Jeroen van der Veer recently admonished international oil companies to set their sights beyond classic supply and demand analysis in dealing with the volatility predicted to haunt crude prices for the foreseeable future. That sounds like a welcome call for pragmatism amid the crescendo of pleas for "price stability" heard before the Organization of Petroleum Exporting Countries' last meeting.
Speaking at the Handelsblatt Energy Conference in Berlin this month, Van der Veer, a Royal Dutch/Shell Group managing director, made the case for majors recognizing the limits of their influence on market fundamentals and instead turning their attention to areas where control might be exerted.
The sway held over price by Big Oil through the early 1970s has given way to an era in which "what we can say with a reasonable degree of certainty is that however much we desire price stability, it is unlikely to return any time soon," he said.
Loss of control
Van der Veer suggests that there is a reward for accepting that control over the price of oil-as the world's key strategic resource-now resides with major resource holders and consuming countries' governments (via taxation policy). This reward will be a deeper-rooted corporate stability, ideal for the start of a century already marked by flux.
"Since we have no influence over prices, the only logical strategy is [to] ignore them and concentrate on building a strong operation at all price levels," he said. "The company structure, the cost profile has to be extremely robust to handle rapid swings in revenue flow. We have to be profitable in a wide range of situations."
This, unfortunately, is where Van der Veer's futurism appears to breaks down. For the advantage gained by operational solidity-"you don't spend so much time speculating about the oil price"-is a focus on "other matters" that, in tenor, sounds suspiciously "1990s": "cutting costs, getting close to the customer, and developing new products and services."
Past is prologue
These comments come from a managing director of an integrated energy company, of course, and one who justifiably has his eye on diversification away from oil. The keynotes of his address were, in fact, Shell's shift toward increasing its gas reserves, the procurement and trading savings afforded by e-business, and the commercialization of renewables technology.
At a time when industry contractors are, in large, still struggling to find anything resembling commercial stability, and when oil companies are again posting record yearend balance sheets on the back of high crude prices, this sounds like Big Oil is about to tighten the screw on its supply chain in the name of "competitiveness."
The International Energy Agency, albeit a creature born in the last century, recently offered potentially better guidance than simply trying to turn aside the matter of crude market volatility: calming the oil price rhetoric surrounding "stability."
"Producers have been quick to blame unscrupulous speculators for driving up prices and increasing market volatility," said IEA. "They proclaim market stability is their goal. Fair play, but such oft-repeated statements by unnamed officials generate uncertainty, fuel speculative pressure, and feed volatility. Their statements have an immediate effect on the market, while the physical impact of any potential producing cut is another 2 or 3 months away."
