petroleumworld

Gabe Collins: Nationalized oil resources,
political instability drive gas prices higher

Here is a vital issue to consider as the Senate once again roasts American oil companies for high petroleum prices: The most serious threat to world oil markets in the next 10 years is not geologic or economic - it is political instability in producer countries.

World oil reserves are sufficient to meet growing demand for the next decade. The problem is accessing and developing petroleum reserves behind the stone wall of political instability and resource nationalism.

Iraq, for example, is in the top four of world oil reserve holders, yet it produces less than 2 million barrels per day. Venezuela cannot even meet its OPEC production quota of 3.165 million barrels per day. Russia, Nigeria, and other major oil exporters have also seen serious political disturbances in their energy sectors over the past three years.

The common wisdom has been that rapid growth in China and to a lesser extent, India, is responsible for driving up world oil prices. Unexpectedly fast oil demand in these countries and the United States tightened the market, but the most fundamental reason prices have shot up may be that many major exporters are not increasing production quickly enough to keep pace with demand.

State oil companies control more than 80 percent of the world's oil, but are not developing new fields quickly enough because bringing them fully online typically requires more than five years and billions of dollars in investment.

State-owned oil companies are often saddled with large social responsibilities, reducing the amount of money they have to explore for new oil and even to maintain production in their currently operating fields.

Therefore, while PEMEX, PDVSA, Saudi ARAMCO and other state companies control much of the world's oil reserves, they must partner with foreign companies (like ExxonMobil) who have the capital and technical expertise to develop the national firms' large reserves.

During the low oil price period of the mid to late 1990s, foreign companies were generally given favorable terms in Russia, Venezuela and other major oil producing states because these governments needed to keep production as high as possible to keep revenue flowing into state coffers.

However, with the meteoric rise in oil prices since 2002, revenues shot up without concomitant production increases and governments began feeling empowered to deal harshly with foreign companies in their countries. In Venezuela and Russia, the situation has become such that only developments in which the state has a controlling share will proceed. One effect of this "resource nationalism" is the stalling out of production in key countries in the past several years.

And atop the harder fiscal terms the companies face, there is also armed conflict in Iraq, Nigeria and perhaps soon Iran. Uncertain government policies, lack of rule of law and physical security threats all reduce investment, and by extension, a producer's ability to expand, or even maintain its oil exports.

The net effect of these factors is that private companies who must put shareholder interests first will not sink billions of dollars into developing new oil fields in countries that might nationalize the companies' property, or where insurgents will dynamite pipelines and kidnap workers.

In that sense, we should not blame ExxonMobil and ConocoPhillips for high gasoline prices. Our companies have been locked out of many areas where they badly want to expand oil production.

The Senate's attention might be better focused on gatekeeper countries such as Iran, Nigeria and Venezuela, which have massive oil reserves stranded by political instability, sanctions imposed by Congress and active hostility to foreign investment by producer country governments.

Gabe Collins is program services director of the Citizens' Alliance for Responsible Energy in Albuquerque. Its primary mission is educating the public about the need for secure and affordable energy and how we can achieve that goal. Petroleumworld not necessarily share these views.

Editor's Note: This commentary was originally published in by Albuquerque Tribune, on 03/22/2006. Petroleumworld reprint this article in the interest of our readers.

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Petroleumworld 03/23/06