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Oil co. collapse ripples through industry

Marketplace Staff Sep 30, 2008

Oil co. collapse ripples through industry

Marketplace Staff Sep 30, 2008


Kai Ryssdal: If we’ve learned just one thing over the long slow playout of the credit crisis, it’s that there’s no such thing as a stand-alone company. Yeah, on the face of it, any given enterprise might seem to be self-sufficient. But as Wall Street has beaten into us over the past year and a half, it’s what you don’t see that gets you.

A case in point comes to us from the oil business and a now-bankrupt trading company called SemGroup. The firm was caught short when a swing in the markets left it without enough money to cover its bets. Crude margins have only gotten tighter since then. And thousands of oilmen jilted in the bankruptcy are themselves close to ruin. From Tulsa, Oklahoma, Laurie Burkitt reports.

Laurie Burkitt: You’d almost expect to see cows grazing outside Kevin Cantrell’s country office. It’s in the middle of a green pasture in a small town called Ada, Oklahoma. But Cantrell doesn’t raise cattle on this land. He drills oil. So there’s another thing you might expect: that with oil at more than $100 a barrel, Cantrell would be making big money. Instead, thanks to the collapse of SemGroup, he’s hurting.

Kevin Cantrell: The first call I made when I found out that it was looking like we were not going to get our money was to an attorney. The second call I made was to my bank. And I asked them: Hey, I am gonna have to have a couple months leeway here, because SemGroup’s stolen my oil and I can’t get it back. I’m not going to get paid for it, so.

SemGroup didn’t send masked bandits to steal Cantrell’s oil. When the company went belly up, it simply failed to pay him $400,000 worth of crude.

Cantrell: What can you afford to lose is the question. You know, I mean, this is my livelihood, I’ve got three kids and my family, you know, that I take care of through this and employees and everything else. So, even though we’re a small company and it seems like a smaller amount, to me, that’s a large amount.

Want to hear a large amount? — $2.4 billion. That’s the amount SemGroup lost. The company’s failure hasn’t just swamped producers like Cantrell, energy analyst John Kilduff says SemGroup also left a stain on the oil market.

John Kilduff: When the news about SemGroup’s insolvency hit the marketplace, there was first a sell off and then a bit of a price spike, but we’ve been coming down in price ever since really that news hit the market.

Kilduff says SemGroup didn’t single-handedly cause the drop in oil prices. But the fact that it made bets without having the money to cover them panicked the market. Oilmen worried that other companies might be doing business the same way as SemGroup. So they sold out, fast.

[Sound of a truck horn honking] More than 100 miles north in Tulsa, a Conoco truck pulls up to one of Bob Sullivan’s oil storage tanks. Sullivan is only selling his oil to public companies now.

Bob Sullivan: We were hurt to the tune of about $2.5 million.

Sullivan says SemGroup collapsed two months ago, but the ripple effects through the market are affecting his ability to pump.

Sullivan: The impact on us is that we have to postpone or defer the activity out there in drilling more oil. It simply slows down the pace at which new oil is brought on the market.

And Sullivan says that’s bad news for everyone.

Sullivan: The consumer and the taxpayer are going to have to suffer from our country going out into the world market and buying crude from Venezuela or the Middle East or wherever it comes from. Those are barrels that would otherwise come from us. It drives up our imbalance of trade. It weakens the dollar. It defers tax collections by the state and federal government. The trickle down, is pretty significant.

A steadily weakening economy is magnifying the effects of SemGroup’s collapse. Fortunately, for the oil business, demand for oil will probably grow strongly in future. But it’s not clear when that demand will kick in, or whether small producers like Cantrell and Sullivan can hold out that long.

In Tulsa, I’m Laurie Burkitt for Marketplace.

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