Oil Prices Approach Historic High

It has been announced that British Petroleum had to shut down an Alaskan oil field providing 8% of US crude oil production. Oil prices on the world market immediately surged to within pennies of their all-time high. Whats really going on? For an answer I look back to former President Richard Nixon. Privately Nixon who was smart, and as shrewd a man as any President in history use to talk to his friends about if there is a dollar to be made somewhere, than somebody is making it.

It does seem strange that for two consecutive years, the large multinational oil companies have had greater earnings, and free cash flow than in any period in history. At the same time, giant British Petroleum is clueless that they have corroded pipes that are about to take down 8% of Americas oil production. There is a dis-connect here of massive proportions, and nobody is thinking about it.

We all know the airlines are suffering. When you are hemorrhaging money, and the revenue just isnt coming in, its really tough for a company financially to maintain the maintenance programs that are vital to keep an airplane flying. This however is not the situation that British Petroleum or the other major multinationals find themselves in. The oil companies are PRINTING MONEY. They dont call oil BLACK GOLD for nothing.

Why would any oil company choose to skimp on maintenance? Why would BP be this dumb in their managerial policies? They have allowed a massive, and important pipeline to experience corrosion to the point where it has to be shut down? Listen up, when airlines fly a 747 airplane; each and every plane has to have its oil changed every so many miles or hours. The engines have to taken off the plane, and rebuilt every so many miles or flight hours. This is why planes are far more reliable than cars. The airlines make sure that this maintenance gets done or the Federal Aviation Agency will shut them down, no questions asked.

The President of the United States tours the world in Air Force One, which is a glorified version of a 747. The President actually has two of these planes identical to one another.

The Presidents planes are put on whats called a White Glove maintenance program. What this means is that the manufacturer, in this case Boeing wants the oil changed, and the engines ripped down every so flight hours. There are also scores of other items that must be done as well. Whatever the schedule is for whatever procedure, White Glove maintenance means the schedule is chopped in half. If Boeing wants an engine ripped apart every 500 hours, for Air Force One its every 250 hours.

Whats British Petroleums excuse for not maintaining the pipeline in a period of unprecedented earnings power, and monstrous unrestricted FREE CASH FLOW? Its certainly not stupidity. I have been involved with oil and oil stocks since 1978, and I am telling you that the people in the oil business are some of the smartest people on earth. Do you know how much oil a supertanker holds? These tankers can hold up to 2 million barrels (thats barrels, not gallons) of oil. The typical loss or spillage loading, and unloading a 2 million barrel tanker is no more than ONE TEASPOON of crude, thats how efficient these processes are.

It is unthinkable that a modern management team would allow a segment of the Alaskan pipeline to corrode. Corrosion is like metal fatigue in a helicopter. You dont wait for metal fatigue to become critical before dealing with replacing parts on helicopters. Todays chemical engineers know exactly how long it takes a pipe to corrode. The oil industry has more PhD chemical engineers than any industry on earth, and these guys are not asleep at the switch. It is up to you the reader to figure out how this happened, or could have been permitted to happen?

Oil is priced at the margin. This means, todays price is determined by the price of the last barrel that needs to be sold. It is not an average price, it is a marginal price. We are right now at the cusp of where demand equals supply. Even if you could bring another ten million barrels onto the market daily, we dont have the refining capacity to refine it. The last refinery in this country was built in the 1970s.

The Wall Street Journal reported in its cover story of August 8, 2006, that the oil industry .has been stymied in putting in .new refineries, by intense public opposition. This is absolutely untrue. I have not met an oil man (including CEOs of the majors) in the last ten years, who has expressed any interest whatsoever in creating a new refinery in this country. Big oil doesnt want to create new refineries.

As far as our leadership in Washington DC is concerned, this country has not had an oil policy in 30 years, thank you very much. If anything, Americas policies on oil, have been dictated by oil lobbyists paid to do oils bidding. The oil companies are not responsible for the high price of oil. OPEC sets the price, and big oil just tacks on their piece, and oh what a piece.

Richard Stoyecks background includes being a limited partner at Bear Stearns, Senior VP at Lehman Brothers, Kuhn Loeb, Arthur Andersen, and KPMG. Educated at Pace University, NYU, and Harvard University, today he runs Rockefeller Capital Partners and StocksAtBottom.comMangue Blog79817
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