The financial crisis has caused oil companies to be tight, and mergers and acquisitions are very complicated in international operations. Wang Zhen, dean of the Institute of Business Administration at China University of Petroleum, said that mergers and acquisitions should be cautious. The current financial turmoil has swept the world and the domestic oil and petrochemical industry has been seriously affected. What is the impact of the financial crisis on oil prices? How do multinational oil companies and Chinese companies deal with the financial crisis? The reporter interviewed Dr. Wang Zhen, Dean of the School of Business Administration of China University of Petroleum.
In the medium to long term, the price of oil will inevitably rise. Reporter: At present, the international crude oil prices continue to fall. What do you think the future oil price will develop in?
Wang Zhen: As a financial asset, oil, in the short-term, speculation and US dollar interest rates will lead to international oil price fluctuations; but in the medium and long term, the international crude oil price is determined by its fundamentals:
The first is the marginal cost of new capacity. This refers to the factors such as the average size of the oil field and the average cost of capital consumed per barrel of crude oil production. The price of crude oil is determined by the cost of new production capacity, unlike the refining industry, where the cost of refining is determined by the average cost. Upstream petroleum exploration and development is a typical high-risk investment industry. The view that the crude oil price is determined by the average cost stems from the incomplete understanding of this industry chain.
The second is changes in supply and demand. Reflecting the supply and demand factors of oil prices, imbalances in supply and demand or changes in inventory, will lead to changes in oil prices. Due to several major world oil crises in history, oil supply was reduced in a short period of time. Therefore, on the surface, the change in oil supply is the power that dominates the changes in international oil prices. However, in the medium to long term, demand is more dominant than supply, and demand becomes the decisive factor for oil prices.
Analyzing the data for a total of 42 years from 1965 to 2006 will lead to a unified conclusion: In the past 40 years, the dominant factor in the change of the international oil market is demand.
The third is the risk premium. The risk premium is due to the short-term changes in oil prices caused by supply interruptions or lags in capacity growth and excessive demand growth.
Therefore, in the medium to long term, oil companies should pay more attention to the two medium and long-term factors of marginal cost and supply and demand changes. In the medium to long term, crude oil prices have a balanced oil price.
The future equilibrium price of crude oil is affected by many factors, but I personally think that we should look at two factors. From the perspective of supply, one is the marginal cost of new oil fields, and the other is the balanced oil price of the OPEC oil budget; from the demand side, it is the economic alternative to oil substitutes such as biofuels. It has been new in the past few years. The investment in energy and renewable energy is very large. The price of substitute products is very important. What is the price of oil they can support? The balance between them is in the medium to long term.
I personally think that the price of oil will continue to decline for the time being, but it will inevitably rise in the medium and long term. Because the drop in oil prices is a drop in demand caused by the global economic downturn, the global economic recovery will inevitably lead to an increase in oil prices. The financial crisis is not a global economic crisis. Emerging countries will still maintain the growth of the real economy and the demand for oil consumption, even if consumer demand decreases. Oil-exporting countries will also adjust.
The oil trading mechanism is not perfect, and it is necessary to fight for the right of oil pricing. Reporter: Does the current oil trading mechanism have an impact on crude oil prices?
Wang Zhen: I personally believe that to really understand oil prices, we must understand the oil trading mechanism.
At present, there are four major markets in the world: WTI regional market, Brent regional market, Asia-Pacific regional market, and Dubai Middle East. Judging from the main pricing, it is priced through the two types of futures trading in North America's WTI and London's Brent. The most influential in the Asia-Pacific region is the Platts offer system, which has a huge impact on the Asian market. When we look at the price every day, we pay more attention to the price of WTI or the price of Brent. However, at certain times, the WTI price does not reflect the information of the global market. Sometimes it only reflects the market information of North America.
In addition to the oil trading mechanism, benchmark oils are very important when we look at the price of oil. The volume of WTI is relatively small, only 20 million tons of production, oil is relatively light, but it determines the world's major oil market prices, the current pricing more reflects the light oil pricing, but the new capacity is very important Part of it is heavy acid oil. Exports to Saudi Arabia, such as Saudi Arabia, are exported to the United States, Europe, and Asia. Pricing is different. It is sold to the United States using the WTI price as a benchmark oil, while in Europe it sells a Brent price as a benchmark oil. In Asia, Dubai's price is used as a benchmark oil. The first two are the futures prices while the latter is the spot price, which is the Platts price.
China should also strive to gain the right to speak about oil pricing because the authority and influence of the spot pricing system is smaller than that of the standard futures quotation system.
Corporate strategy transfer, mergers and acquisitions should be cautious Reporter: What impact does the financial turmoil have on multinational oil companies?
Wang Zhen: First, the profits of multinational oil companies have begun to decline before the financial turmoil, not when profits have begun to decline.
Because the profits from rising oil prices are not exclusively enjoyed by oil companies, but shared by the entire industry chain, the rise in oil prices will inevitably bring about significant increases in the costs of upstream discovery, development costs, and technical service fees. Since 2003, the rise in oil prices has pushed up costs, and the cost of corporate crude oil discovery has risen far more than the increase in oil prices, which has squeezed the profit margins of oil companies.
Second, compared with 2006, the “implicit price†of oil reserves in 2007 has shown a downward trend.
Second, the financial crisis affected the strategic transfer of multinational oil companies. For example, in 2002, BP focused mainly on strengthening cooperation with governments of resource-rich countries while focusing on mature basins. However, by the end of 2007, BP began to pay attention to the exploration and development of new areas; China not only paid attention to cooperation with governments of oil-producing countries, but also paid attention to the new areas. Development and exploration; other oil companies have their own strategic shifts.
Reporter: Is it now a good opportunity for mergers, acquisitions, and overseas “baskets�
Wang Zhen: The drop in oil prices has brought great opportunities for the merger and acquisition of China's oil companies, but it does not mean that companies must conduct mergers and acquisitions.
On the one hand, due to the drop in oil prices, some oil companies’ funds are tight. On the other hand, mergers and acquisitions are very complicated in international operations. Under high oil prices, some mergers and acquisitions may still be correct and low. Under oil prices, mergers and acquisitions of companies still need to be very cautious.
In the medium to long term, the price of oil will inevitably rise. Reporter: At present, the international crude oil prices continue to fall. What do you think the future oil price will develop in?
Wang Zhen: As a financial asset, oil, in the short-term, speculation and US dollar interest rates will lead to international oil price fluctuations; but in the medium and long term, the international crude oil price is determined by its fundamentals:
The first is the marginal cost of new capacity. This refers to the factors such as the average size of the oil field and the average cost of capital consumed per barrel of crude oil production. The price of crude oil is determined by the cost of new production capacity, unlike the refining industry, where the cost of refining is determined by the average cost. Upstream petroleum exploration and development is a typical high-risk investment industry. The view that the crude oil price is determined by the average cost stems from the incomplete understanding of this industry chain.
The second is changes in supply and demand. Reflecting the supply and demand factors of oil prices, imbalances in supply and demand or changes in inventory, will lead to changes in oil prices. Due to several major world oil crises in history, oil supply was reduced in a short period of time. Therefore, on the surface, the change in oil supply is the power that dominates the changes in international oil prices. However, in the medium to long term, demand is more dominant than supply, and demand becomes the decisive factor for oil prices.
Analyzing the data for a total of 42 years from 1965 to 2006 will lead to a unified conclusion: In the past 40 years, the dominant factor in the change of the international oil market is demand.
The third is the risk premium. The risk premium is due to the short-term changes in oil prices caused by supply interruptions or lags in capacity growth and excessive demand growth.
Therefore, in the medium to long term, oil companies should pay more attention to the two medium and long-term factors of marginal cost and supply and demand changes. In the medium to long term, crude oil prices have a balanced oil price.
The future equilibrium price of crude oil is affected by many factors, but I personally think that we should look at two factors. From the perspective of supply, one is the marginal cost of new oil fields, and the other is the balanced oil price of the OPEC oil budget; from the demand side, it is the economic alternative to oil substitutes such as biofuels. It has been new in the past few years. The investment in energy and renewable energy is very large. The price of substitute products is very important. What is the price of oil they can support? The balance between them is in the medium to long term.
I personally think that the price of oil will continue to decline for the time being, but it will inevitably rise in the medium and long term. Because the drop in oil prices is a drop in demand caused by the global economic downturn, the global economic recovery will inevitably lead to an increase in oil prices. The financial crisis is not a global economic crisis. Emerging countries will still maintain the growth of the real economy and the demand for oil consumption, even if consumer demand decreases. Oil-exporting countries will also adjust.
The oil trading mechanism is not perfect, and it is necessary to fight for the right of oil pricing. Reporter: Does the current oil trading mechanism have an impact on crude oil prices?
Wang Zhen: I personally believe that to really understand oil prices, we must understand the oil trading mechanism.
At present, there are four major markets in the world: WTI regional market, Brent regional market, Asia-Pacific regional market, and Dubai Middle East. Judging from the main pricing, it is priced through the two types of futures trading in North America's WTI and London's Brent. The most influential in the Asia-Pacific region is the Platts offer system, which has a huge impact on the Asian market. When we look at the price every day, we pay more attention to the price of WTI or the price of Brent. However, at certain times, the WTI price does not reflect the information of the global market. Sometimes it only reflects the market information of North America.
In addition to the oil trading mechanism, benchmark oils are very important when we look at the price of oil. The volume of WTI is relatively small, only 20 million tons of production, oil is relatively light, but it determines the world's major oil market prices, the current pricing more reflects the light oil pricing, but the new capacity is very important Part of it is heavy acid oil. Exports to Saudi Arabia, such as Saudi Arabia, are exported to the United States, Europe, and Asia. Pricing is different. It is sold to the United States using the WTI price as a benchmark oil, while in Europe it sells a Brent price as a benchmark oil. In Asia, Dubai's price is used as a benchmark oil. The first two are the futures prices while the latter is the spot price, which is the Platts price.
China should also strive to gain the right to speak about oil pricing because the authority and influence of the spot pricing system is smaller than that of the standard futures quotation system.
Corporate strategy transfer, mergers and acquisitions should be cautious Reporter: What impact does the financial turmoil have on multinational oil companies?
Wang Zhen: First, the profits of multinational oil companies have begun to decline before the financial turmoil, not when profits have begun to decline.
Because the profits from rising oil prices are not exclusively enjoyed by oil companies, but shared by the entire industry chain, the rise in oil prices will inevitably bring about significant increases in the costs of upstream discovery, development costs, and technical service fees. Since 2003, the rise in oil prices has pushed up costs, and the cost of corporate crude oil discovery has risen far more than the increase in oil prices, which has squeezed the profit margins of oil companies.
Second, compared with 2006, the “implicit price†of oil reserves in 2007 has shown a downward trend.
Second, the financial crisis affected the strategic transfer of multinational oil companies. For example, in 2002, BP focused mainly on strengthening cooperation with governments of resource-rich countries while focusing on mature basins. However, by the end of 2007, BP began to pay attention to the exploration and development of new areas; China not only paid attention to cooperation with governments of oil-producing countries, but also paid attention to the new areas. Development and exploration; other oil companies have their own strategic shifts.
Reporter: Is it now a good opportunity for mergers, acquisitions, and overseas “baskets�
Wang Zhen: The drop in oil prices has brought great opportunities for the merger and acquisition of China's oil companies, but it does not mean that companies must conduct mergers and acquisitions.
On the one hand, due to the drop in oil prices, some oil companies’ funds are tight. On the other hand, mergers and acquisitions are very complicated in international operations. Under high oil prices, some mergers and acquisitions may still be correct and low. Under oil prices, mergers and acquisitions of companies still need to be very cautious.
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