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The Growing Importance of National Oil Companies

The efforts of Venezuela’s Hugo Chavez to assert state control over the country’s oil industry are just one example of an important worldwide trend toward the nationalization of oil.

According to a very interesting report from Rice University’s Baker Institute for Public Policy, National Oil Companies (NOCs) now control 77 percent of global proved oil reserves. Production is also increasingly controlled by NOCs, according to the report:

In contrast to years past, when privately held IOCs with publicly listed shares, such as ExxonMobil, BP, Royal Dutch Shell and Chevron, represented the largest oil and gas producers worldwide, NOCs now dominate global production. According to PIW, of the top 20 oil producers worldwide, 14 are NOCs or newly privatized NOCs and the international majors have been relegated to second-tier status in terms of controlling the world’s oil production.

So what is the significance of this?

The report asserts six broad conclusions. Those conclusions would seem to support the growing consensus of those concerned about the economic, national security and environmental implications of the oil economy: The United States and other oil-importing countries would be better off if they found a cost-effective way to reduce their reliance on imported oil and to move consumption toward alternatives sources of energy. (This article perhaps heralds the arrival of this notion as conventional wisdom.)

Here’s what the report says about what the growing importance of NOCs means for oil-importing countries like the United States:

The growing role of the NOCs in global oil markets has important policy implications for oil importing nations. To begin, if a larger share of global investment in oil production capability will be influenced in the future by noncommercial factors, then importing nations may need to adjust their national energy strategies to reduce vulnerability to changes or instability in NOC reinvestment rates. In addition, consuming nations also will have to debate the benefits and challenges of having NOCs seek security of demand and other benefits of vertical integration by positioning themselves in downstream markets through the purchase of assets in major consuming markets like the United States, Europe, and China. For consuming countries, a desirable policy will be to promote free trade and utilize multilateral frameworks such as the World Trade Organization and Energy Charter to press NOCs to adopt institutional structures that will enhance their efficiency, promote market competition and curb interference in commercial investment decisions by their national governments.

This being the Baker Institute (in built-on-oil Houston, Texas) the solution proposed in the above paragraph’s final sentence to the risks outlined in the first three sentences make no mention of alternative sources of energy, instead advocating policies that attempt to make the world oil market as free as possible. But common sense tells us that to the extent competitive alternatives to oil can be found, the risk associated with nationalization of oil will be mitigated.

Ironically, because it is less efficient, the nationalization of oil by undemocratic regimes is helping to make alternatives to the commodity that is the lifeblood of those regimes more competitive. (And, in the case of Chavez, killing the golden goose that pays for the social spending that keeps him in power.)