[Pops]

Another potential source of aggravation to the world petroleum market that the leaked German peak oil report brought into focus for me, is the relationship of states to private oil development.

Based on the increasing importance of oil, governments are becoming more relevant in securing the benefits of oil, both on the supply and on the demand side. This puts a higher emphasis on political negotiations and deals, and increases the risks for nationalizations of resources and key exploration activities.

I mentioned Bi-Lateral agreements between states and also between states and private oil companies (in other states) in another thread, in this one lets discuss the changing relationship between states and private oil companies within their own borders.

Most peak oil forecasts seem to assume a "Free Market" where supply can satisfy demand regardless of political boundaries, all that matters is how much is produced, how much is desired and what is the ability to pay. Most forecasts then do not account for what is the obvious fly in the ointment, national self interest.

The constraints of growing consumption in export land and bi-lateral production agreements are making producers much less free to simply sell to the highest bidder. State owned oil already accounts for 75% of oil production and with a majority of oil reserves found in countries ranked by Transparency International as "most corrupt" the potential for further nationalization is high. Out of 180 countries ranked, Iraq is number 176, Venezuela 162, Nigeria 130, and that number is probably going to increase.

Earlier this year the King of the Kingdom said KSA needs to leave some oil in the ground for future generations - that's the Export Land Idea of constraint. China entering an agreement with Iraq to develop the Rumalla oil field is the Bi-Lateral constraint. Russia revoked Shell's environmental permit forcing it to give up half it's percentage and giving Gazprom majority ownership - that's the nationalization constraint. Nationalization of course, allows countries the ability to proceed to either keep all their oil for their own use or to make bi-lateral agreements with other, friendly, countries.

I read that states already own most of the oil on land and the international oil companies (IOCs)have been pushed into the deep oceans - but the BP spill now gives the countries that want to use it a good excuse to make exploration and production even more expensive for those companies and of course less so for the national company. The IOCs still have the edge in technology and downstream infrastructure.


At what point along the spectrum of decline will the "free market" aspect of oil production effectively end?

At what point will the importing countries, "liberal democracy" or not, be forced to nationalize their energy infrastructure? Or will they only levi tariffs, windfall profits taxes and other trade barriers?


http://www.wikinvest.com/concept/Oil's_ ... Turbulence
http://www.reuters.com/article/idUSTRE6651ZI20100706
http://en.wikipedia.org/wiki/National_I ... il_Company
http://online.wsj.com/article/SB1000142 ... 90852.html
http://www.cfr.org/publication/12089/ve ... onomy.html

[Plantagenet]

Virtually all the exporting countries have already created "national oil companies" and have partly or completely nationalized their oil industry.

IMHO, it doesn't gain the importing countries very much to nationalize their oil industry. If a western liberal democracy that has to import the bulk of its oil nationalizes the oil industry, the government would have to take over buying and importing oil from foreign countries, making the price of gasoline dependent on political pressure (we'd have "gas stamps" for poor people in no time just like we have "food stamps" now) and creating a risk of turning the trade deficit that results from buying foreign oil into a huge and crippling government budget deficit.

[lper100km]

P: You’re almost there.

The point of importing countries nationalizing their oil industry is to control the distribution of oil purchases that they have wrangled out of the suppliers. It's inevitable. Guess who will keep the lion’s share?

[efarmer]

Let me guess, the nation's government and military?

How will they unwind the oil speculators who are up in the air when the time comes?
I imagine they will cover them for the real price and give them an imaginary kiss and
hug for the difference.

[Pops]

Yea, the point in the importing country would be to create a regulated monopoly. We did lots of stuff during the embargoes (and since) that resembled a command economy. With the Emergency Petroleum Allocation Act of 1973 we controlled just about everything in the line from the ground to the gas station, and at the gas station we controlled when and how much and for how much gas could be purchased, reduced speed limits; we enacted all sorts of economy measures and building codes and subsidies and started the Strategic Petroleum Reserve to boot.

[efarmer]

I would assume the big NY players would know it was coming and go to ground and just leave some sucker money in. I think food commodities would be right behind petroleum for keeping a nation
dog paddling instead of jackpotting speculators.

It should define who is really connected and who is a sucker, with a load of shocked suckers no doubt.

[Pops]

I wonder, maybe .gov will have done so much damage with "tightening regulation" and "windfall profits" and elimination of subsidies; and foreign national oil will have commandeered so many reserves to boot the only thing left will be the refineries and distribution network?

Surely once the export regions have nationalized everything that can flow through a pipe and the US has had a few more spikes like '08 with less and less of a break between, the voter anger we see now will seem tame.

[Pops]

Here is the scoop from Yergin, either give oil companies more tax breaks or else supply will be constrained - by taxes, certainly not geology, heaven forbid.

The U.S. is falling behind in the investment race to develop the world's future energy supply, and some current proposals would make things even more difficult for U.S. companies, according to a new benchmark by IHS CERA.
...
Companies such as the UK, Netherlands, Russia, Canada, Norway, Italy and China pay less by way of additional taxes on their repatriated income and are therefore able to compete more effectively against U.S.-based companies - in some cases enabling them to afford to bid twice as much for oil and gas concessions.

"That places a hurdle in the path of U.S.-based oil and gas companies that is higher than for companies based in other countries. Securing new concessions requires them to overcome this hurdle," said Hobbs, noting that certain legislative proposals in the U.S. to amend U.S. tax legislation could actually make the current hurdle even worse for U.S. companies, making them the least competitive among the analyzed peer group, excepting India.
...
The report notes that the competitive playing field in the international oil and gas business has become more crowded. The share of global activity by investor-owned companies (IOC)-measured by oil production, the acreage owned and the number of wells operated by IOCs in the U.S. and elsewhere-has declined in relative terms over the past 40 years as national oil companies (NOCs) have taken control of their home territories and emerged into the international arena as what are known as "INOCs"-international national oil companies.

However, non-U.S.-based companies have fared better in the face of this new competition than their U.S.-based counterparts over the same period.

Rigzone

[pup55]

Hi, Pops:

Leaving aside for the moment the free market argument, and leaving aside for another moment whether or not it "should" go that way....

I think it's inevitable that this entire industry even in the US will be government controlled, and here is why:

First of all, the government does not require any ROI. At some point, the deepwater platforms will be so deep, or the tar sands deposits will be so nasty and expensive to get to, and the whole thing will be so risky, that private companies will no longer be able to extract the oil because the risk is too high. The economics of extracting an extra billion barrels of oil will not justify the risk. The government, who can extract money from the taxpayers, will have to get involved. First, they will back up the projects like they are propping up the banks right now, by insuring the participanes against losses, and eventually this will morph into being outright, where the government owns the project and civilian contractors do the work. This will go all the way down to the refinery system which right now is functioning below reinvestment economics. The government will just borrow the money and subsidize fuel for as long as they can because they see the ramifications of the social disruption that will happen.

At some point, rather than insisting that the public sacrifice, and conserve, it will be politically expedient for the government take over parts of the system and subsidize cheap fuel all the way until armageddon. Hugo Chavez is doing this right now. The Republicans will be the very ones who will do this, as long as they feel that they can keep better social order by keeping the pickup truck drivers happy...

They're already doing it in a way..... there is a whole system set up of backdoor subsidies for this industry....at some point it will be out in the open...

Secondly, at some point, the government will need the fuel for the war machines, and at that point, economics be damned, and also EROEI be damned.... They will make people extract this stuff at the point of a gun if they have to in order to keep the war machines fueled.

[Expatriot]

Hard for me to see govt. nationalizing oil in the U.S..
My view is that corporations run the U.S., ergo, capital shifts towards megacorps, not away.

[eastbay]

Immediately after the coming extreme shortage develops the importing governments will take control over the distribution of oil through rationing and price controls thereby assuring that the military, police, critical industry, and other essential services have enough to operate. The public will split the ever-dwindling remains and the method of splitting the remains shall be determined by each government and not the market.

Will nationalization occur? In some countries, yes. But investors will know the ever-changing energy service sector will remain private long afterward.

[Pops]

Both good points.

I can't get a handle on which way I think this will go since both political parties in the US are so dependent on contributions from The Corp's (and employment after their public "service") as well as demagoging whatever the Corp's has convinced J6p to be concerned about on any given day.

On the one hand (consumption side) we heard calls for a "gas tax holiday", another institution of "windfall profits taxes" and of course we nominated Drill Baby for VP in '08, now were talking about eliminating subsidies for oil cos, we'll certainly regulate drilling much more.

If things really are as bad for the IOCs as Yergin says, the gov may need to "bail them out" and install a provisional administrator.

I guess I lean towards Pup's version, but with The Corp's rights of free speech as a natural person now enshrined by our non-activist SCOTUS I can imagine we'll be hearing from Harry and Louise on the topic.

[pup55]

capital shifts towards megacorps, not away.

Correct. But, capital flows away from risk. So, the corps will get the government to accept the risk, and there will be plenty of reward.... They are doing exactly that right now with GM and the banks.... The government is accepting the risk....the corps are getting the reward...

There is plenty of historical precedent for the government stepping in, if a project is sufficiently important, sufficiently risky, and there is some doubt that the private sector would have the stomach for it. I am thinking right now about the transcontinental railroad, which I believe was completed in 1875 or 6. Private enterprise could never have assembled the land, bought all the hardware, and literally laid 2000 miles of track through hostile territory without backing of the government. The corpgov set up the two companies that would do the project, they even appointed an ex-general to run the thing, and naturally there was plenty of opportunity to skim a little off the top....ref: Credit Mobilier that allowed the influential congressmen of the day and their cronies to participate in the funding of the whole thing.....

So if you look at something like some gigantic deepwater offshore project, or oil sand project, for example, the government could easily say "it's critical to our nation that this resource be tapped into even though it makes no sense economically", they claim the land via eminent domain, set up the subcontractors like Halliburton who will dig the hole, make sure they get nice no-bid contracts out of the treasury, we get that little bit of fuel so that the Hummers keep humming.... and who cares about EROEI...

I am ready to argue that the same thing is happening with the space program, but there is a military component to that, like there always has been....

[efarmer]

Good points Pup55. The US railroad was a very interesting point in how it worked. In addition to all the things you mentioned, huge Brit money came in, provided Coolie labor from the Chinese colonies, buried dead by the side of the tracks,and was even allowed to print railroad currency to pay coolies.

[pup55]

That's right. I always have to laugh at those people that say "where does it say in the constitution that the government should be involved in this stuff, let the market decide" but here was an example that was up to if not completely outside the constitution that happened to be the driving force in populating the western half of the country...

If you want another example, look at the TVA and REC.... the very same hillbillies that are populating the tea party movement and wanting to secede from the country because the government is intervening in their lives are forgetting that 2/3 of the south was still living in tar paper shacks and using outhouses until the 50's and the main driving force was this series of government initiatives that electrified the nation. There was no "free market" or "economic justification" from a market standpoint to run a power line 7 miles out to Cousin Earl's farm... even at the time it was argued strenuously that it was extra-constitutional for the government to be involved in this stuff....

So, if a project is sufficiently big, and not otherwise justified economically, but considered to be sufficiently important, there is plenty of precedent for the government "intervening"...

[Pops]

You are getting around to something else I was pondering, which is the interim step of regulated utilities in general. The railroads were a big factor in the rise of regulated utilities as the Progressives started putting the screws to the "Robber Barons" like Crocker, Stanford and all those boys.

There are lots of good arguments for free market solutions but the Trust Busters instituted strong regulation on everything from rail to busses to trucking to Ma Bell because their monopolies could set prices and service schedules with little regard to consumers - there were no alternatives to their product.

Just as my farmhouse wasn't economical to run a wire to in the 50's without the REA, perhaps it's also unprofitable to run a wire out to a wind farm in Kansas or some other alternative that otherwise would be viable.

In the days before deregulation in the 1980's regulated electric utilities were responsible for maintaining and expanding the power grid as necessary. When the utilities were broken up, the transmission providers were caught in a squeeze, the money is made in producing and selling power, transmission not so much.

I know the gov isn't always the most efficient, buying from Enron turned out to not be too efficient either.


http://en.wikipedia.org/wiki/California ... ity_crisis
http://www.oe.energy.gov/1371.htm

[Plantagenet]

Stay on topic, please.

[Plantagenet]

Its pretty easy to find fault with private oil companies etc. I'm still not clear on what the benefits are of privatizing them.

Look at Mexico----they nationalized years ago and created PEMEX, and it has't worked out all that great for them...

[Pops]

The point is basically that production is mostly nationalized now and and bi lateral and political agendas will increasingly determine who gets oil n the future. The free market will not be free and perhaps not a market either if most production is spoken for ahead of time.

I don't know if it will be "better" or not, I'm just throwing it up to see what others think.

[efarmer]

You don't nationalize the corporate oil players Plant, the government sets price limits to neuter speculation and the private oil companies then decide if they wish to drill and produce at the set pricing or not. The government will have to boost the price to where it makes it possible for drillers to pursue the hard to get at oil, but the market speculator will be frozen out of the deal unless they wish to operate in a narrow and low profit little window, knowing dirt cheap is long gone and sky high will only be reached from depletion rather than cheerleaders at the casino.

If someone hollers tilt, you simply tell them that when the free market delivers it's substitute product since supply and demand has broken for petroleum, Uncle Sugar will take the collar off the dog and let him go and run with the pack again.