Rex Tillerson's World View of Oil

February 14, 2017


In an economic thesis, it is hard to displace geopolitical events with respect to how oil behaves. With the new kingdom and its new administration, it is hard to determine which direction it will go. Either Saudi Arabia pushes their own policies or pushes U.S. interest first. When oil periodically rose to levels that threatened U.S. economic growth, certain Presidents could rely on Saudi Arabia to increase production and decrease the pain at the pumps. However, the ultimate paradigm is changing in terms of Saudi Arabia and Israel being in collusion with each other due to U.S. interest shifting to Iran. In economic circles, we also need to consider NATO's position and its strategic alliance with U.S. interests. Is NATO's interest the pivot to Asia? If so, are they taking into account religion, norms, historical alliances, and even how U.S. multinational companies work? Could the pivot of Asia be achieved with U.S. companies partnering up and investing their resources in China, Russia, Malaysia, Saudi Arabia, and so forth without the intervention of the U.S. government? OPEC has no bearing on a priori acceptance of perfect competition as opposed to imperfect competition.


A swing producer like Saudi Arabia needs a swing buyer to purchase their spare capacity. Raising capacity may have a short-term effect on U.S. production due to lack of investments in bringing new oil wells into production. However, Saudi Arabia's motives are quite different than what's happening in the U.S. oil renaissance. They know the U.S. oil trend is down. Their main pivot and goal in 2035 is the Asia-Pacific region whereby growth in terms of population and the urbanization of China is the source of OPEC's revenue growth. Saudi Arabia also feels that Russia plays an integral part in their growth prospects into this region. Just recently, and we need to decipher Russian propaganda and relevant news, newspaper TASS reported that Russian Energy Minister Alexander Novak relaxed his stance against Saudi Arabia and indicated that the drop of oil has nothing to do with the economic war against Russia. He simply stated that it is a temporary misbalance in oil.


King Salman's policy will be to maintain stability in Saudi Arabia and his personality suggests that he is more of a mediator in partnering with other nations to achieve and maintain Saudi Arabia's dominance in oil. Russia, as a participatory member of OPEC, does have leverage in aligning their philosophy with an oligopoly. Bear in mind, OPEC did have a price band mechanism in maintaining control and stabilizing the oil market. They can revive it anytime with the cooperation of Russia in raising the price to $70, $80, and even $90, to preserve the average price of oil. OPEC's mandate is to regulate the supply of petroleum to consuming nations and a fair return of capital to those that are investing in this industry.


Oil is a global commodity. It drives our industries and businesses. It transports our people and commercial goods. It is essential to virtually everything we do. It is not bounded by ethnicity or religion. It is the goal to supply oil to consuming nations. However, it is also used as a weapon based on oligopoly mentality rather than a democracy. OPEC is an epitome of an oligopoly, they establish a co-operative mode to mitigate competition amongst themselves, it is called collusion. However, they also establish their own internal interests and an imperfect form of competition due to national interest.


OPEC is a shared monopoly that includes the participation of Russia and Brazil. That is why the price of oil is not as simple as supply and demand. My question is has this doctrine to the pivot to Asia manifested itself to become an oligopoly? Does China have the right to determine their own destiny in economic trade? Or, are we to contain China because of their ambition in the Asia-Pacific region? So why do the rules have to be determined in terms of economic trade in the Asia-Pacific region by the U.S.? This manifest destiny in the Asia-Pacific region is contrary to the fundamental beliefs in the stability of the global economy. Russia is also ideally placed to serve as an energy hub, sitting between the markets of Europe and Asia, with the latter expected to be the largest energy demand centre by far in the years ahead. The recent 30-year deal between Russia and China for Gazprom to deliver Russian gas to China is a clear sign that Asian demand will grow significantly in the coming decades.


In the recent State of the Union address, it was very interesting that Obama stressed, "China wants to write the rules for the world's fastest growing region. Why would we let that happen?" This had more to do with China's economic transactions with Russia, Singapore, South Korea, and so on. These deals are cemented by economic partnerships rather than coercion or threats. China and Russia are moving swiftly with force. They are creating economic alliances and opportunity to countries that show little economic development. Economists lack a clear understanding of NATO's movements playing a key role in the alignment of economic nations. China changed their foreign policy and are expanding their military and modernizing their nuclear weapons with Russia's help.


China has clear economic stakes in Ukraine and wants stability. Ukraine is a conduit for China and Russia's natural gas trade with Europe. China's $400 billion gas deal with Russia benefits China's joint partnership by strengthening their competitive advantage over rival nations. We may have a global economy, but it is also based on regional economic benefits. Obama referred to China and the U.S. working together as a great benefit to the rest of the world. Xi Jinping of China responded with, "A pool begins with many drops of water." It is this argument that has changed China's foreign policy. Xi walked away from the meeting knowing there is no divine economic benefit dominating the Asia-Pacific agenda.


OPEC, Russia, and China require oil to achieve a stable market environment to spur investment. The market must evolve to adapt to ever-changing circumstances in the global philosophy of regional economies. British Petroleum's 20% stake in Rosneft is a testament to this philosophy, no different than Exxon Mobil's philosophy to extract oil from Russia's arctic. Economists lack a clear understanding of NATO's movements playing a key role in the alignment of economic nations. American multinational companies are not in the business of containing regional economies. However, can we say that the modus operandi of American multinational companies is now coerced in changing their philosophy without clear economic benefits to fellow shareholders?


International companies believe in a cooperative environment as a sustainable platform for economic expansion between nations. It is the Asia-Pacific region and their population explosion that will amount to trillions of dollars into their treasuries, which pales in comparison with Europe. Abdallah Salem el-Badri, Secretary General of OPEC, said in an interview that he's not concerned about shale oil. It only proves that US supplies are a welcome addition to the global outlook of oil. It's not supply and demand. OPEC's stance in how they view the world is that OPEC and non-OPEC oil supply will both be required in the long term for economic growth worldwide. Supply will come from a wide diversity of sources, and there's plenty of it. Oil demand and trade will continue their shift to the East and the downstream is likely to witness a shift in capacity from OECD to non-OECD regions, specifically Asia and the Middle East. The Middle East plays a dominant role in providing fuel to economic engines globally, particularly Saudi Arabia. India and Saudi Arabia's bilateral trade reached almost $50 billion. Iran wants to move westward with their trade, especially with the European Union. Iran has little trust with Russia and China, as they are aware of the fact that Saudi Arabia may move with them to the Asia-Pacific region. Remember, Putin said he has no allegiance to the Assad government and could be a bargaining chip.


When the Russian government refused to have the anti-ballistic missile defense system in Europe, Putin realized it would destabilize China and it meant a serious provocation for China's economic stability. Putin indicated, "Whom is this expansion intended for?" What he meant was that there is a great degree of stability in the world, so why destabilize it. NATO's role in energy security has overstepped their boundaries because they believe certain nations are able to advance international trade and regional cooperation in oil and natural gas. Their divine right believes that it should be their members that should reap the rewards of this oil rush in the Asia-Pacific region.


Russian Foreign Minister Sergey Lavrov stated in a defeated tone that at the centre of U.S. philosophy is only one thing, "We are number one, and everyone else has to recognize that. It shows that the United States wants all the same, to dominate and not merely be first among equals." What caught most economists off guard is the speed Xi Jinping worked to secure energy supplies in expanding markets for Chinese products and services. He is quickly becoming the most important economic leader in the 21st century. He adopted the 'offend-no-one' policy that bewilders many Western economists. However, what economists don't understand is that Xi is the actor whereby he manages all state functions as a key to diplomacy and advancing Chinese economic interests with regions and nations. He knows the global economy does not exist anymore, it has become regional. He cultivates goodwill and long-term economic interests to nations that are willing to do business. He chooses no side among any nations, he believes in economic stability and growth providing that China's security is not compromised. Xi established that there shouldn't be any disruptions in the oil and natural gas industry. China believes the price of oil is only reflected on how much it can hoard. China is one of the few countries in the world to concurrently maintain good relations with Israel, Palestine, and the Muslim world in general. The lower the price, the more they hoard and the more money this asset-class will be worth.


On February 2, 2015, Xi Jinping stated, "You know that due to our joint effort we have achieved a great result in our cooperation and we support rather intensive contacts at the highest level, and further expansion and deepening of cooperation in various spheres is seen in Russia." Chinese credit agency Dagong then released that Russian sovereign credit rating stands at 'A', indicating stable outlook after the Fitch Ratings & Moody's Investor Service downgrade.


Jeffery Woodbury, Vice-President of Investor Relations with Exxon Mobil, said in the earnings transcript, "I will remind you that Exxon Mobil has very long-standing and successful business in Russia built on an effective and mutual beneficial relationship with our Russian partners." What they're saying is that they're not willing to relinquish their multinational framework and investment because of sanctions. Chevron has a growing business with Russia. $800 million went to the Caspian Pipeline Consortium. It is a $5.6 billion expansion program. Again, oil and natural gas companies are not willing to capitulate. British Petroleum's 20% stake in Rosneft is built with trust and mutual reward. For them to operate in this kind of climate and become regional players is not a philosophy that they adhere to.


Multinational oil and gas companies are now working as a consortium to reduce capital expenditures and to raise the price of oil. China's speed in securing oil and natural gas deals from Russia caught many multinationals off guard. No one anticipated that they would give away their resources to China in order to prevent Russia's collapse. Multinationals including Exxon Mobil, Chevron, BP, Total Global, are literally forced to think regionally and their deployment of capital will be limited in their expansion of oil and natural gas. This means future deals will be made with China. There are indeed subtle hints of how nations behave. On January 29, 2015, TASS reported that insufficient supply in Ukrainian underground gas storages can jeopardize stability in supply to Europe, even though Gazprom continues to deliver gas despite Ukraine's debt to them.


China's diplomacy in the Gulf region has played dividends with their cooperation with Saudi Arabia. The opening of the Fujian Refinery & Petrochemical Company Ltd. in July of 2005 was jointly invested by Saudi Aramco, Exxon Mobil, and Sinopec. This is an integration with the Gulf countries. Beijing has boosted its military spending by double digits over territorial disputes with U.S. allies in the East. Along with their allies, they may be planning to deploy a ballistic missile defense system in the Asia-Pacific region. What does this all mean to economists, markets, and investors? For economists, new economic models have emerged that have replaced the global models of the past. The growth of economic engines is now based on economic blocks. It also means that China, Russia, India, and perhaps Saudi Arabia, depending on how irritated they get with the Iranian nuclear deal, will dominate the Asia-Pacific region's oil rush.


So how can an international community of investors profit from this geopolitical mayhem? We will need to understand that the global economy has been terminated. Economists are rethinking and reshaping global economies by focusing on regional economies. Multinational oil and gas companies are forced to think regionally with their investments therefore limiting growth. With the lack of investment, there is little oil and natural gas to bring to consumers. Multinationals are unable to operate their businesses in this kind of environment. Nations are adopting bilateral and trilateral trade cooperation that will limit other nations from getting a piece of the pie. OPEC's Secretary-General Abdallah Salem el-Badri recently indicated oil prices would reach $200 a barrel. 


$200 a barrel may not be possible since OPEC lost its dominance in leveraging the supply and demand of oil. Way too many countries depend on oil for revenue and their currency. As long as the US maintains their sanctions against Russia, Russia's only hope is to transform their economy into a technologically-advanced nation to compete with America and China. What's unfortunate is Canada's position; they could've been a contender in the Asia Pacific region. Marlon Brando is correct, there's always a contender, what could've been should've been albeit with the right leadership. 

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