Nationalization of oil supplies
Encyclopedia
The nationalization of oil supplies refers to the process of deprivatization of oil
production operations, generally in the purpose of obtaining more revenue from oil for oil producing countries. This process, which should not be confused with restrictions on crude oil exports, represents a significant turning point in the development of oil policy. Nationalization
eliminates the concession system—in which private international companies control oil resources within oil-producing countries—and allows oil-producing countries to regain control. Once these countries become the sole owners of their resources, they have to decide how to maximize the net present value
of their known stock of oil in the ground.
Several key implications can be observed as a result of oil nationalization. On the home front, national oil companies are often torn between national expectations that they should carry the flag and their own ambitions for commercial success, which might mean a degree of emancipation from the confines of a national agenda.
According to consulting firm PFC Energy, only 7% of the world's estimated oil and gas reserves are in countries that allow private international companies free rein. Fully 65% are in the hands of state-owned companies such as Saudi Aramco
, with the rest in countries such as Russia
and Venezuela
, where access by Western companies is difficult. The PFC study implies political factors are limiting capacity increases in Mexico
, Venezuela
, Iran
, Iraq
, Kuwait
and Russia. Saudi Arabia
is also limiting capacity expansion, but because of a self-imposed cap, unlike the other countries. As a result of not having access to countries amenable to oil exploration, ExxonMobil
is not making nearly the investment in finding new oil that it did in 1981.
, Iran
, Saudi Arabia
, and Kuwait
were all poor and underdeveloped. They were desert kingdoms that had few natural resources and were without adequate financial resources to maintain the State. Poor peasants made up a majority of the population.
When oil was discovered in these developing nations during the early twentieth century, the countries did not have enough knowledge of the oil industry to make use of the newly discovered natural resources. The countries were therefore not able to mine or market their petroleum.
Major oil companies saw this as an opportunity for profit and they negotiated concession agreements with the developing countries; the companies were given exclusive rights to explore and develop the production of oil within the country. The concession agreements made between the oil producing country and the oil company specified a limited area the company could utilize, lasted a limited amount of time, and required the company to take all the financial and commercial risks as well as pay the host governments surface taxes, royalties
, and production taxes. Despite all of this, however, the countries were able to claim any of the oil they mined. As a result, the world’s oil was largely in the hands of seven corporations based in the United States
and Europe
. Five of the companies were American (Chevron
, Exxon
, Gulf
, Mobil
, and Texaco
), one was British (British Petroleum), and one was Anglo-Dutch (Royal Dutch/Shell). These companies have since merged into four common oil companies: Shell, ExxonMobil
, Chevron
, and BP
.
The established contracts between oil companies and nations with oil reserves gave the oil companies an advantageous position, leading to the inclusion of choice-of-law clauses. In other words, disputes over contract details would be settled by a third party instead of the host country. The only way for host countries to alter their contracts was through nationalization. Most of the countries, with the exception of Venezuela, even signed away their right to tax the companies in exchange for one time royalty payments.
Although undeveloped nations originally welcomed concession agreements, the movement for nationalism began once the developing countries realized that the oil companies were exploiting them. Led by Venezuela, oil producing countries realized that they could control the price of oil by limiting the supply. The countries joined together as OPEC
and gradually they gained control of their own oil supplies rather than allowing the oil companies to control them.
Before the 1970s there were only two major incidents of successful oil nationalization—the first following the Bolshevik Revolution of 1917 in Russia and the second in 1938 in Mexico. Due to the swift growth of the energy economy, resources shifted to becoming nationalized to protect themselves from adjustments in demand worldwide.
was the first country that took interest in Middle Eastern oil. In 1908, oil was discovered in Persia by the Anglo-Persian oil company under the stimulus
of the British government. Britain maintained strategic and military domination of areas of the Middle East outside Turkish control until after World War I
when the former Turkish Empire was divided between the British and the French. It turned out that many of the areas controlled by the French had little oil potential.
On the other hand, Britain continued to expand oil interests into other parts of the Persian Gulf
. Although oil resources were found in Kuwait, there was not enough demand for oil at the time to develop in this area.
Due to political and commercial pressure, it did not take long before the United States
secured an entry into Middle Eastern oil supplies. The British government was forced to allow the US into Iraq
and the Persian Gulf
states. Iraq became dominated by US oil companies while Kuwait
consisted of a 50/50 split between British and American companies.
Up until 1939, Middle Eastern oil remained relatively unimportant in world markets. According to “The Significance of Oil,” the Middle East at the time
After WWI, the demand for oil increased significantly as the result of an energy shortage. Due to war-time oil development, which proved the great potential for oil discovery in the Middle East, there was little hesitation in investing capital in Iran
, Iraq
, Kuwait
, and Saudi Arabia
.
Huge investments were made to improve the infrastructure needed to transport Middle Eastern oil. For example, investment was made on the Suez Canal
to ensure that larger tankers could utilize it. There was also an increased construction of oil pipelines. The expansion of infrastructure to produce and transport Middle East oil was mainly under the operation of the seven major international oil companies.
The first country to act was Venezuela, which had the most favorable concession agreement. In 1943, the country increased the total royalties
and tax paid by the companies to 50% of their total profits
. However, true equal profit sharing
was not accomplished until 1948. Because oil companies were able to deduct the tax from their income tax
, profits acquired by the oil companies did not change significantly and, as a result, the oil companies did not have any major problems with the change imposed by Venezuela. Even with increased oil prices, the companies still held a dominant position over Venezuela.
Oil producing countries did not realize that the companies were adjusting oil prices until the cost of oil dropped in the late fifties and companies started reducing posted prices very frequently. The main reason for the reduction in oil prices was the change in the world’s energy situation after 1957 that led to competition between energy sources. Efforts to find markets led to price cuts. Price cutting was first achieved by shaving profit margins, but soon prices were reduced to levels far lower than posted prices as companies producing oil in the Middle East started to offer crude to independent and state-owned refineries.
Producing countries became aggravated when the companies would reduce the prices without warning. According to “The Significance of Oil,”
High oil prices, on the other hand, raise the bargaining power
of oil-producing countries. As a result, some say that countries are more likely to nationalize their oil supplies during times of high oil prices. However, nationalization can come with various costs and it is often questioned why a government would respond to an oil price increase with nationalization rather than by imposing higher taxes. Contract theory
provides reasoning against nationalization.
and the emergence of shared group consciousness
among developing countries accompanied the end of the formal colonial relationships in the fifties and sixties. Shared group consciousness among the oil exporting countries was expressed through the formation of OPEC, increased contact and communication between countries, and attempts of common action countries during the 1960s. The structure of the industry, which led to increased nationalistic mentality, was affected by the following important changes:
located within the country. However, as the countries began to develop, their demands for revenue
increased. The industry became integrated into a local economy that required strategic control by the host country over pricing and the rate of production. Gradually, foreign investors lost the trust of oil-producing countries to develop resources in the national interest. Oil-producing countries demanded participation in the control of the oil within their country.
loop. Revenue provided the financial basis for further development, which, in turn, increased revenue and development even further. In addition, successful exploration reduced risk and the need for financial capacity. Furthermore, technological innovation and managerial expertise increased dramatically after World War II
, which increased the bargaining power
of producing countries. Increased bargaining power allowed the companies to change their mode of operation.
The new, independent companies disturbed the equilibrium between the major companies and the producing countries. Countries became aware of their options as these companies offered better agreement terms.
(2) is communicated through certain channels (3) over time (4) among members of a social system.” Innovations may consist of technology
, philosophy
, or managerial techniques. Examples of communication channels include the mass media
, organizations such as OPEC
or the U.N., or educational institutions. Due to diffusion, attempts at oil nationalization from producing countries, and whether or not these attempts were successful, affected decisions to nationalize oil supplies.
Two attempts of nationalization that had clear inhibiting effects on other producing countries was the nationalization of Mexico in 1938 and of Iran in 1951, which occurred prior to the important structural change in the oil industry. The Mexican nationalization proved that although it was possible to accomplish nationalization, it came at the cost of isolation
from the international industry, which was dominated by the major companies at the time. The Iranian nationalization also failed due to the lack of cooperation
with international oil companies. These two incidences proved to other oil producing countries that until the structure of the oil industry changed to rely less upon international oil companies, any attempts to nationalize would be a great risk and would likely be unsuccessful.
Once the structure of the oil industry changed, oil-producing countries were more likely to be successful in nationalizing their oil supplies. The development of OPEC
provided the medium
in which producing countries could communicate and diffusion could occur rapidly.
The first country to successfully nationalize after the structural change of the industry was Algeria
, who nationalized 51% of the French
companies only ten days after the Teheran agreement and later was able to nationalize 100% of their companies. The nationalization of Algerian oil influenced Libya to nationalize British Petroleum in 1971 and the rest of their foreign companies by 1974. A ripple effect
quickly occurred, spreading first to the more militant
oil producers like Iraq
and then followed by more conservative oil producers like Saudi Arabia. Stephen J. Kobrin states that
within the system. Vertical integration was replaced with a dual system where OPEC countries controlled upstream activities such as the production and marketing of crude oil while oil companies controlled downstream activities such as transportation, refining, distribution, and sale of oil products.
Under the new dual structure, OPEC
was neither vertically or horizontally integrated and was not able to take over the entire oil sector from the oil companies. The temporary fear of an oil shortage during the 1970s helped to hide this consequence. In addition, relations between producing countries of the Persian Gulf
and previous concessionary companies induced an “artificial” vertical integration. These relations included long-term contracts, discount of official prices, and phase-out clauses. Free markets started to become prevalent in 1981 after the trade in oil switched from being a sellers’ to a buyers’ market.
of horizontal integration
for the crude oil production industry was 1600 and the horizontal integration for the exploration industry was 1250. By 1986, it decreased to around 930 for the crude oil production industry and 600 for the exploration industry. This created a further destabilizing factor for OPEC.
of their world refining and distribution network in order to decrease their dependence on OPEC countries. The increase in the refining capacity of OPEC countries that wanted to sell not only crude oil but also refined products further reinforced this trend towards rationalization.
to change in both orientation and size. The spot market changed in orientation because it started to deal not only with crude oil but also with refined products. The spot market changed in size because as the OPEC market declined the number of spot market transactions increased.
The development of the spot market made oil prices volatile. The risks involving oil investment increased. In order to protect against these potential risks, parallel markets such as the forward market
developed. As these new markets developed, price control became more difficult for OPEC. In addition, oil was transformed from a strategic product to a commodity
.
Changes in the spot market favored competition
and made it more difficult for oligopolistic agreements. The development of many free markets impacted OPEC in two different ways:
has had one of the most volatile oil policies in the region, partly a reflection of the high political volatility in the country. Petroecuador
accounts for over half of oil production, however, as a result of financial setbacks combined with a drop in oil price, private companies increased oil investments in Ecuador. In the early 1990s annual foreign investment in oil was below US$ 200 million, by the early 2000s it had surpassed US $1 billion (Campodónico, 2004). Changes in political power led to an increase in government control over oil extraction. In particular, the election of President Rafael Correa
, on a resource-nationalism platform, prompted increases in government control and the approval of a windfall tax
.
declined soon after the start of World War II
. Recovery began in 1943 with the reopening of supply routes to the United Kingdom
. The oil was produced by what became the Anglo-Iranian Oil Company, but political difficulties arose with the Iranian government in the postwar period.
In the late 19th century, when interest in petroleum
as an industrial grade fuel first emerged, Iran under the Qajar dynasty
was in economic and political disarray. Iran
, now among the world's leading crude-oil exporters, could become a net importer of oil within the next decade due to rising demand and slow-growing production. Possessing the world's second-biggest proven reserves of oil, it infuriated its people when the government
brought in petrol rationing on two hours notice. Due to limited refinery capacity, it has discouraged gasoline usage. Shortly after the petrol/gasoline rationing, which has reduced demand in some areas by 20%-30%, it announced it will not be producing cars powered only by gasoline.
. In spite of United Nations sanctions, has been rebuilding war-damaged oil facilities and export terminals. Iraq plans to increase its oil productive capacity to 4 Moilbbl/d in 2000 and 6 Moilbbl/d in 2010.
caused conflict within the state. The emergence of commercial oil production from the region in 1958 and thereafter raised the stakes and generated a struggle by the indigenes for control of the oil resources. The northern hegemony
, ruled by Hausa and Fulani, took a military dictatorship
and seized control of oil production. To meet popular demands for cheaper food during the inflationary period just after the civil war
, government created a new state corporation, the National Nigerian Supply Company (NNSC). While oil production proceeded, the region by the 1990s was one of the least developed and most poor. The local communities responded with protests and successful efforts to stop oil production in the area if they did not receive any benefit. By September 1999, about 50 Shell workers had been kidnapped and released. Not only are the people of Nigeria affected, but the environment in the area is also affected by deforestation
and improper waste treatment
. Nigerian oil production also faces problems with illegal trade of the refined product on the black market. This is undertaken by authorized marketers in collusion with smuggling syndicates.
Activities such as these severely affect the oil industries of both the state and MNCs. Oil production deferments arising from community disturbances and sabotage was 45mm barrels in 2000 and 35mm barrels in 2001. The state has not been a very effective means of controlling incursions such as these. The illegal oil economy in such a circumstance may continue to exist for a long time, albeit in
curtailed and small scales.
. The newly elected Minister of Mines and Hydrocarbons, Juan Pablo Pérez Alfonso, acted to raise the income tax
on oil companies and introduced the key aspect of supply and demand
to the oil trade. Nationalization of oil supplies was achieved in 1976. Major oil companies operating in Venezuela
have had difficulty with the spreading resource nationalism. After decades of high investment, in the 1960s and 1970s oil taxation of the IOCs was significantly increased and oil concessions were not renewed. Exxon Mobil and ConocoPhilips have said they would walk away from their large investment in the Orinoco
heavy-oil belt rather than accept tough new contract terms which raise tax
es and oblige all foreign companies to accept minority shares in joint ventures with the state oil company, Petróleos de Venezuela (PDVSA). The projects offered to foreign investors were often those which entailed high costs for extraction
, leading to lower implicit tax rates. In the late 1990s, private investment substantially increased, adding 1.2 million BD of production by 2005. While private investors were producing more oil and PDSVA decreased oil production, Venezuela still managed to increase its oil fiscal take for each barrel. Continued shortcomings for PDSVA spurred an effort to eliminate the company, leading to a strike which severely reduced investment and production. This gave to government opportunity to seize control and, as a result, in the last two years the contractual framework of the oil opening has been significantly changed, considerably increasing the government-take and control over private investments.
, a state-owned oil company. Petro-Canada put forth national goals including, increased domestic ownership of the industry, development of reserves not located in the western provinces, that is to say, the promotion of the Canada Lands in the north and offshore, better information about the petroleum industry, security of supply, decrease dependence on the large multinational oil corporations, especially the Big Four, and increase revenues flowing to the federal treasury from the oil and gas sector.
Petro-Canada has been met with opposition mainly from Alberta
, home to one of the main oil patches in Canada. After negotiating a royalty increase on oil and price increases for natural gas, Lougheed asserted Alberta’s position as the centre of Canada’s petroleum industry. Alberta had since been the main source of oil in Canada since the 1970s. The clashing viewpoints of resource control has resulted in conflict over the direction of Canada's oil industry.
nationalized its oil industry in 1938, and has never privatized
, restricting foreign investment. Important reserve additions in the 1970s allowed a significant increase in production and exports, financed by the high oil prices. Despite producing more oil than any other country in Latin America
, oil does not carry a relevant proportion of Mexico's exports. Since the giant Cantarell Field
in Mexico is now in decline, the state oil company Pemex
has faced intense political opposition to opening up the country's oil and gas sector to foreign participation. The lack of financial autonomy has limited Pemex’s own investment capacity, inducing the company to become highly indebted and to use an out of budget mechanism of deferred payment of projects (PIDIREGAS) to finance the expansion of production. Some feel that the state oil company Pemex does not have the capacity to develop deep water assets by itself, but needs to do so if it is to stem the decline in the country's crude production.
amounts to a creeping re-nationalization of the Russian oil industry. In Russia
, Vladimir Putin
's government has pressured Royal Dutch Shell
to hand over control of one major project on Sakhalin
Island, to Russia's Gazprom
in December. The founder of formerly private Yukos
has also been jailed, and the company absorbed by state-owned Rosneft
. Such moves strain the confidence of international oil companies in forming partnerships with Russia. Russia has taken notice of their increasing foreign oil investment improving politics with other countries, especially former states of the Soviet Union
. Oil industry in Russia is one of the top producers in the world, however, the proven reserves in Russia are not as prevalent as in other areas. Furthermore, previously accessible oil fields have been lost since the Cold War
. With the collapse of the USSR, Russia has lost the rich Caspian Basin off-shore and on-shore oil fields in the Central Asian states and Azerbaijan
.
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
production operations, generally in the purpose of obtaining more revenue from oil for oil producing countries. This process, which should not be confused with restrictions on crude oil exports, represents a significant turning point in the development of oil policy. Nationalization
Nationalization
Nationalisation, also spelled nationalization, is the process of taking an industry or assets into government ownership by a national government or state. Nationalization usually refers to private assets, but may also mean assets owned by lower levels of government, such as municipalities, being...
eliminates the concession system—in which private international companies control oil resources within oil-producing countries—and allows oil-producing countries to regain control. Once these countries become the sole owners of their resources, they have to decide how to maximize the net present value
Net present value
In finance, the net present value or net present worth of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values of the individual cash flows of the same entity...
of their known stock of oil in the ground.
Several key implications can be observed as a result of oil nationalization. On the home front, national oil companies are often torn between national expectations that they should carry the flag and their own ambitions for commercial success, which might mean a degree of emancipation from the confines of a national agenda.
According to consulting firm PFC Energy, only 7% of the world's estimated oil and gas reserves are in countries that allow private international companies free rein. Fully 65% are in the hands of state-owned companies such as Saudi Aramco
Saudi Aramco
Saudi Aramco , officially the Saudi Arabian Oil Company, is the national oil company of Saudi Arabia.Saudi Aramco is the world's largest and most valuable privately-held company, with estimates of its value in 2011 to be $7 trillion USD.Saudi Aramco has both the largest proven crude oil reserves,...
, with the rest in countries such as Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
and Venezuela
Venezuela
Venezuela , officially called the Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It borders Colombia to the west, Guyana to the east, and Brazil to the south...
, where access by Western companies is difficult. The PFC study implies political factors are limiting capacity increases in Mexico
Mexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
, Venezuela
Venezuela
Venezuela , officially called the Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It borders Colombia to the west, Guyana to the east, and Brazil to the south...
, Iran
Iran
Iran , officially the Islamic Republic of Iran , is a country in Southern and Western Asia. The name "Iran" has been in use natively since the Sassanian era and came into use internationally in 1935, before which the country was known to the Western world as Persia...
, Iraq
Iraq
Iraq ; officially the Republic of Iraq is a country in Western Asia spanning most of the northwestern end of the Zagros mountain range, the eastern part of the Syrian Desert and the northern part of the Arabian Desert....
, Kuwait
Kuwait
The State of Kuwait is a sovereign Arab state situated in the north-east of the Arabian Peninsula in Western Asia. It is bordered by Saudi Arabia to the south at Khafji, and Iraq to the north at Basra. It lies on the north-western shore of the Persian Gulf. The name Kuwait is derived from the...
and Russia. Saudi Arabia
Saudi Arabia
The Kingdom of Saudi Arabia , commonly known in British English as Saudi Arabia and in Arabic as as-Sa‘ūdiyyah , is the largest state in Western Asia by land area, constituting the bulk of the Arabian Peninsula, and the second-largest in the Arab World...
is also limiting capacity expansion, but because of a self-imposed cap, unlike the other countries. As a result of not having access to countries amenable to oil exploration, ExxonMobil
ExxonMobil
Exxon Mobil Corporation or ExxonMobil, is an American multinational oil and gas corporation. It is a direct descendant of John D. Rockefeller's Standard Oil company, and was formed on November 30, 1999, by the merger of Exxon and Mobil. Its headquarters are in Irving, Texas...
is not making nearly the investment in finding new oil that it did in 1981.
History
The nationalization of oil supplies has been a gradual process. Before the discovery of oil, Middle Eastern countries such as IraqIraq
Iraq ; officially the Republic of Iraq is a country in Western Asia spanning most of the northwestern end of the Zagros mountain range, the eastern part of the Syrian Desert and the northern part of the Arabian Desert....
, Iran
Iran
Iran , officially the Islamic Republic of Iran , is a country in Southern and Western Asia. The name "Iran" has been in use natively since the Sassanian era and came into use internationally in 1935, before which the country was known to the Western world as Persia...
, Saudi Arabia
Saudi Arabia
The Kingdom of Saudi Arabia , commonly known in British English as Saudi Arabia and in Arabic as as-Sa‘ūdiyyah , is the largest state in Western Asia by land area, constituting the bulk of the Arabian Peninsula, and the second-largest in the Arab World...
, and Kuwait
Kuwait
The State of Kuwait is a sovereign Arab state situated in the north-east of the Arabian Peninsula in Western Asia. It is bordered by Saudi Arabia to the south at Khafji, and Iraq to the north at Basra. It lies on the north-western shore of the Persian Gulf. The name Kuwait is derived from the...
were all poor and underdeveloped. They were desert kingdoms that had few natural resources and were without adequate financial resources to maintain the State. Poor peasants made up a majority of the population.
When oil was discovered in these developing nations during the early twentieth century, the countries did not have enough knowledge of the oil industry to make use of the newly discovered natural resources. The countries were therefore not able to mine or market their petroleum.
Major oil companies saw this as an opportunity for profit and they negotiated concession agreements with the developing countries; the companies were given exclusive rights to explore and develop the production of oil within the country. The concession agreements made between the oil producing country and the oil company specified a limited area the company could utilize, lasted a limited amount of time, and required the company to take all the financial and commercial risks as well as pay the host governments surface taxes, royalties
Royalties
Royalties are usage-based payments made by one party to another for the right to ongoing use of an asset, sometimes an intellectual property...
, and production taxes. Despite all of this, however, the countries were able to claim any of the oil they mined. As a result, the world’s oil was largely in the hands of seven corporations based in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
and Europe
Europe
Europe is, by convention, one of the world's seven continents. Comprising the westernmost peninsula of Eurasia, Europe is generally 'divided' from Asia to its east by the watershed divides of the Ural and Caucasus Mountains, the Ural River, the Caspian and Black Seas, and the waterways connecting...
. Five of the companies were American (Chevron
Chevron Corporation
Chevron Corporation is an American multinational energy corporation headquartered in San Ramon, California, United States and active in more than 180 countries. It is engaged in every aspect of the oil, gas, and geothermal energy industries, including exploration and production; refining,...
, Exxon
Exxon
Exxon is a chain of gas stations as well as a brand of motor fuel and related products by ExxonMobil. From 1972 to 1999, Exxon was the corporate name of the company previously known as Standard Oil Company of New Jersey or Jersey Standard....
, Gulf
Gulf Oil
Gulf Oil was a major global oil company from the 1900s to the 1980s. The eighth-largest American manufacturing company in 1941 and the ninth-largest in 1979, Gulf Oil was one of the so-called Seven Sisters oil companies...
, Mobil
Mobil
Mobil, previously known as the Socony-Vacuum Oil Company, was a major American oil company which merged with Exxon in 1999 to form ExxonMobil. Today Mobil continues as a major brand name within the combined company, as well as still being a gas station sometimes paired with their own store or On...
, and Texaco
Texaco
Texaco is the name of an American oil retail brand. Its flagship product is its fuel "Texaco with Techron". It also owns the Havoline motor oil brand....
), one was British (British Petroleum), and one was Anglo-Dutch (Royal Dutch/Shell). These companies have since merged into four common oil companies: Shell, ExxonMobil
ExxonMobil
Exxon Mobil Corporation or ExxonMobil, is an American multinational oil and gas corporation. It is a direct descendant of John D. Rockefeller's Standard Oil company, and was formed on November 30, 1999, by the merger of Exxon and Mobil. Its headquarters are in Irving, Texas...
, Chevron
Chevron Corporation
Chevron Corporation is an American multinational energy corporation headquartered in San Ramon, California, United States and active in more than 180 countries. It is engaged in every aspect of the oil, gas, and geothermal energy industries, including exploration and production; refining,...
, and BP
BP
BP p.l.c. is a global oil and gas company headquartered in London, United Kingdom. It is the third-largest energy company and fourth-largest company in the world measured by revenues and one of the six oil and gas "supermajors"...
.
The established contracts between oil companies and nations with oil reserves gave the oil companies an advantageous position, leading to the inclusion of choice-of-law clauses. In other words, disputes over contract details would be settled by a third party instead of the host country. The only way for host countries to alter their contracts was through nationalization. Most of the countries, with the exception of Venezuela, even signed away their right to tax the companies in exchange for one time royalty payments.
Although undeveloped nations originally welcomed concession agreements, the movement for nationalism began once the developing countries realized that the oil companies were exploiting them. Led by Venezuela, oil producing countries realized that they could control the price of oil by limiting the supply. The countries joined together as OPEC
OPEC
OPEC is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings...
and gradually they gained control of their own oil supplies rather than allowing the oil companies to control them.
Before the 1970s there were only two major incidents of successful oil nationalization—the first following the Bolshevik Revolution of 1917 in Russia and the second in 1938 in Mexico. Due to the swift growth of the energy economy, resources shifted to becoming nationalized to protect themselves from adjustments in demand worldwide.
Pre-nationalization
Due to the presence of oil, the Middle East has been the center of international tension even before the nationalization of oil supplies. BritainUnited Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
was the first country that took interest in Middle Eastern oil. In 1908, oil was discovered in Persia by the Anglo-Persian oil company under the stimulus
Stimulus (economic)
In economics, stimulus refers to attempts to use monetary or fiscal policy to stimulate the economy. Recently "stimulus" has become particularly associated with Keynesian economics and the theory that government spending projects can generate economic growth in a recession...
of the British government. Britain maintained strategic and military domination of areas of the Middle East outside Turkish control until after World War I
World War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
when the former Turkish Empire was divided between the British and the French. It turned out that many of the areas controlled by the French had little oil potential.
On the other hand, Britain continued to expand oil interests into other parts of the Persian Gulf
Persian Gulf
The Persian Gulf, in Southwest Asia, is an extension of the Indian Ocean located between Iran and the Arabian Peninsula.The Persian Gulf was the focus of the 1980–1988 Iran-Iraq War, in which each side attacked the other's oil tankers...
. Although oil resources were found in Kuwait, there was not enough demand for oil at the time to develop in this area.
Due to political and commercial pressure, it did not take long before the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
secured an entry into Middle Eastern oil supplies. The British government was forced to allow the US into Iraq
Iraq
Iraq ; officially the Republic of Iraq is a country in Western Asia spanning most of the northwestern end of the Zagros mountain range, the eastern part of the Syrian Desert and the northern part of the Arabian Desert....
and the Persian Gulf
Persian Gulf
The Persian Gulf, in Southwest Asia, is an extension of the Indian Ocean located between Iran and the Arabian Peninsula.The Persian Gulf was the focus of the 1980–1988 Iran-Iraq War, in which each side attacked the other's oil tankers...
states. Iraq became dominated by US oil companies while Kuwait
Kuwait
The State of Kuwait is a sovereign Arab state situated in the north-east of the Arabian Peninsula in Western Asia. It is bordered by Saudi Arabia to the south at Khafji, and Iraq to the north at Basra. It lies on the north-western shore of the Persian Gulf. The name Kuwait is derived from the...
consisted of a 50/50 split between British and American companies.
Up until 1939, Middle Eastern oil remained relatively unimportant in world markets. According to “The Significance of Oil,” the Middle East at the time
“was contributing only 5 percent of total world oil production and its exports were limited to countries within the immediate region and, via the Suez Canal, in western Europe.”The real significance of pre-1939 developments in the Middle East is that they established the framework for the post-1945 oil expansion.
After WWI, the demand for oil increased significantly as the result of an energy shortage. Due to war-time oil development, which proved the great potential for oil discovery in the Middle East, there was little hesitation in investing capital in Iran
Iran
Iran , officially the Islamic Republic of Iran , is a country in Southern and Western Asia. The name "Iran" has been in use natively since the Sassanian era and came into use internationally in 1935, before which the country was known to the Western world as Persia...
, Iraq
Iraq
Iraq ; officially the Republic of Iraq is a country in Western Asia spanning most of the northwestern end of the Zagros mountain range, the eastern part of the Syrian Desert and the northern part of the Arabian Desert....
, Kuwait
Kuwait
The State of Kuwait is a sovereign Arab state situated in the north-east of the Arabian Peninsula in Western Asia. It is bordered by Saudi Arabia to the south at Khafji, and Iraq to the north at Basra. It lies on the north-western shore of the Persian Gulf. The name Kuwait is derived from the...
, and Saudi Arabia
Saudi Arabia
The Kingdom of Saudi Arabia , commonly known in British English as Saudi Arabia and in Arabic as as-Sa‘ūdiyyah , is the largest state in Western Asia by land area, constituting the bulk of the Arabian Peninsula, and the second-largest in the Arab World...
.
Huge investments were made to improve the infrastructure needed to transport Middle Eastern oil. For example, investment was made on the Suez Canal
Suez Canal
The Suez Canal , also known by the nickname "The Highway to India", is an artificial sea-level waterway in Egypt, connecting the Mediterranean Sea and the Red Sea. Opened in November 1869 after 10 years of construction work, it allows water transportation between Europe and Asia without navigation...
to ensure that larger tankers could utilize it. There was also an increased construction of oil pipelines. The expansion of infrastructure to produce and transport Middle East oil was mainly under the operation of the seven major international oil companies.
Early nationalizations
Prior to 1970, there were ten countries that nationalized oil production: the Soviet Union in 1918, Bolivia in 1937 and 1969, Mexico in 1938, Iran in 1951, Iraq in 1961, Burma and Egypt in 1962, Argentina in 1963, Indonesia in 1963, and Peru in 1968. Although these countries were nationalized by 1971, all of the “important” industries that existed in developing countries were still held by foreign firms. In addition, only Mexico and Iran were significant exporters at the time of nationalization.Exploitation
The original contracts held between an oil producing country and an oil company were unfair to the producing country. Contracts, which could not be altered or ended in advance of the true end date, covered huge expanses of land and lasted for long durations. Nationalist ideas began once producing countries realized that the oil companies were exploiting them.The first country to act was Venezuela, which had the most favorable concession agreement. In 1943, the country increased the total royalties
Royalties
Royalties are usage-based payments made by one party to another for the right to ongoing use of an asset, sometimes an intellectual property...
and tax paid by the companies to 50% of their total profits
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
. However, true equal profit sharing
Profit sharing
Profit sharing, when used as a special term, refers to various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company's profitability in addition to employees' regular salary and bonuses...
was not accomplished until 1948. Because oil companies were able to deduct the tax from their income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
, profits acquired by the oil companies did not change significantly and, as a result, the oil companies did not have any major problems with the change imposed by Venezuela. Even with increased oil prices, the companies still held a dominant position over Venezuela.
Change in oil prices
The posted price of oil was originally the determinant factor of the taxes that oil companies had to pay. This concept was beneficial to the oil companies because they were the ones who controlled the posted prices. Companies could increase the actual price of oil without changing the posted price, thus avoiding an increase in taxes paid to the producing country.Oil producing countries did not realize that the companies were adjusting oil prices until the cost of oil dropped in the late fifties and companies started reducing posted prices very frequently. The main reason for the reduction in oil prices was the change in the world’s energy situation after 1957 that led to competition between energy sources. Efforts to find markets led to price cuts. Price cutting was first achieved by shaving profit margins, but soon prices were reduced to levels far lower than posted prices as companies producing oil in the Middle East started to offer crude to independent and state-owned refineries.
Producing countries became aggravated when the companies would reduce the prices without warning. According to “The Significance of Oil,”
“small reductions in posted prices in 1958 and 1959 produced some indications of disapproval from certain Middle East governments, but it was not until major cuts—of the order of 10 to 15 percent—were announced in 1960 that a storm broke over the heads of the companies whose decisions would reduce the oil revenues of the countries by 5 to 7 ½ percent.”
High oil prices, on the other hand, raise the bargaining power
Bargaining power
Bargaining power is a concept related to the relative abilities of parties in a situation to exert influence over each other. If both parties are on an equal footing in a debate, then they will have equal bargaining power, such as in a perfectly competitive market, or between an evenly matched...
of oil-producing countries. As a result, some say that countries are more likely to nationalize their oil supplies during times of high oil prices. However, nationalization can come with various costs and it is often questioned why a government would respond to an oil price increase with nationalization rather than by imposing higher taxes. Contract theory
Contract theory
In economics, contract theory studies how economic actors can and do construct contractual arrangements, generally in the presence of asymmetric information. Because of its connections with both agency and incentives, contract theory is often categorized within a field known as Law and economics...
provides reasoning against nationalization.
Structural change of oil producing countries
The Third World went through dramatic structural change between the time oil was first discovered and decades later. Rising nationalismNationalism
Nationalism is a political ideology that involves a strong identification of a group of individuals with a political entity defined in national terms, i.e. a nation. In the 'modernist' image of the nation, it is nationalism that creates national identity. There are various definitions for what...
and the emergence of shared group consciousness
Consciousness
Consciousness is a term that refers to the relationship between the mind and the world with which it interacts. It has been defined as: subjectivity, awareness, the ability to experience or to feel, wakefulness, having a sense of selfhood, and the executive control system of the mind...
among developing countries accompanied the end of the formal colonial relationships in the fifties and sixties. Shared group consciousness among the oil exporting countries was expressed through the formation of OPEC, increased contact and communication between countries, and attempts of common action countries during the 1960s. The structure of the industry, which led to increased nationalistic mentality, was affected by the following important changes:
Strategic control
Originally, oil-producing countries were poor and needed oil companies to help them manage the oil reservesOil reserves
The total estimated amount of oil in an oil reservoir, including both producible and non-producible oil, is called oil in place. However, because of reservoir characteristics and limitations in petroleum extraction technologies, only a fraction of this oil can be brought to the surface, and it is...
located within the country. However, as the countries began to develop, their demands for revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
increased. The industry became integrated into a local economy that required strategic control by the host country over pricing and the rate of production. Gradually, foreign investors lost the trust of oil-producing countries to develop resources in the national interest. Oil-producing countries demanded participation in the control of the oil within their country.
Increased capabilities
Financial capacity, technological abilities, and managerial skills improved quickly due to the revenue that comes from a producing well. This is often seen as a positive feedbackPositive feedback
Positive feedback is a process in which the effects of a small disturbance on a system include an increase in the magnitude of the perturbation. That is, A produces more of B which in turn produces more of A. In contrast, a system that responds to a perturbation in a way that reduces its effect is...
loop. Revenue provided the financial basis for further development, which, in turn, increased revenue and development even further. In addition, successful exploration reduced risk and the need for financial capacity. Furthermore, technological innovation and managerial expertise increased dramatically after World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
, which increased the bargaining power
Bargaining power
Bargaining power is a concept related to the relative abilities of parties in a situation to exert influence over each other. If both parties are on an equal footing in a debate, then they will have equal bargaining power, such as in a perfectly competitive market, or between an evenly matched...
of producing countries. Increased bargaining power allowed the companies to change their mode of operation.
Expansion of the oil industry
Stephen J. Kobrin states that“During the interwar period and through the 1950s, international petroleum was a very tight oligopolyOligopolyAn oligopoly is a market form in which a market or industry is dominated by a small number of sellers . The word is derived, by analogy with "monopoly", from the Greek ὀλίγοι "few" + πόλειν "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others...
dominated by seven major international oil companies (ExxonExxonExxon is a chain of gas stations as well as a brand of motor fuel and related products by ExxonMobil. From 1972 to 1999, Exxon was the corporate name of the company previously known as Standard Oil Company of New Jersey or Jersey Standard....
, Shell, BPBPBP p.l.c. is a global oil and gas company headquartered in London, United Kingdom. It is the third-largest energy company and fourth-largest company in the world measured by revenues and one of the six oil and gas "supermajors"...
, GulfGulf OilGulf Oil was a major global oil company from the 1900s to the 1980s. The eighth-largest American manufacturing company in 1941 and the ninth-largest in 1979, Gulf Oil was one of the so-called Seven Sisters oil companies...
, TexacoTexacoTexaco is the name of an American oil retail brand. Its flagship product is its fuel "Texaco with Techron". It also owns the Havoline motor oil brand....
, MobilMobilMobil, previously known as the Socony-Vacuum Oil Company, was a major American oil company which merged with Exxon in 1999 to form ExxonMobil. Today Mobil continues as a major brand name within the combined company, as well as still being a gas station sometimes paired with their own store or On...
and ChevronChevron CorporationChevron Corporation is an American multinational energy corporation headquartered in San Ramon, California, United States and active in more than 180 countries. It is engaged in every aspect of the oil, gas, and geothermal energy industries, including exploration and production; refining,...
—as they are known today). However, between 1953 and 1972 more than three hundred private firms and fifty state-owned firms entered the industry, drawn by the explosion in oil consumption and substantially diminished barriers to entry.”
The new, independent companies disturbed the equilibrium between the major companies and the producing countries. Countries became aware of their options as these companies offered better agreement terms.
Changes in supply and demand
The shortage of oil in the 1970s increased the value of oil from previous decades. The bargaining power of producing countries increased as both the country governments and the oil companies became increasingly concerned about the continued access to crude oil.Diffusion of ideas between oil producing countries
Rogers defines diffusion as “the process by which (1) an innovationInnovation
Innovation is the creation of better or more effective products, processes, technologies, or ideas that are accepted by markets, governments, and society...
(2) is communicated through certain channels (3) over time (4) among members of a social system.” Innovations may consist of technology
Technology
Technology is the making, usage, and knowledge of tools, machines, techniques, crafts, systems or methods of organization in order to solve a problem or perform a specific function. It can also refer to the collection of such tools, machinery, and procedures. The word technology comes ;...
, philosophy
Philosophy
Philosophy is the study of general and fundamental problems, such as those connected with existence, knowledge, values, reason, mind, and language. Philosophy is distinguished from other ways of addressing such problems by its critical, generally systematic approach and its reliance on rational...
, or managerial techniques. Examples of communication channels include the mass media
Mass media
Mass media refers collectively to all media technologies which are intended to reach a large audience via mass communication. Broadcast media transmit their information electronically and comprise of television, film and radio, movies, CDs, DVDs and some other gadgets like cameras or video consoles...
, organizations such as OPEC
OPEC
OPEC is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings...
or the U.N., or educational institutions. Due to diffusion, attempts at oil nationalization from producing countries, and whether or not these attempts were successful, affected decisions to nationalize oil supplies.
Two attempts of nationalization that had clear inhibiting effects on other producing countries was the nationalization of Mexico in 1938 and of Iran in 1951, which occurred prior to the important structural change in the oil industry. The Mexican nationalization proved that although it was possible to accomplish nationalization, it came at the cost of isolation
Isolationism
Isolationism is the policy or doctrine of isolating one's country from the affairs of other nations by declining to enter into alliances, foreign economic commitments, international agreements, etc., seeking to devote the entire efforts of one's country to its own advancement and remain at peace by...
from the international industry, which was dominated by the major companies at the time. The Iranian nationalization also failed due to the lack of cooperation
Cooperation
Cooperation or co-operation is the process of working or acting together. In its simplest form it involves things working in harmony, side by side, while in its more complicated forms, it can involve something as complex as the inner workings of a human being or even the social patterns of a...
with international oil companies. These two incidences proved to other oil producing countries that until the structure of the oil industry changed to rely less upon international oil companies, any attempts to nationalize would be a great risk and would likely be unsuccessful.
Once the structure of the oil industry changed, oil-producing countries were more likely to be successful in nationalizing their oil supplies. The development of OPEC
OPEC
OPEC is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings...
provided the medium
Medium
- Communication :* Medium , storage and/or transmission tools used to store and deliver information or data* Transmission medium, in physics and telecommunications, any material substance which can propagate waves or energy...
in which producing countries could communicate and diffusion could occur rapidly.
The first country to successfully nationalize after the structural change of the industry was Algeria
Algeria
Algeria , officially the People's Democratic Republic of Algeria , also formally referred to as the Democratic and Popular Republic of Algeria, is a country in the Maghreb region of Northwest Africa with Algiers as its capital.In terms of land area, it is the largest country in Africa and the Arab...
, who nationalized 51% of the French
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
companies only ten days after the Teheran agreement and later was able to nationalize 100% of their companies. The nationalization of Algerian oil influenced Libya to nationalize British Petroleum in 1971 and the rest of their foreign companies by 1974. A ripple effect
Ripple effect
The ripple effect is a term used to describe a situation where, like the ever expanding ripples across water when an object is dropped into it, an effect from an initial state can be followed outwards incrementally....
quickly occurred, spreading first to the more militant
Militant
The word militant, which is both an adjective and a noun, usually is used to mean vigorously active, combative and aggressive, especially in support of a cause, as in 'militant reformers'. It comes from the 15th century Latin "militare" meaning "to serve as a soldier"...
oil producers like Iraq
Iraq
Iraq ; officially the Republic of Iraq is a country in Western Asia spanning most of the northwestern end of the Zagros mountain range, the eastern part of the Syrian Desert and the northern part of the Arabian Desert....
and then followed by more conservative oil producers like Saudi Arabia. Stephen J. Kobrin states that
“By 1976 virtually every other major producer in the mid-East, Africa, Asia, and Latin America had followed nationalizing at least some of its producers to gain either a share of participation or to take over the entire industry and employ the international companies on a contractual basis.”
Vertical integration of the oil industry was broken
Due to the overall instability of supply, oil became an instrument of foreign policy for oil-exporting countries. Nationalization increased the stability in the oil markets and broke the vertical integrationVertical integration
In microeconomics and management, the term vertical integration describes a style of management control. Vertically integrated companies in a supply chain are united through a common owner. Usually each member of the supply chain produces a different product or service, and the products combine to...
within the system. Vertical integration was replaced with a dual system where OPEC countries controlled upstream activities such as the production and marketing of crude oil while oil companies controlled downstream activities such as transportation, refining, distribution, and sale of oil products.
Under the new dual structure, OPEC
OPEC
OPEC is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings...
was neither vertically or horizontally integrated and was not able to take over the entire oil sector from the oil companies. The temporary fear of an oil shortage during the 1970s helped to hide this consequence. In addition, relations between producing countries of the Persian Gulf
Persian Gulf
The Persian Gulf, in Southwest Asia, is an extension of the Indian Ocean located between Iran and the Arabian Peninsula.The Persian Gulf was the focus of the 1980–1988 Iran-Iraq War, in which each side attacked the other's oil tankers...
and previous concessionary companies induced an “artificial” vertical integration. These relations included long-term contracts, discount of official prices, and phase-out clauses. Free markets started to become prevalent in 1981 after the trade in oil switched from being a sellers’ to a buyers’ market.
Oil companies lost access to oil supplies
According to the Energy Studies Review,"between 1973 and 1982, companies lost around 50% of their share of the crude oil market, from 30 million barrels per day (MMbbl/d) to around 15.2 MMbbl/d, while 'free world' demand decreased only 15% over the same time period. Even more significant, in 1982 the major (oil companies) could rely on 6.7 MMbbl/d of production from the reserves under their control, while the corresponding number in 1973 was 25.5 MMbbl/d—a decrease of 74% in less than 10 years."As a result, important oil companies were became important net buyers of crude oil after a long time of being vertically integrated sellers to their own refineries.
Change in the horizontal integration of the oil industry
The increase in oil prices of the 70s attracted non-OPEC producers—Norway, Mexico, Great Britain, Egypt, and some African and Asian countries—to explore within their country. In 1965, the Herfindahl indexHerfindahl index
The Herfindahl index is a measure of the size of firms in relation to the industry and an indicator of the amount of competition among them. Named after economists Orris C. Herfindahl and Albert O. Hirschman, it is an economic concept widely applied in competition law, antitrust and also...
of horizontal integration
Horizontal integration
In microeconomics and strategic management, the term horizontal integration describes a type of ownership and control. It is a strategy used by a business or corporation that seeks to sell a type of product in numerous markets...
for the crude oil production industry was 1600 and the horizontal integration for the exploration industry was 1250. By 1986, it decreased to around 930 for the crude oil production industry and 600 for the exploration industry. This created a further destabilizing factor for OPEC.
Restructuring of the refining sector
The world refining capacity of the major oil companies in 1973 was 23.2 Moilbbl/d. However, by 1982, their world refining capacity had decreased to 14 Moilbbl/d. This decrease was a result of their decreased access to the oil reserves of OPEC countries and, subsequently, the rationalizationRationalization
Rationalization may refer to:*Rationalization , the means of transition from a traditional society into a rationalized one*Rationalization , the process of constructing a logical justification for a decision that was originally arrived at through a different mental process*Rationalization , an...
of their world refining and distribution network in order to decrease their dependence on OPEC countries. The increase in the refining capacity of OPEC countries that wanted to sell not only crude oil but also refined products further reinforced this trend towards rationalization.
Change in the spot market
The nationalization of oil supplies and the emergence of the OPEC market caused the spot marketSpot market
The spot market or cash market is a public financial market, in which financial instruments or commodities are traded for immediate delivery. It contrasts with a futures market in which delivery is due at a later date...
to change in both orientation and size. The spot market changed in orientation because it started to deal not only with crude oil but also with refined products. The spot market changed in size because as the OPEC market declined the number of spot market transactions increased.
The development of the spot market made oil prices volatile. The risks involving oil investment increased. In order to protect against these potential risks, parallel markets such as the forward market
Forward market
The forward market is the over-the-counter financial market in contracts for future delivery, so called forward contracts. Forward contracts are personalized between parties The forward market is the over-the-counter financial market in contracts for future delivery, so called forward contracts. ...
developed. As these new markets developed, price control became more difficult for OPEC. In addition, oil was transformed from a strategic product to a commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
.
Changes in the spot market favored competition
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...
and made it more difficult for oligopolistic agreements. The development of many free markets impacted OPEC in two different ways:
- A destabilizing effect occurred that made it easier for OPEC members not to respect their own quota if they did not want to.
- A stabilizing effect occurred that provided an incentive for cooperation among OPEC members. Decreased prices due to free markets made it more profitable for OPEC countries to work together rather than to seek profit individually.
Ecuador
EcuadorEcuador
Ecuador , officially the Republic of Ecuador is a representative democratic republic in South America, bordered by Colombia on the north, Peru on the east and south, and by the Pacific Ocean to the west. It is one of only two countries in South America, along with Chile, that do not have a border...
has had one of the most volatile oil policies in the region, partly a reflection of the high political volatility in the country. Petroecuador
Petroecuador
Petroecuador [Petroleums of Ecuador State Enterprise] is the national oil company of Ecuador. It is a state-owned enterprise, founded on September 26, 1989...
accounts for over half of oil production, however, as a result of financial setbacks combined with a drop in oil price, private companies increased oil investments in Ecuador. In the early 1990s annual foreign investment in oil was below US$ 200 million, by the early 2000s it had surpassed US $1 billion (Campodónico, 2004). Changes in political power led to an increase in government control over oil extraction. In particular, the election of President Rafael Correa
Rafael Correa
Rafael Vicente Correa Delgado born is the President of the Republic of Ecuador and was the president pro tempore of the Union of South American Nations. An economist educated in Ecuador, Belgium and the United States, he was elected President in late 2006 and took office in January 2007...
, on a resource-nationalism platform, prompted increases in government control and the approval of a windfall tax
Windfall tax
In Australia, windfall tax may refer to either:* Commonwealth places windfall tax, imposed under the Commonwealth Places Windfall Tax Act 1998 and the Commonwealth Places Windfall Tax Act 1998...
.
Iran
Since its beginning, Iran's oil industry has experienced expansion and contraction. Rapid growth at the time of World War IWorld War I
World War I , which was predominantly called the World War or the Great War from its occurrence until 1939, and the First World War or World War I thereafter, was a major war centred in Europe that began on 28 July 1914 and lasted until 11 November 1918...
declined soon after the start of World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...
. Recovery began in 1943 with the reopening of supply routes to the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. The oil was produced by what became the Anglo-Iranian Oil Company, but political difficulties arose with the Iranian government in the postwar period.
In the late 19th century, when interest in petroleum
Petroleum
Petroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
as an industrial grade fuel first emerged, Iran under the Qajar dynasty
Qajar dynasty
The Qajar dynasty was an Iranian royal family of Turkic descent who ruled Persia from 1785 to 1925....
was in economic and political disarray. Iran
Iran
Iran , officially the Islamic Republic of Iran , is a country in Southern and Western Asia. The name "Iran" has been in use natively since the Sassanian era and came into use internationally in 1935, before which the country was known to the Western world as Persia...
, now among the world's leading crude-oil exporters, could become a net importer of oil within the next decade due to rising demand and slow-growing production. Possessing the world's second-biggest proven reserves of oil, it infuriated its people when the government
Politics of Iran
The politics of Iran take place in a framework of theocracy guided by an Islamist ideology. The December 1979 constitution, and its 1989 amendment, define the political, economic, and social order of the Islamic Republic of Iran, declaring that Shi'a Islam of the Twelver school of thought is...
brought in petrol rationing on two hours notice. Due to limited refinery capacity, it has discouraged gasoline usage. Shortly after the petrol/gasoline rationing, which has reduced demand in some areas by 20%-30%, it announced it will not be producing cars powered only by gasoline.
Iraq
The properties of the majors were nationalized totally in Iraq, in 1972. Worldwide oil shortages major oil supplies in the 1970s forced major oil suppliers to look elsewhere for ways to acquire the resource. Under these circumstances, NOCs often came forward as alternative suppliers of oil. Nationalization of the Iraq Petroleum Company (IPC) in 1972 after years of rancor, together with restrictions on oil liftings by all but one of the IPC's former partners, put Iraq at the forefront of direct marketing. Iraq's oil production suffered major damage in the aftermath of the Gulf WarGulf War
The Persian Gulf War , commonly referred to as simply the Gulf War, was a war waged by a U.N.-authorized coalition force from 34 nations led by the United States, against Iraq in response to Iraq's invasion and annexation of Kuwait.The war is also known under other names, such as the First Gulf...
. In spite of United Nations sanctions, has been rebuilding war-damaged oil facilities and export terminals. Iraq plans to increase its oil productive capacity to 4 Moilbbl/d in 2000 and 6 Moilbbl/d in 2010.
Libya
Libya, in particular, sought out independent oil firms to develop its oilfields; in 1970, the Libyan government used its leverage to restructure radically the terms of its agreements with these independent companies, precipitating a rash of contract renegotiations throughout the oil-exporting world.Nigeria
The discovery of oil in NigeriaNigeria
Nigeria , officially the Federal Republic of Nigeria, is a federal constitutional republic comprising 36 states and its Federal Capital Territory, Abuja. The country is located in West Africa and shares land borders with the Republic of Benin in the west, Chad and Cameroon in the east, and Niger in...
caused conflict within the state. The emergence of commercial oil production from the region in 1958 and thereafter raised the stakes and generated a struggle by the indigenes for control of the oil resources. The northern hegemony
Hegemony
Hegemony is an indirect form of imperial dominance in which the hegemon rules sub-ordinate states by the implied means of power rather than direct military force. In Ancient Greece , hegemony denoted the politico–military dominance of a city-state over other city-states...
, ruled by Hausa and Fulani, took a military dictatorship
Dictatorship
A dictatorship is defined as an autocratic form of government in which the government is ruled by an individual, the dictator. It has three possible meanings:...
and seized control of oil production. To meet popular demands for cheaper food during the inflationary period just after the civil war
Civil war
A civil war is a war between organized groups within the same nation state or republic, or, less commonly, between two countries created from a formerly-united nation state....
, government created a new state corporation, the National Nigerian Supply Company (NNSC). While oil production proceeded, the region by the 1990s was one of the least developed and most poor. The local communities responded with protests and successful efforts to stop oil production in the area if they did not receive any benefit. By September 1999, about 50 Shell workers had been kidnapped and released. Not only are the people of Nigeria affected, but the environment in the area is also affected by deforestation
Deforestation
Deforestation is the removal of a forest or stand of trees where the land is thereafter converted to a nonforest use. Examples of deforestation include conversion of forestland to farms, ranches, or urban use....
and improper waste treatment
Waste treatment
Waste treatment refers to the activities required to ensure that waste has the least practicable impact on the environment. In many countries various forms of waste treatment are required by law.-Solid waste treatment:...
. Nigerian oil production also faces problems with illegal trade of the refined product on the black market. This is undertaken by authorized marketers in collusion with smuggling syndicates.
Activities such as these severely affect the oil industries of both the state and MNCs. Oil production deferments arising from community disturbances and sabotage was 45mm barrels in 2000 and 35mm barrels in 2001. The state has not been a very effective means of controlling incursions such as these. The illegal oil economy in such a circumstance may continue to exist for a long time, albeit in
curtailed and small scales.
Saudi Arabia
By 1950, Saudi Arabia had become a very successful producing area with an even greater oil production potential remaining to be developed. Because of favorable geological conditions and the close proximity of oil fields to the coast, Saudi Arabia operations were low cost. American companies therefore heavily valued the oil. The joint concessionary company, ARAMCO, agreed to the government’s demand to use the introduced posted price as a way to calculate profits. Profit-sharing between ARAMCO and Saudi Arabia was established as a 50/50 split.Venezuela
In 1958 a revolution in Venezuela brought an end to their military dictatorshipMilitary dictatorship
A military dictatorship is a form of government where in the political power resides with the military. It is similar but not identical to a stratocracy, a state ruled directly by the military....
. The newly elected Minister of Mines and Hydrocarbons, Juan Pablo Pérez Alfonso, acted to raise the income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
on oil companies and introduced the key aspect of supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
to the oil trade. Nationalization of oil supplies was achieved in 1976. Major oil companies operating in Venezuela
Venezuela
Venezuela , officially called the Bolivarian Republic of Venezuela , is a tropical country on the northern coast of South America. It borders Colombia to the west, Guyana to the east, and Brazil to the south...
have had difficulty with the spreading resource nationalism. After decades of high investment, in the 1960s and 1970s oil taxation of the IOCs was significantly increased and oil concessions were not renewed. Exxon Mobil and ConocoPhilips have said they would walk away from their large investment in the Orinoco
Orinoco
The Orinoco is one of the longest rivers in South America at . Its drainage basin, sometimes called the Orinoquia, covers , with 76.3% of it in Venezuela and the remainder in Colombia...
heavy-oil belt rather than accept tough new contract terms which raise tax
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
es and oblige all foreign companies to accept minority shares in joint ventures with the state oil company, Petróleos de Venezuela (PDVSA). The projects offered to foreign investors were often those which entailed high costs for extraction
Extraction
Extraction may refer to:* Extraction , an album by guitarist Greg Howe* Extraction , the separation of a substance from a matrix* Extraction , the removal of someone from a hostile area to a secure location...
, leading to lower implicit tax rates. In the late 1990s, private investment substantially increased, adding 1.2 million BD of production by 2005. While private investors were producing more oil and PDSVA decreased oil production, Venezuela still managed to increase its oil fiscal take for each barrel. Continued shortcomings for PDSVA spurred an effort to eliminate the company, leading to a strike which severely reduced investment and production. This gave to government opportunity to seize control and, as a result, in the last two years the contractual framework of the oil opening has been significantly changed, considerably increasing the government-take and control over private investments.
Canada
Canada reigns as the United States' leading oil supplier, exporting some 707316000 barrels (112,454,257.6 m³) of oil per year (1.938.00 oilbbl/d), 99 percent of its annual oil exports, according to the EIA. Following the OPEC oil embargo in the early 1970s, Canada took initiative to control its oil supplies. The result of these initiatives was Petro-CanadaPetro-Canada
Petro-Canada was a crown corporation of Canada in the field of oil and natural gas. It was headquartered in the Petro-Canada Centre in Calgary, Alberta. In August, 2009, Petro-Canada merged with Suncor Energy, a deal in which Suncor investors received approximately 60 per cent ownership of the...
, a state-owned oil company. Petro-Canada put forth national goals including, increased domestic ownership of the industry, development of reserves not located in the western provinces, that is to say, the promotion of the Canada Lands in the north and offshore, better information about the petroleum industry, security of supply, decrease dependence on the large multinational oil corporations, especially the Big Four, and increase revenues flowing to the federal treasury from the oil and gas sector.
Petro-Canada has been met with opposition mainly from Alberta
Alberta
Alberta is a province of Canada. It had an estimated population of 3.7 million in 2010 making it the most populous of Canada's three prairie provinces...
, home to one of the main oil patches in Canada. After negotiating a royalty increase on oil and price increases for natural gas, Lougheed asserted Alberta’s position as the centre of Canada’s petroleum industry. Alberta had since been the main source of oil in Canada since the 1970s. The clashing viewpoints of resource control has resulted in conflict over the direction of Canada's oil industry.
Mexico
MexicoMexico
The United Mexican States , commonly known as Mexico , is a federal constitutional republic in North America. It is bordered on the north by the United States; on the south and west by the Pacific Ocean; on the southeast by Guatemala, Belize, and the Caribbean Sea; and on the east by the Gulf of...
nationalized its oil industry in 1938, and has never privatized
Privatization
Privatization is the incidence or process of transferring ownership of a business, enterprise, agency or public service from the public sector to the private sector or to private non-profit organizations...
, restricting foreign investment. Important reserve additions in the 1970s allowed a significant increase in production and exports, financed by the high oil prices. Despite producing more oil than any other country in Latin America
Latin America
Latin America is a region of the Americas where Romance languages – particularly Spanish and Portuguese, and variably French – are primarily spoken. Latin America has an area of approximately 21,069,500 km² , almost 3.9% of the Earth's surface or 14.1% of its land surface area...
, oil does not carry a relevant proportion of Mexico's exports. Since the giant Cantarell Field
Cantarell Field
Cantarell Field or Cantarell Complex is an aging supergiant oil field in Mexico. It was discovered in 1976 by a fisherman, Rudesindo Cantarell. It was placed on nitrogen injection in 2000, and production peaked at in 2003. In terms of cumulative production to date, it is by far the largest oil...
in Mexico is now in decline, the state oil company Pemex
Pemex
Petróleos Mexicanos or Pemex is a Mexican state-owned petroleum company. As of 2010, with a total asset worth of $415.75 billion, it is the second non-publicly listed largest company in the world by total market value, and Latin America's second largest enterprise by annual revenue as of 2009...
has faced intense political opposition to opening up the country's oil and gas sector to foreign participation. The lack of financial autonomy has limited Pemex’s own investment capacity, inducing the company to become highly indebted and to use an out of budget mechanism of deferred payment of projects (PIDIREGAS) to finance the expansion of production. Some feel that the state oil company Pemex does not have the capacity to develop deep water assets by itself, but needs to do so if it is to stem the decline in the country's crude production.
Russia
Since Putin assumed the Russian Presidency in January 2000, there has been whatamounts to a creeping re-nationalization of the Russian oil industry. In Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...
, Vladimir Putin
Vladimir Putin
Vladimir Vladimirovich Putin served as the second President of the Russian Federation and is the current Prime Minister of Russia, as well as chairman of United Russia and Chairman of the Council of Ministers of the Union of Russia and Belarus. He became acting President on 31 December 1999, when...
's government has pressured Royal Dutch Shell
Royal Dutch Shell
Royal Dutch Shell plc , commonly known as Shell, is a global oil and gas company headquartered in The Hague, Netherlands and with its registered office in London, United Kingdom. It is the fifth-largest company in the world according to a composite measure by Forbes magazine and one of the six...
to hand over control of one major project on Sakhalin
Sakhalin
Sakhalin or Saghalien, is a large island in the North Pacific, lying between 45°50' and 54°24' N.It is part of Russia, and is Russia's largest island, and is administered as part of Sakhalin Oblast...
Island, to Russia's Gazprom
Gazprom
Open Joint Stock Company Gazprom is the largest extractor of natural gas in the world and the largest Russian company. Its headquarters are in Cheryomushki District, South-Western Administrative Okrug, Moscow...
in December. The founder of formerly private Yukos
YUKOS
OJSC "Yukos Oil Company" was a petroleum company in Russia which, until 2003, was controlled by Russian oligarch Mikhail Khodorkovsky and a number of other prominent Russian businessmen. After Yukos was bankrupted, Khodorkovsky was convicted and sent to prison.Yukos headquarters was located in...
has also been jailed, and the company absorbed by state-owned Rosneft
Rosneft
Rosneft is an integrated oil company majority owned by the Government of Russia. Rosneft is headquartered in Moscow’s Balchug district near the Kremlin, across the Moskva river...
. Such moves strain the confidence of international oil companies in forming partnerships with Russia. Russia has taken notice of their increasing foreign oil investment improving politics with other countries, especially former states of the Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
. Oil industry in Russia is one of the top producers in the world, however, the proven reserves in Russia are not as prevalent as in other areas. Furthermore, previously accessible oil fields have been lost since the Cold War
Cold War
The Cold War was the continuing state from roughly 1946 to 1991 of political conflict, military tension, proxy wars, and economic competition between the Communist World—primarily the Soviet Union and its satellite states and allies—and the powers of the Western world, primarily the United States...
. With the collapse of the USSR, Russia has lost the rich Caspian Basin off-shore and on-shore oil fields in the Central Asian states and Azerbaijan
Azerbaijan
Azerbaijan , officially the Republic of Azerbaijan is the largest country in the Caucasus region of Eurasia. Located at the crossroads of Western Asia and Eastern Europe, it is bounded by the Caspian Sea to the east, Russia to the north, Georgia to the northwest, Armenia to the west, and Iran to...
.
See also
- Energy securityEnergy securityEnergy security is a term for an association between national security and the availability of natural resources for energy consumption. Access to cheap energy has become essential to the functioning of modern economies. However, the uneven distribution of energy supplies among countries has led...
- Energy security and renewable technologyEnergy security and renewable technologyThe environmental benefits of renewable energy technologies are widely recognised, but the contribution thatthey can make to energy security is less well known. Renewable technologies can enhance energy security in electricity generation, heat supply, and transportation.-Energy security:Access to...
- PetroleumPetroleumPetroleum or crude oil is a naturally occurring, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds, that are found in geologic formations beneath the Earth's surface. Petroleum is recovered mostly through oil drilling...
- Peak oilPeak oilPeak oil is the point in time when the maximum rate of global petroleum extraction is reached, after which the rate of production enters terminal decline. This concept is based on the observed production rates of individual oil wells, projected reserves and the combined production rate of a field...
- U.S. Energy IndependenceU.S. energy independenceU.S. energy independence relates to the goal of reducing the U.S imports of oil and other foreign sources of energy. If total energy is looked at, the U.S. is over 70% self-sufficient. Energy independence is espoused by those who want to leave America unaffected by global energy supply...