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08 April 2008

Inefficient Nationalized Oil Companies

This last week Congress once again called the big American oil companies before committee to ask them why they were making profits when Americans were paying so much at the gas pump for gasoline. The oil companies ran weak ads on TV defending themselves and blaming the cost of oil on OPEC, high demand in developing countries, and the political uncertainties in many oil-producing nations. They did not complain about the government adding to the cost of oil with ethanol mandates and high gasoline taxes. They also did not point out that Congress will not allow them to drill for oil in much of the United States and its territorial waters. They did not point out that oil production is falling in some countries due to the inefficient operation of their nationalized oil companies.

Of the top ten companies in the world in terms of petroleum reserves in 2006, nine are state-owned national oil companies. The largest by far is Saudi Aramco and the 2nd, 3rd, and 4th largest are NIOC (Iran), INOC (Iraq), and KPC (Kuwait). These all have reserves of over 100,000 million barrels of oil. Fifth place is PDV (Venezuela), 6th is Adnoc (United Arab Emirates), 7th is Libya NOC, 8th is NNPC (Nigeria), 9th is Lukoil, and tenth is Qatar Petroleum. Of these, only Lukoil is private and it is controlled by ex-KGB thugs. Exxon-Mobil, the largest US oil company in terms of reserves, is number 14! BP is 17, Chevron is 19, ConocoPhillips is 23, and Shell is 25 in 2006. Because the international oil companies have so few reserves, they have a greatly diminished ability to determine the cost of oil and that ability is diminishing with time.

It is true that the international oil companies carry their weight better when it comes to the actual production of oil. Three of them are actually in the top ten in that respect. In 6th place is BP, in 7th is Exxon-Mobil, and in 9th is Shell. Production is dominated by Saudi Aramco, followed by NIOC (Iran), Pemex (Mexico), PDV (Venezuela), and Kuwait Petroleum Company. PetroChina is 8th and Sonotrach (Algeria) is 10th. Exxon-Mobil and BP each produce about 23% as much oil as Saudi Aramco does. NOIC (Iran) produces about 37% as much and Pemex (Mexico) produces 34% as much. PDV (Venezuela) produces 24% as much as Saudi Arabia. Iran and Venezuela are self-declared enemies of the United States and Saudi Arabia heads the OPEC cartel and Kuwait in position 5 is active in OPEC. Of the top 5 producing oil companies, only Mexico's Pemex is not in OPEC and is not in a country participating in terrorist activities, outside of some bloody drug traffic anyway.

These statistics are known to our grandstanding Congress. They were taken from a report prepared by the Congressional Research Service for Congress. The report is called The Role of National Oil Companies in the International Oil Market. It was written by Robert Pirog and dated 21 August 2007.

Many of these national oil companies are inefficient producers of oil. This goes with having government monopolies in general and the oil business is no exception. Articles appeared in the Economist about the increasing inefficiency of the once relatively efficient PDV, the number 4 producer, under Hugo Chavez in the last couple of years. Pemex, the number 3 producer, is similarly plagued with inefficiencies. NIOC (Iran), ONGC (India), Rosneft (Russia, 75.16%), and PetroChina are very inefficient oil producers. This inefficiency raises the cost of oil.

On Friday, 7 April, the Washington Times had an article on the problems with Pemex. Production at the Cantarell oil field, Mexico's largest, fell 18% last year. Overall, Pemex's production has fallen in 2005, 2006, and again in 2007. Since the price of oil went up 57% last year, company revenues are not decreasing despite the reduced production.

Pemex has virtually no control over the 110,000 union workers among its employees. A fertilizer plant closed in 2002 is still manned with union workers who cannot be fired or transferred. They show up each day and clean the plant a bit and then sit. Meanwhile, despite estimates that there are 30 billion barrels of oil and gas in the deep water areas of Mexican territory in the Gulf of Mexico, Pemex is doing nothing to expand its oil reserves. They do not have the money, the knowledge, and the technology to do so. They suffer also from high taxes, corruption, deteriorating equipment, lack of investment, and lack of competition. Pemex exported 1.67 million barrels of oil last year, but without new oil fields, exports are expected to fall to 290,000 barrels in 2016.

Pemex paid the government $62.5 billion in taxes last year. This is 60% of Pemex revenues! Pemex provided the Mexican government with 40% of federal spending. With continuing production decreases, it is unlikely that Pemex will be able to support so much of the weight of the government. Mexican legislators are themselves becoming a bit worried and have allowed Pemex to retain $18 billion for exploration this year. But, Pemex is limited in its ability to pursue market approaches to solving its problems since the Mexican constitution gives the state the exclusive right to process and distribute oil and natural gas. It appears unlikely that Pemex production will soon stop decreasing.

In general, the national oil companies have little incentive to expand production and they have even less to operate efficiently. They are commonly operated to employ as many people as possible and keep them beholdened to the governments. This is clearly the case in Iran, Venezuela, and Mexico. Taken together these 3 nationalized oil companies produce 94% as much oil as Saudi Arabia does. The other nationalized oil companies are not very efficient either.

There is little we can do about this as Americans, except to open new oil fields of our own in the Gulf, off the Pacific and Atlantic coasts, and in Alaska. We can also open the huge tracts of land in the west languishing in the hands of the Federal government for the development of oil sands and oil shales for oil production. We should build new clean and safe nuclear power plants and use our very plentiful coal for power stations with improved scrubbers to remove pollutants. We will still use foreign oil suppliers, but it is foolish not to increase our options and suppliers, so long as we rely on our most effective weapon, the free market. Unfortunately, our Congress will not allow the free market to do its wonders.

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