Oil Supply II: Producers

From the broad perspective of global oil supplies, we will now turn to the behavior of individual companies and countries that produce oil. This section will divide into three parts: private oil companies, national oil companies, and oil cartels.

Private Oil Companies

For many years it was large private oil companies that dominated global oil production. In the late nineteenth and early twentieth century, America’s Standard Oil Company, the monopoly created and controlled by John D. Rockefeller, was one of the country’s industrial giants and accounted for almost 90 percent of total American oil sales.

In 1911, a Supreme Court decision based on the emerging body of antitrust laws ordered the monopoly to be broken up into 34 smaller companies. Three of these companies Exxon (formerly Standard Oil of New Jersey), Mobil (formerly Standard Oil of New York), and Chevron (formerly Standard Oil of California would eventually join Royal Dutch Shell (Netherlands), British Petroleum (Great Britain), Texaco (United States), and Gulf Oil (United States) to form a group that became known as the Seven Sisters^{. 1}

The Seven Sisters, some of which merged with each other to form “supermajors”, would control most of global oil production for the rest of the twentieth century. When nationalized oil companies in many oil producing nations began to flex their strength in the 1970s, having learned the trade of oil production from partnerships with private firms, the Seven Sisters and other major private producers survived by investing in more unconventional oil sources in Alaska, the Gulf of Mexico and the North Sea. ²

In recent years, private sector profits have skyrocketed thanks to strong oil prices. ExxonMobil earned the “largest annual profit in corporate history” in FY2005, netting over $32 billion. The company has continually beat this record, setting a new one again in FY2007 with $40.6 billion net income. “Exxon Mobil earned more than $1,287 for every second of 2007.” 3The supermajors have become so flush with cash that they are having trouble spending it productively.⁴

At the same time, the supermajors are facing increasingly fierce competition from national or renationalized oil companies (see “National Oil Companies” directly below). In an attempt to retain a greater share of oil profits for the state, many of these national oil companies have ended or renegotiated unfavorable terms for longstanding contracts with international partners. Since national oil companies are now in a position to extract oil from conventional sources largely without private sector assistance, the supermajors have seen their role in global production change.⁵

The loss of traditional revenue streams means supermajors must now offer unique specialized services or invest in the development of expensive unconventional oil sources such as tar sands, oil shale, or deep-sea oil if they want to remain globally competitive. ⁶ So far, such “frontier projects” have not fared well.

According to one expert, “The once-proud giants may have to reconcile themselves to shriveling up over time as they fail to replenish reserves.” Though their ultimate fate remains unclear, the supermajors now have the capital to mount significant resistance in what some believe is the “coming age of ‘asymmetric warfare’” against the nationalized oil companies ⁷.

National Oil Companies

Most oil producing countries have a national oil company. Oil production is a knowledge-intensive and capital-intensive industry. Therefore it makes sense in many cases for resources to be concentrated in a few firms or a single monopoly. In the early days of oil, governments granted private companies the rights to mine for oil in exchange for the transfer of expertise and technology and for a share of the profits. States formed their own national oil companies to handle their side of the partnership.

As national producers acquired skills of their own, they grew more reluctant to remain minority stakeholders in the natural resources of their own countries. Fortunately for them, they were backed by national governments which had the power to change the terms of partnerships and contracts as they deemed fit. Private companies either had to accept new terms or leave the country, in which case national producers gained sole control over the valuable oil assets.

The case of Saudi Arabia is an illuminating one. In the 1930s and 1940s, various remnants of America’s Standard Oil Company formed a joint venture with the government of the kingdom the Arabian American Oil Company, or Aramco to develop the country’s vast oil reserves. The private firms reaped the vast majority of profits from the venture until 1973, when the Saudi government successfully negotiated a 25 percent share. The government continued to consolidate its holdings in Aramco until it secured 100 percent control in 1980, at which time the company’s name was officially changed to Saudi Aramco.⁸

National oil companies now “dwarf’ the supermajors in profitability and reserve holdings. Saudi Aramco, for example, has reserves equivalent to twenty times those of ExxonMobil, the largest private oil producer. ⁹ At the same time, national companies still cannot match the expertise of the private firms and are unable to fully exploit reserves once the easier initial stages of mining have been completed.¹⁰ There are some exceptions to this rule among smaller, more advanced economies such as Brazil, Norway, and Malaysia. But, in general, the growing power of national oil companies at the expense of private firms translates into less oil on the global market. This trend constitutes a significant threat to the stability of global energy security ¹¹.

WAVE OF RENATIONALIZATION The recent spikes in oil and natural gas prices have emboldened the governments of several important energy producing nations to pursue an aggressive strategy of renationalizing their energy sectors. While Russia has been notorious for using state power to weaken rivals to the national monopolies in oil (Rosneft) and natural gas (Gazprom), the trend toward “resource nationalism” is most pronounced in Latin America .  The populist governments of Venezuala and Bolivia have not hesitated to renegotiate settled contracts and banish foreign companies. Venezuala alone secured $31 billion in new revenues for the state using such tactics and alienated several major European producers, including France’s Total and Italy's Eni.12 In 2006, Bolivia dispatched its army to seize control of several oil and gas fields, effectively holding them hostage until private partners agreed to renegotiate contracts.13 By 2008, Venezuela’s oil revenue reached $85 billion. Oil is now 90 percent of Venezuela’s total export revenue.14 The wave of renationalization has significant consequences for international energy security. The general consensus is that, “When national governments strengthen their grip, the outcome is more often than not a deterioration of the country’s industry and a drop in output.” 15 The general population may see some benefits from renationalization in the form of increased social spending, but the primary beneficiaries of such rent-seeking behavior are often government officials and national treasuries. 16 Both the individual country and the whole world are ultimately hurt by resource nationalism and the decreased production it inevitably yields.

Supply Imperfections: Oil Cartels and OPEC

While the demand imperfections we identified in the previous section (“Oil Demand”) resulted in fragmentation, the supply imperfections this section will discuss result in a problematic concentration of power. In 1960, a group of the world’s leading oil exporters convened in Baghdad, Iraq to discuss ways of coordinating their production policies. The goal of these countries, as articulated in Article 2 of the chartering Statute of their association, was to develop a common oil policy that would determine “the best means for safeguarding [the] interests [of members], individually and collectively.” ¹⁷ The group, now known as the Organization of Petroleum Exporting Countries, includes 12 members: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela. It has been the dominant force in global oil markets since its founding.

The OPEC countries operate as a cartel, “a combination of independent commercial or industrial [actors] designed to limit competition or fix prices.” ¹⁸ Each member nation is periodically assigned an export quota that sets the maximum amount of oil they can sell to other countries. Since OPEC controls 55 percent of the oil traded internationally, its decisions regarding supply have a tremendous impact on global prices.¹⁹ The cartel can control prices either by (a) directly increasing or decreasing the amount of oil it releases into the market, or (b) merely signaling that a shift in policy is forthcoming. In the estimation of one report, “The very existence of OPEC has influenced conditions in the petroleum market as buyers and sellers await decisions taken at OPEC meetings, and monitor the institution’s behavior.” ²⁰

OPEC’s charter mentions other objectives that go beyond pure self-interest, highlighting the need to ensure “the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations.” ²¹ In practice, OPEC has played both a destructive and constructive role in the history of oil prices over the last 30 years.


Source: http://www.opec.org/opec_web/en/data_graphs/330.htm  

In 1973, the Arab members of OPEC announced an oil embargo against any country that supported Israel in the Yom Kippur War against Syria and Egypt, including the United States and many European countries. The embargo triggered history’s most catastrophic oil crisis as the price of oil more than doubled almost overnight. Acute shortages led to long lines at the gasoline pump and strict government rationing policies.²² When the embargo was ended almost a year later, international relations between the West and the Middle East had been severely damaged. Many countries began to take steps to curb OPEC’s power by investing in oil development in non-Arab countries and researching alternative energy technologies.²³

OPEC played a more constructive role in regulating supplies and prices during the Iranian Revolution in 1979 and the Persian Gulf War in 1990-1, largely thanks to the leadership of Saudi Arabia. The threatened losses of market share and revenue posed by developments in the 1980s led OPEC to increase export levels and stabilize the global market at a reasonable price level. ²⁴ Although OPEC’s power has waned from its peak in the mid-1970s, the group remains a dominant force in the world energy landscape. It will continue to be a key player in the years ahead.