from Follow the Money

Italian (oil) realism

October 7, 2006

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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Paolo Scaroni (interviewed by Jad Mouawad in the New York Times) points out that if Americans continue to drive SUVs with oil at $60 a barrel, oil isn't all that high.  Scaroni heads an oil company (INI), so he is talking his book to a degree.  Oil executives are not known for thinking oil prices are too high.  

But he also frankly recognizes that the countries with lots of oil don't currnently see much reason to give the world's international oil companies a large share of the current oil windfall, in part because some of them don't have much need the international oil companies.  Scaroni:

It’s their oil not mine. As a consequence we will have access to their oil as long as we bring something they cannot have by themselves. What do we bring — technology, project management capability, investment — something that adds value to them. If we do not add value we are out. Try going into Saudi Arabia and help Aramco to extract the easy oil. They don’t need us. First of all they are a good company. Second the oil is easy. Why should they share something they can do by themselves.

Scaroni also recognizes that countries will try to renegotiate contracts that were based on a much lower assumed oil price should oil prices rise unexpectedly, just as companies will try to rengotiate contracts when oil prices are lower than expected.

The second concept that I learned is that when oil prices move from $50 to $60 you cannot expect that this $10 difference falls into your pocket. You’d be happy if half of it went to you. All over the globe, there has been a big push to change the terms of the agreements over the past three years .... The same thing happens when prices fall. This time we renegotiate. When oil prices went down in the 1990’s, we renegotiated. But if renegotiation goes too far, and international oil companies leave, and then production starts to drop. At that point governments understand that the terms and conditions are important and that we have our own interest. 

That seems about right to me.  

The countries that have the oil will utlimately decide how much of their oil they want to produce right now, and who they want to produce the oil.  Sometimes, they may not necessarily want to produce as much as they can at the lowest possible cost -- ultimately, that is their choice.  It is their oil.

And what of the countries that don't have the oil needed to meet their domestic demand?  They aren't likely to have a lot of influence over the policies of the oil producers.  But they certainly can adopt policies to reduce their own demand for oil -- and thus their exposure to the policy choices made by the world's oil exporters.

One of Scaroni's factoids: If US cars were as efficient as European cars, that would save 4mbd.  That is as much as Iran produces, and more than it exports.  Worth pondering.

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