The two – arguably – most important and controversial global markets are currently engulfed in structural flux. For banking, the recent financial crisis has kicked regulators from the United States to the United Arab Emirates into overdrive, in attempts to control debt and cash flow and maintain economic stability. In oil, the narrative has focused more on the struggle of the once dominant ‘supermajors’, who now must fight falling profits as well as environmental activism to keep investors, and indeed the public, happy. In both markets, however, for both producers and consumers, the key to stability and prosperity is to shrink the gigantic business groups that dominate their respective fields. This is happening in both banking and oil, but for very different reasons. The banks, especially in Europe, are still considered too big to fail, and are being encouraged to shed assets and halt activities to remain stable under new legislation. Separately, in oil, companies are witnessing falling profits as vast sums of cash are pumped into new and expensive exploratory (both geographically and technically) projects. Successful shrinking will produce market places with more effective competition, more freedom for state finance and a higher quality consumer experience.
In the deepest irony, the Royal Bank of Scotland (RBS) produced a report this week declaring that many financial institutions in Europe would be required to shed billions of Euros worth of assets, and increase their available capital, in order to comply with ‘Basel III’ regulations – upcoming rules designed to reduce the susceptibility of banks to failure. RBS pointed to Deutsche Bank, Barclays and Credit Agricole as three that required particular attention – although had another bank produced the reports, the list probably would have included RBS itself, judging by how much money the British Treasury was required to fork out to save it in 2008. The message, however, is clear, regardless of where it comes from. Consumers and regulators are beginning to demand security and rationality in banking culture. The ‘ ring-fencing’ rulings that came into effect last year – in which retail banking provisions contained within institutions had to be legally divided from the investment limbs – were just the start of a revolution in international banking procedure. RBS may be the perfect example for how the industry will operate in the future – that is, if British Chancellor George Osborne splits up the semi-nationalised bank into ‘good’ (retail, insurance) and ‘bad’ (investment banking, asset management) departments.
The global economy has, to an extent, been more liberal with the oil industry. That is, the big five (Exxon-Mobil, British Petroleum (BP), Total, Chevron and Royal Dutch Shell (RDS)) or the ‘supermajors’ have been left to deal with shrinking profit margins and huge increases in costs by themselves. Returns on both equity and capital employed have significantly falling across the market since their peak in 2005, despite the steady increase of the price of crude oil to over $100 per barrel. It is the costs of production, i.e. securing and extracting the oil, rather than the politics of the market that is dictating balance sheets – which is again ironic as oil companies in fact manipulate market equilibrium by withholding stocks in order to keep prices high. The supermajors are looking, in the words of BP CEO Bob Dudley, to ‘value not volume’ as costs of various expenses soar in the current economic climate. BP for one face tough conditions in Canadian tar sands, whilst the Deepwater Horizon payments from the 2010 Gulf of Mexico spill seep into the tens of billions of Pounds Sterling. Simultaneously, RDS and Total have both been hit by crime and corruption in Nigeria. The results of these complications have led the big five to concentrating efforts into refining their very best methods and tactics, and neglecting new and unexplored sources of revenue. Shale gas and its controversies will play important parts in the immediate future of the industry, as smaller companies gain momentum in an ever changing market.
The fabric of the global economy is set to change. While this may sound like a line out of a JRR Tolkein fantasy, such rhetoric may in fact be the only way of describing what will happen to the system in the next fifty years. Finances will spread as consumers and regulators demand more accountability; crude oil will fail as a global fuel and will be replaced by something else – what that will be is yet to be decided. What is certain is that everything will shrink until it is reasonably sustainable. It is a sign of how the 20th Century was organised that the relics of the era – namely the economic powerhouses in oil and high finance – are now falling apart around us.
Christopher Thompson, ‘Banks ‘need’ €3.2tn asset cuts’. Financial Times, 12/08/2013
Guy Chazan, ‘Oil majors spending more to find less’. Financial Times, 12/08/2013