor.

The fear has been raised that the Spratly airbases could be used as a ‘jumping-off point’ for attacks by China on Southeast Asian nations

Well yes. That could happen. But then again, a big piece of plasma could be ejected by the Sun and crash into Earth wiping out all life on the planet. Neither is very likely, yet it is theoretically possible that either (or both) could happen.

It just depends if you see the glass as half-full or half empty

If you see the United States and its partners as nations that are sliding from their historical high place in the world and are now feeling threatened by China’s incredible economic surge, then it’s understandable that the U.S. and its partners might base their decisions on fear.

If you don’t think the sky is falling, then the Spratly’s are a ‘tempest-in-a-teapot’ and that ships should continue to navigate as carefully around those islets as they’ve done for centuries.

If it were up to me

Were the decision up to me, or if we had a stronger UN body, the suggestion would be to use nuclear weapons for peaceful purposes — boring holes deep beneath the islands to safely place an appropriately sized bomb, in order to liquefy all of the rock 5 miles below the islands.

By deploying a number of tiny nuclear devices deep under the rock formations upon which those islands stand, the rock strata far below the islets could be liquefied, allowing the islets to sink deep below the surface — permanently removing those threats to shipping in the region.

This has been done before, and with zero radiation release into the air or water. It’s a completely enclosed detonation and like the molten magma deep under the Earth’s crust it would never come anywhere near the atmosphere or seawater.

One would hope that one islet would be spared for the purposes of building a massive emergency base that all Southeast Asian nations would “own a share of” and “feel comfortable enough with” to contribute aircraft, ships and personnel in order to maintain a high level of anti-piracy/anti-terrorism readiness, for rescue missions, and to carry forward-based and rapid assistance to future tsunami/earthquake victims throughout the region.

Of the choices available to us, which are the most appropriate?

  • Human beings could use our much vaunted technology to sink all of the Spratly Islands to a depth far below any ship hulls thereby removing a significant navigational hazard from the charts.
  • China could turn one of the islands into a joint rescue, anti-piracy, and anti-terrorism super-base, where  operations could operate at a high level and tsunami/earthquake aid could maintain a rapid-response level. (This could be done regardless of whether the other islets were sunk)
  • We could annoy and provoke China into a conflict over how far we allow that country to project its maritime power. That fight could escalate in a matter of minutes or days, and as both China and the U.S. are superpowers it’s possible that the conflict could spread far beyond the South China Sea.

From a purely human life and health standpoint, deaths due to shipping accidents worldwide are relatively rare, amounting to less than 8,000 people per year, while deaths due to terrorism total less than 15,000 per year, and military conflict between nations can range from small numbers of deaths up to (potentially) all life on the planet if a nuclear war between two superpowers is allowed to develop.

Therefore, it seems appropriate to resolve the situation using diplomacy. In that way, the present default slide towards conflict can be turned into a positive.

Win-Win or Lose-Lose: Our choice

Human beings will either be ‘up to the task’ of resolving the differences between nation states, or eventually there will be no life on the planet.

Let’s be civilized people and choose, Win-Win.

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