Crude Oil: Do Companies Control Prices? – News 24

As drivers continue to grapple with record gasoline prices, the only industry that clearly benefits from the cost of a barrel of crude is the oil companies themselves.

Companies such as Cenovus, Esso-owned Imperial Oil, and Canadian Natural Resources Ltd. And Shell and BP reported record profits in the first quarter of billions of dollars.

Le géant pétrolier Saudi Aramco, détenu à 98% par le gouvernement saoudien, a déclaré que ses bénéfices avaient grimpé de plus de 80% au cours des trois premiers mois de l’année, lui permettant de dépasser la société é tanté In the world.

The price of crude oil, in turn, affected the price of gasoline, although there are a number of other factors that also play a role, namely problems with refineries, tight supply and demand, and the war in Ukraine.

But do the oil companies themselves control the price of crude oil? The simple answer is no, at least not on an individual level.

“If they had the ability to influence prices in a way that helped them achieve their bottom line, they would not have allowed prices to collapse in 2015 and 2016, even in 2020, University of Calgary economics professor Trevor Tomb told CTVNews.ca in a phone interview. On May 24th.

“So they take market prices and that determines their income.”

“take price”

Toump said that in order to affect the global price of crude, you have to be a very large producer.

“Most oil producers are small relative to the global market as a whole, so their individual ability to influence prices is very limited. They are really price takers,” he said.

Tombi added that any individual company that decides to stop production will only give up the opportunity to sell a barrel of oil at this high price.

“But you see some of the major oil producers coordinating with each other and together they make up a large part of the global market and so they can influence the price, and here I am talking about OPEC, Saudi Arabia in particular.”

OPEC, or the Organization of Petroleum Exporting Countries, which includes Saudi Arabia, produces about 40% of the world’s crude oil and accounts for about 60% of international exports, according to the US Energy Information Administration.

Global demand for oil plummeted during the COVID-19 pandemic, which led to a drop in crude oil prices at one point.

OPEC and its allies agreed to drastically cut production to support prices and kept production targets low even as demand returned.

OPEC also said it would not increase production to compensate for the loss of Russian oil. OPEC and its allies, which together make up OPEC+, include non-member Russia.

By producing less than it could otherwise do, OPEC can influence the price of crude oil.

Individual oil companies, in turn, benefit from these prices, which translates into higher profits for themselves, hence the term “price payers.”

Other jurisdictions may also affect markets, including demand from large countries such as China. The United States has also significantly increased its oil production over the past decade.

“But this is not collusive behavior on the part of the producers, and in fact, if we are talking about oil companies, and we are talking about Canadian oil companies in particular, they have absolutely no ability, if they want to, to affect global prices,” Tombe said.

Ian Lee, an assistant professor at Carleton University’s Sprout School of Business in Ottawa, described the idea of ​​this happening as “ridiculous,” given the number of buyers and firms involved in the global market.

“For prices to get fixed, a company or a country has to control nearly all of the world’s supply, or someone is going to lower the price on you. That’s the nature of competition, it’s that simple,” he told CTVNews.ca in a phone interview. May 23.

Figures from the International Energy Agency show how tight oil supply and demand are at the moment.

Lee noted that although OPEC accounts for a large share of global supplies, the majority of crude oil is produced by non-OPEC countries.

He said that this does not mean that OPEC has no influence and that refineries are undoubtedly benefiting, but this does not mean that it controls crude prices.

He told me that they are simply the beneficiaries. “It’s like winning the lottery, and they won the lottery.”

elasticity of demand

As Heather Exner-Beirut pointed out to CTVNews.ca, the price of crude would never be low if producers had the ability to control it.

Prior to the COVID-19 pandemic, the price of oil was relatively low as the United States was from a net oil importer to a net exporter due to the “shale oil revolution,” the lead researcher at the Calgary-based MacDonald Laurier Institute said in a March 24 phone interview.

Exner Beirut said the pandemic then led to a significant drop in oil demand and companies slashed production budgets.

“Demand is up now but production hasn’t gone up, and part of that is the oil companies are doing really well at the moment,” she said.

Investors would like to see dividends now rather than putting that money back into production. Until then, she said, the ability to get this oil to market in Canada is limited, as the country also faces supply chain constraints and a labor shortage.

What is different this time, she said, is that OPEC has limited spare capacity, on top of current refining challenges.

The short answer is that we are going to have an energy crisis. There is no way around it at the moment, except for a collapse in demand due to another pandemic,” Exner Beirut said.

Werner Antweiler, director of the University of British Columbia’s Sauder School of Business Markets, told CTVNews.ca in an email May 23 that if major oil producers are making big profits, the price hikes are not of their making.

“It is a consequence of the market when we have a shortage of supply and demand the price is inelastic. Then prices have to rise significantly to balance global supply and demand.

Everyone is at the mercy of global oil markets, Antweiler said, and business entities can simply pass on higher prices to consumers.

“The problem is that demand is inelastic in terms of price,” he said. “Industry and transportation are reacting very slowly to adjust their activities, and a massive increase in prices is required to reduce demand sufficiently.”

Instead, what recent events have shown is that consumers are still willing to pay $2 a liter for gasoline, but the length of that period can change in the form of demand destruction.

Drivers can change their behavior to reduce the price of gas, whether it’s carpooling or telecommuting, only to later opt for a hybrid or electric vehicle.

However, CTVNews.ca experts agreed that the effects would be felt most strongly by people on low to modest incomes.

Tombe said the higher prices will motivate farmers to increase the quantity they are offering. “And no doubt many of them are doing exactly that now.”

Some have proposed a moratorium on county gasoline tax collection, as well as a federal carbon tax, to help consumers. Alberta has suspended a regional gasoline tax, for example.

Exner-Pirot says that although it is politically sound, in reality it will encourage consumption and reverse demand destruction.

“It works so far in rich countries that can afford it, but it will only lead to higher prices,” she said.


With files from CTV News, The Canadian Press, The Associated Press, Reuters and CNN

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