Colin Barry

BP and the Consolidation of the Oil Industry (ENERGY, Wednesday, Week 2)


Capital markets function inefficiently for oil companies. One of the factors driving consolidation of massive integrated oil companies (IOCs) has been liquidity constraints; access to capital has been a serious driver of M&A.

Vertical integration (BP buying Amoco to add refining and retailing) has helped eliminate hold-up problems that could not be realistically solved by contractual obligation, even in countries with court systems. In concentrated industries, there is no substitute for owning your channel partner.

In general, the energy business offers a fascinating set of game-theory-esque case studies. National Oil Companies (NOCs) like Saudi Aramco own refineries in the U.S. basically so that they have enough collateral for American companies to seize (via the U.S. court system) in the event of contractual breach. The insane costs that (for example) Amoco could impose by ceasing to buy oil from BP --- even temporarily --- have impelled consolidation to ensure that upstream firms (exploration and extraction) will have access to the market.

Empirically, expropriation (when the Venezuelan government nationalizes extraction) doesn't really hurt IOC revenues. NOCs still need technical help with extracting oil, access to the consumers, and often access to capital --- try floating a huge bond issue on the international capital markets if you are Angola.

And BP/Amoco/ARCO's play to "short the West Coast markets and elevate prices" in 2000 by shipping Alaskan oil to Asia is possibly the coolest nefarious corporate plot in recent history. An American company tried to manipulate oil prices the world's eighth largest economy (California) and almost got away with it!