Crude oil: Do companies control the price?

As motorists continue to anticipate record-high gas prices, the only industry clearly benefiting from the cost of a barrel of crude oil is the oil companies themselves.

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

Oil giant Saudi Aramco, which is 98 percent owned by the Saudi government, said its profits rose more than 80 percent in the first three months of the year, allowing it to overtake Apple as the world’s most valuable company.

In turn, the price of crude oil has influenced the price of gasoline, although a number of other factors also play a role, namely problems at the refinery level, 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 manipulate prices in a way that would improve their own bottom line, they wouldn’t have allowed the price to collapse in 2015 and 2016, even through 2020,” said Trevor Tombe, a professor of economics at the university of Calgary, CTVNews.ca told CTVNews.ca in a May 24 phone interview.

“So they take the prices off the market and that determines their revenue.”

‘PRICES-TAKER’

To affect the global price of crude oil, you would have to be a very large producer, Tombe said.

“Most oil producers are small compared to the world market as a whole and therefore have very limited individual ability to influence prices. They’re really price takers,” he said.

Any single company that decides to hold back production would only miss the opportunity to sell a barrel of oil at this high price, Tombe added.

“But you see some major oil producers coordinating with each other and together they make up a big chunk of the world market and so can influence the price, and I’m specifically talking about OPEC, Saudi Arabia. “

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

Global oil demand collapsed during the COVID-19 pandemic, which at times drove crude oil prices negative.

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

OPEC has also said it will not increase production to offset the loss of Russian oil. OPEC and its allied countries, which together make up OPEC+, also include non-member Russia.

By producing less than usual, OPEC can affect the price of crude oil.

Individual oil companies, in turn, take advantage of these prices, resulting in higher profits for themselves, hence the term “price takers”.

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

“But this is not collusive behavior on the part of producers, and if we’re really talking about oil companies, and we’re talking about Canadian oil companies in particular, they have absolutely no ability if they wanted to influence global prices,” Tombe said.

Ian Lee, an associate professor at Carleton University’s Sprott School of Business in Ottawa, called the idea of ​​this happening “absurd, given the number of buyers and companies operating in the global marketplace.”

“For price fixing to occur, the company or country has to control almost all of the world’s supply or someone will undercut you. It’s the nature of competition, it’s as simple as that,” he told CTVNews.ca in a May 23 phone interview.

Figures from the International Energy Agency make it clear how scarce the supply and demand for oil are at the moment.

Although OPEC accounts for a sizeable portion of global supply, the majority of crude is produced by non-OPEC countries, Lee pointed out.

That’s not to say OPEC has no leverage and refiners will undoubtedly benefit, but that’s not because they control the price of crude, he said.

They’re just the beneficiaries, Lee said. “It’s like winning the lottery, and they won the lottery.”

DEMAND ELASTICITY

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

The Calgary-based senior fellow at the Macdonald-Laurier Institute said in a March 24 phone interview that the price of oil was relatively low before the COVID-19 pandemic as the US went from being a net importer of oil to a net exporter because of the ” slate revolution”.

The pandemic then severely reduced demand for oil and companies cut production budgets, Exner-Pirot said.

“Now demand is up but production isn’t, and part of that is oil companies are doing well right now,” she said.

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

What’s different this time, she says, is that OPEC has limited spare capacity on top of existing refining challenges.

“The short answer is that we will have an energy crisis. There is currently no way around it, except for a slump in demand due to another pandemic,” said Exner-Pirot.

Werner Antweiler, director of the Sauder School of Business Prediction Markets at the University of British Columbia, told CTVNews.ca in an email on May 23 that while the big oil producers are making significant profits, the price hike is not their fault.

“It’s a market outcome when we have a supply shortage and demand is price inelastic. Then prices need to rise significantly to balance global supply and demand,” he said.

Everyone is at the mercy of international oil markets, Antweiler said, and commercial companies can simply pass higher prices on to their consumers.

“The problem is that demand is so price inelastic,” he said. “Industry and transport are very slow to react to adjust their activities, and it will take a huge price increase to sufficiently reduce demand.”

If anything, recent events have shown that consumers are still willing to pay $2 a liter for gas, but how long that takes could change in the form of demand destruction.

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

However, the experts that CTVNews.ca spoke to agreed that people on low to modest incomes would feel the impact very badly.

However, the high prices will encourage producers to increase the quantity they supply, Tombe said. “And no doubt many of them are doing just that right now.”

Some have suggested temporarily suspending provincial gas taxes as well as the federal carbon tax to help consumers. Alberta, for example, suspended its provincial gas tax.

Exner-Pirot says that while it’s politically good, it would actually encourage consumption and lead to the opposite of destroying demand.

“This has worked so far in rich countries that can afford it, but it will only drive up the price,” she said.

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