April 4, 2016 | Posted by D. T. Cochrane
An op-ed on the advocacy website Oil Change International examines the high levels of debt within the oil business and the consequences of that debt for extraction. It postulates a dangerous positive feedback mechanism between extraction levels, oil prices and oil company debt. The basic argument is that in order to service their debt, the oil companies must keep drilling. However, the argument continues, high levels of output are driving ever greater over-supply. In turn, over-supply pushes down oil prices, reducing profits, which makes it harder to service debts.
The argument makes intuitive sense. Certainly oil prices have been low and remain low. However, the argument also contain an implicit assumption that replicates a standard assumption of mainstream economics: oil companies are price takers. The assumption is that prices are determined by ‘the market’ — the intersection of supply and demand — and the companies then respond. In this case there are two prices that the oil companies are assumed to take: 1) the price of oil; 2) the price of debt. The pricing of oil company debt would be an interesting — and important — subject to study. What is the distribution of power as translated into these financial instruments? Because productivity, rather than pricing, has been the focus of both mainstream and critical political economy, this study has not been done. The study of the price of oil as a power mechanism, however, has been done.
Nitzan and Bichler devoted considerable analytical attention to the price of oil. One of their primary findings was that periods of differential deccumulation by the dominant oil businesses were followed by conflicts in the Middle East that drove oil prices up and and returned the oil businesses to differential gain. Recently, there have been significant conflicts in the Middle East. First the Arab Spring, escalating with the Syrian civil war that resulted in the rise of the Islamic State, or Da’esh, drawing a coalition of Western countries back into Iraq. However, these conflicts appear to have failed to result in accumulatory gain for the oil businesses.
The chart above compares the combined market equity of Exxon and Chevron, the two U.S. members of Big Oil, with the S&P 500. The year-over-year monthly growth of the S&P 500 is subtracted from that of the combined equity of the two firms. This is then smoothed as a 36 month moving average. When the line is above zero, U.S. Big Oil is differentially accumulating. When it is below, it is differentially deccumulating. The chart shows the incredible long-term differential success of U.S. Big Oil. The smoothing removes important volatility, which includes the events that Nitzan and Bichler have written about. However, over the long term, we see more than three decades of outpacing the rest of dominant capital. Until, that is, the aftermath of the global financial crisis of 2007.
The tale for Big Oil during the crisis was not the familiar tale of woe. The second chart is the separated monthly year-over-year growth of Exxon, Chevron and the S&P 500, focused in on 2007-10. While the S&P 500 began to lose absolute value from the beginning of 2008, Exxon and Chevron would not see absolute contraction until the third quarter of that year. Then, exemplifying the insights of the differential approach, although both companies moved into the red, their losses were smaller than dominant capital’s in general. In other words, the crisis was differentially beneficial for U.S. Big Oil. The recovery, however, was differentially detrimental.
Through 2009-10, as the S&P 500 averaged year-over-year growth of almost 20%, the combined value of Exxon and Chevron lost 8%. Exxon largely drove this, continuing to lose in absolute terms. Although Chevron achieved absolute gain although it also lagged behind the S&P 500 through most of 2009-10. The qualitative reasons for this separation of the two companies, whose growth is highly correlated (0.74), requires further analysis.
As the recovery slowed, U.S. Big Oil was unable to reverse its differential misfortune, even as the crises in the Middle East and Northern Africa broke out in 2011. Instead, it continued its differential decline, as seen in the first chart. The result is a period of differential deccumulation unprecedented in the last 40 years. Why has U.S. Big Oil been pushed into these differential doldrums? Why is its power waning? If a Middle East crisis is failing to generate differential gains, what options are left?