Could nationalization correct for long-term oil costs?
A recent Business Week cover story points out that despite recent massive profits at big oil companies, their future ability to meet world demand is uncertain at best. A big reason why is that more and more reserves are under nationalized control:
In the 1960s, 85% of known reserves worldwide were fully open to the international oil companies. That number is now 16%. The rest of the world’s oil and gas is either restricted or entirely cordoned off. National champions such as Saudi Aramco, Kuwait Petroleum, and Mexico’s Pemex outweigh publicly traded oil companies in the production contest.
When it comes to commodities, public ownership is a major meta. The article makes the well-documented point that national oil companies are not profit-driven, and so tend to lag in technology, production capacity, and information transparency. This has historically led to a more expensive, volatile market for oil. Now, while it seems clear that price volatility is an enormous negative, both for the world economy and for investments in new energy sources, it isn’t so clear that slower production and higher prices are such a negative.
Let’s assume that the perfect competitive market for oil existed. Then prices would be close to that necessary to cover the cost of extracting enough oil to meet world demand at that moment in time. Adding in speculation and derivatives might help prices take into account likely world demand in the near future, but uncertainty wipes out the possibility of taking into account any longer-term costs.
So in this scenario, the likely outcome seems to be the one widely feared: that prices will remain relatively low until demand outstrips supply given current extraction techniques, at which point prices will spike. While new technologies will be deployed as prices rise enough to justify them, there’s certainly a good chance that the time window affecting prices will be shorter than the time needed to develop and deploy these new technologies. In this case, volatility would be extreme, and the high societal cost of this volatility would have been an externality, missed by the market.
Could it be that the poor performance of nationalized oil companies, by reducing effective supply prematurely, might help correct for this missed cost? By leading to higher prices earlier, it could be argued that they could lengthen the window available to develop new energy sources. The key seems to be that to encourage this development, the reduced supply and higher prices must be consistent and reliable.
Unfortunately, history seems to indicate that in general, national oil companies drift lower and lower in production until additional funds are desperately needed by the government. At this point international oil companies, always waiting in the wings, are called in to help fix things; then production surges, prices plummet, and any efforts to develop alternatives are wiped out. If anything, steady constriction of supply seems to work best under authoritarian regimes, such as OPEC since the 70s, where powerful governments are able to dictate production to oil companies, regardless of whether they are privately or publicly owned.
So it seems to me that the answer is no, nationalization doesn’t really help the situation overall. If it could somehow be ensured that national policies would take advantage of not needing to maximize profits, instead reliably and consistently restricting overall supply, then it could be possible that the impact of “peak oil” could be blunted. But at least in democracies, political motivations can be at least as short-sighted as economic ones; and if they are allowed to share in the profits, private oil companies will always be eager to help out. All this makes it hard to imagine a scenario where nationalization could effectively help matters.
PS: A great resource for thinking about this stuff is Daniel Yergin’s “The Prize”, as I was reminded by Ethan Stock’s latest at OnoTech.
Update: Hugo Chavez of Venezuela has made a novel proposal: to offer long-term deals for oil at $50 a barrel. His purpose is right in line with the above: to prevent future price plunges from destroying the worth of alternative sources invested in now. Chavez is interested in his own “tar sands,” which if economically recoverable would give Venezuela the highest reserves in the world. $50 is $15 less than current prices, but $10 more than the price needed to make this alternative source of oil viable.
This same approach could also make Canada’s tar sands viable, potentially blunting the power of middle eastern oil and removing the threat of any near-term shock from “peak oil”. Of course, the problem with this entire approach is that middle eastern oil is extractable at around $2 a barrel, much less than any tar sands source. Which brings the issue back to political will: if offered lower prices by middle eastern sources, the enormous amount of money and economic leverage involved makes reneging on any such long-term deals (or smuggling) close to impossible to resist.
March 2nd, 2008 at 3:11 am
Oil will never go below $85 again. In 2010 oil will be over $250 a barrel and gas will be $10 a gallon. Even though reserves are rising which should make oil prices drop the fact they don’t drop in price is because the political tensions are rising. With that you will either buy a hybrid which will still be expensive to operate or ride your bike or take the public transit. There are ways to reduce your fuel cost.