Oil CEO on Wed May 03 at 1:07 PM EST
The Saudis set the price for Saudi oil. OPEC does not regulate price. OPEC attempts to regulate its own output, thereby affecting the price of oil. The world price of oil is really a number of different benchmark grades. WTI, Brent, etc. WTI is a spot price set basically to what the current NYMEX next month delivery futures price is.
Futures prices move up and down according to the balance between buyers and sellers of contracts at various price levels, just like every other commodity. Supply and demand. But if XOM just contracted to buy 100 million barrels from Saudi at $60, they are obviously not going to be in the market for oil on the NYMEX at $74. Then again what they got from Saudi is a different grade of stuff than what West Texas Intermediate is. Close, but not the same. It may cost more to deal with or they might get less good stuff like gasoline per barrel out of it. This is why certain buyers or refiners may or may not want oil from certain places. In other words, oil is fungible, but it's not exactly fungible, if that makes any sense.
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Dave on Wed May 03 at 1:13 PM EST
Couple of things.
OPEC's pricing ability always depended on it's ability to be a swing producer. Therefore, they could affect the NYMEX prices. That's a thing of the past.
Perhaps it's possible we could see a new organization (not OPEC) centered around the Middle East, North Africa and (maybe) the various pipelinestans (e.g. Kazakhstan, Ajerbaijan, Turkmenistan). This would not include Indonesia, Nigeria or Venezuela and perhaps Iraq, which OPEC has basically already disavowed. I believe OPEC's days are numbered. The organization is a sham.
Sometimes I have wondered about whether there will be a natural gas cartel in the future (includes Russia?).
If Lee Raymond said what you heard, then he is a dissembling SOB. Saudi Arabia has no control over prices as recent events have made obvious.
But there's another way to think about it. All the historical forces at play right now argue for a free-for-all on a country by country basis. Why?
Each country must assess for itself it's own demand, what it is willing and able to produce and what it can export. Therefore, each country must consider it's self interests first in a world in which fossil fuels supplies are tight and will become more scarce. This would mean that the days of organizations of various types like OPEC are numbered.
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[new] Oil CEO on Wed May 03 at 2:02 PM EST n all fairness to both Mr.Raymond and the Saudis - Transcript Time. Congress. Nov 9th, 200. Numbers are the page numbers.
Funny stuff. Well worth the read for those of you unfamiliar with the proceedings.
But obviously we have some very serious questions to ask you because our people are asking us. I will tell all of you, I come from an energy State, but in almost every occasion upon my return to New Mexico the first person that puts out their hand and says, hello, Pete, or hello, Senator, follows up with a question: Why don't you bring the price of crude oil down, Pete? What is happening? Who is setting the price of that oil?
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So my first question is, since most of my people and I believe most Americans that we hear from want to know, how is the price of oil set? Who sets it? Why does it go up? How does it come down? Actually, my constituents and I believe most Americans think that somebody rigs these prices, that in the process somebody is getting ripped off, and they think it is them, the constituents who have asked me and the constituents of America who ask this question. So I want to ask you, and please, in the few minutes you have, somebody describe in detail how the price of oil is set, because I close by saying if that is not rational, then are you rigging the price of oil or is somebody rigging the price? Who chooses to answer the question first?
[No response.]
Chairman DOMENICI. No volunteers? We will go the way we
started. Mr. Raymond?
Mr. RAYMOND. I will volunteer.
Chairman DOMENICI. Thank you. That is called an involuntary
volunteer.
Mr. RAYMOND. Senator, that is an extraordinarily complex question that you have just asked. I think, as I made in my comment, in the comments I made, the U.S. companies that are represented here in terms of the total amount of production that they have, that they contribute to the world supply, is relatively modest. Our own company is less than 3 percent and we are the largest producer. The facts are that the world supply pool, many, many countries contribute to that and many companies operate in those countries. But obviously the big actors in the equation are Russia and the Middle East countries and OPEC.
Chairman DOMENICI. Now, Mr. Raymond, let me interrupt. I
want to know something as simple as this. Oil comes out of the ground. It is either put in a boat or put in a pipeline. It then moves. At some point somebody buys it. At some point it assumes a price. That price may be only fixed one time or it may be fixed a number of times. Then it goes to another place and gets refined. I need to know from you, tell me from the time it comes out of the ground, how is the price set?
Mr. RAYMOND. Well, let us talk for a moment about the easiest place to talk about is Saudi Arabia.
Chairman DOMENICI. Okay.
Mr. RAYMOND. A month before the month in which we are going to lift the crude, the Saudis tell us what the crude price will be for that month, and we have the alternative of either saying we will nominate and they will tell us we can lift, we can lift that crude. If we lift that crude, we are going to pay the price that they have said what you have to pay in order to buy that crude oil.
Chairman DOMENICI. What does ``lift'' mean?
Mr. RAYMOND. To have a ship show up and take it away.
Chairman DOMENICI. Be ready to take it.
Mr. RAYMOND. That is exactly right. At this point there are no pipelines out of Saudi Arabia, so it all goes out by ship. They say, here is the price, and the alternative we have is to buy it or not buy it.
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Chairman DOMENICI. Okay.
Mr. RAYMOND. Now, how they determine what that price, what the price is that they are going to set would only be speculation on my part, but I would have to say when you look at that data that the prices they set for the forthcoming month generally are very reflective of world market conditions apparently as they see them.
Chairman DOMENICI. What does that mean, world market conditions?
Mr. RAYMOND. Well, they look around the world and see what
people are willing to pay per barrel of crude oil. It is traded in the North Sea, it is traded in Singapore, it is traded all over the world.
Chairman DOMENICI. So if the price is short they can ask high prices and they will get it; is that right?
Mr. RAYMOND. That is exactly right.
Chairman DOMENICI. Okay. Now, when we hear the word ``speculators'' purchase it or it is bought in bidding, where does that occur?
Mr. RAYMOND. Well, that happens basically on the mercantile exchanges. That could happen in New York, it could happen in Singapore, it can happen in London. Those exchanges, those markets, Senator, are open 24 hours a day all around the world.
Chairman DOMENICI. But Mr. Raymond, what we would like to
know is what does that mean? Do they also respond to Saudi Arabia or do they bid up the price afterwards?
Mr. RAYMOND. They bid up the price afterwards. The Saudis--
to be specific about the Saudis, the Saudis will only sell to end users. That is to say, the Saudis will only sell to refiners. The Saudis have never had any interest in being involved in, I will call it, the speculative market. As a matter of fact, if we were to contract-- we have a long-term contract with the Saudis. If we buy crude oil from them, if for some reason, say for example we had a hurricane, had to shut down the Baytown refinery, we have some crude oil, we do not know what to do with it, before we could sell it to somebody else we would have to go back to the Saudis and tell them that we intend to sell it to someone else and who that other party is, because they want to make sure they sell only to end users.
Chairman DOMENICI. Mr. Raymond, let me interrupt now. Why don't you do this for me. Put yourself in my shoes. I am there talking to that person and they say: How is the price of oil set? How do I answer that person?
Mr. RAYMOND. The price is set on the world market by willing
buyers and sellers as to what willing sellers are willing to sell it for and willing buyers are willing to pay for it.
Chairman DOMENICI. All right. Now, who makes the profit in
that, in that--I do not think my constituent would understand
that, nevertheless.
Mr. RAYMOND. Well, okay. Well, let's stay on the example that we are on. The Saudis set the price. At that point that establishes the price for Saudi Aramco or the Saudi government. We then, in the case say we bought the cargo of crude oil, we will take it to a refinery. We run it through the refinery and the product markets then determine what the margin was in the refinery. But we bought the crude oil at world market price.
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Chairman DOMENICI. All right. Thank you very much. My time has expired. I am not sure my constituent is pleased with the answer, but nonetheless. Not unpleased; they do not understand it.
Senator Bingaman.
Senator BINGAMAN. Thank you
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