Merger Mania

From the January 1999 Trumpet Print Edition

When the final congratulatory pat on the back has been given in response to recent mergers in the petroleum industry (part of the continuing merger mania that seems to have developed into an international contagion), we are left wondering, What’s going on? Why are so many large companies suddenly reluctant to stand on their own?

British Petroleum (BP) surprised the oil industry in August when it announced its planned takeover of the American oil group Amoco, in a $110 billion deal that positioned it as the world’s second largest oil and gas producer behind Shell. This was followed by the announcement of Exxon’s purchase of Mobil for $73.3 billion in stock, making the Exxon-Mobil group the biggest oil refiner in the world. These two, along with the Royal Dutch-Shell group, will form a triumvirate of giant companies that will be at least twice as large as any of their competitors. Why this restructuring of the oil industry? A December 1 Reuters headline sums it up: “Big Oil Merging to Survive, Not Dominate.”

The price of oil has steadily and drastically declined over 1998. Average prices for the year, at $13.60 a barrel, were the lowest since 1976. (A year ago, crude oil on the New York Mercantile Exchange traded above $19.40 a barrel.) Overproduction, coupled with a decreased demand due to an already glutted market, the Asian financial crisis and moderate winter temperatures (particularly in the heavy energy-consuming U.S.), has forced oil producers to cut costs in order to boost profits.

An OPEC (Organization of Petroleum Exporting Countries) meeting in November produced no answers on how to curb the crisis. Internal division and accusations of quota violations have resulted in a suspension of any action until March.

While a drop in oil prices means cheap gasoline prices for U.S. consumers, not everyone benefits. The BP-Amoco merger will result in a loss of approximately 6,000 jobs; the Exxon-Mobil merger, about 9,000. Countries which depend on oil-export revenues are suffering. Mexico and Venezuela, both heavily dependent on oil exports, are also the two largest oil suppliers for the U.S. (as the U.S. has in recent years moved to decrease its dependency on Middle Eastern oil). If this crisis continues and the governments are forced to slash their budgets, domestic social and political crises are likely. The implications of this, internationally, are cause for concern.

What course of action will the U.S. take if its main oil suppliers in Latin America fall into chaos? What may a desperate oil situation mean for an already tense Middle East? OPEC, by suspening action, has tossed the die to the wind. That leaves several months for the pieces to fall where they may.