- Blog Post
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The Wall Street Journal has noticed that the state is no longer in retreat from the commanding heights of the global economy.
The basic pattern of capital flows is now set by central banks, not private markets. Private investors – at least until a few weeks ago – were dumping money into emerging economies. But those flows, in aggregate, were used not to finance current account deficits but to build up reserves. They were lent by the government of emerging economies back to the good old US of A.
But Bushan Bahree and Chip Cummins of the Wall Street Journal don’t focus on central banks. Rather they focus on another area where the state is not in retreat.
It turns out that states – including some of the world’s least savory states – have a rather firm grip on one key input into the global economy. Oil. They report:
Ninety percent of the world's untapped conventional oil reserves are in the hands of governments or state-owned oil companies, far more than was the case several decades ago.
Russia --as Guy Chazen reports -- is the latest example. It wants to reserve a dominant role in its new oil fields for local firms.
Senior Russian officials confirmed fears that the Kremlin will restrict foreign energy companies to the role of junior partners in all but the country's smallest oil and gas fields, keeping the richest reserves for newly assertive domestic companies.
Speaking at a forum highlighting Russia's expanding economic power and prospects, top government officials said the government isn't closing the door to foreign investors but wants to make sure that control of top projects remains in local hands.
[Yuri Trutnev, minister of natural resource] ... noted that Russia remains eager for foreign companies to invest together with Russian ones. .... The rules would ban companies in which foreigners own more than 49% from winning development rights to deposits deemed strategic. That definition has broadened significantly since the idea of the restrictions was broached more than a year ago.
Remember, Russia isn't short on cash right now. It makes a certain amout of sense for Russia to invest in Russia, not just lend to the governments of the US, UK and Germany.
And those state-owned oil companies are not necessarily focused on maximizing their future production. Bahree and Cummins:
Saudi Arabia and other oil-rich states have balked at making the large investments Western policy makers think are necessary to meet demand in coming decades, although they plan to expand production somewhat in the medium term. …
The Paris-based IEA has long expected the Saudis, who now supply about nine million barrels a day, to contribute 18 million to 20 million barrels a day toward that figure. In an interview, however, Mr. Naimi suggested that the Saudis are unlikely to go much beyond 15 million barrels due to concerns about depleting reserves too fast and damaging fields by pumping too quickly. Other suppliers, including Mexico and Kuwait, also appear unwilling or unable to meet the expectations of Western planners.
I am not convinced that a hard-headed analysis of Saudi (and Russian) interests would suggest that they shouldn’t behave a bit like oil oligopolists. At least so long as the world’s oil consumers aren’t able or willing to adjust. The Saudis and the Russians each control about 10 mbd of the world’s roughly 85 mbd of production, and an even larger share of the world’s exports. I wouldn't trust ExxonMobil to have the best interest of oil consumers in its heart either. Russia and Saudi Arabia presumably care far more about their interests as producers than anything else.
Why invest more to pump too much more if it just lowers the price on your existing production? Particularly if most of your current oil revenues are just going into the bank, where they are sitting in (depreciating?) dollars. And why not reserve production for a single national oil company that can control your countries rate of investment and thus influence global production and the amount of rent your country gets from its oil?
Plus, I am pretty sure the Saudis and the Russians remember 1998, when both were in just a bit of financial trouble. Russia defaulted. The Saudis couldn't cover their budget without massive borrowing -- borrowing that they are now paying back. Neither wants to return to the bad old days.
The economics and politics of oil were long driven – at least it seems in retrospect – by the fact that the Saudis over-invested in oil production in the 1970s (I think – some of the investments might have come a bit later). So the Saudis had a ton of spare capacity when all sorts of other investments were made to bring other sources of supply on line.
Plus, the consuming countries got serious about conservation. And about finding alternatives to oil for the production of energy. France turned to nukes. Others turned to coal and gas. That produced a one-off reduction in oil use.
Alas, those times are over. The Saudi no longer have much spare capacity. And key oil consuming countries like the US haven’t been serious – or so it seems to me – about conservation for some time.
So leverage has shifted. At least so long as global growth continues to be strong. I too remember what happened to oil prices back in 1998, when fast-growing emerging economies cooled.
Another Wall Street Journal article also caught my attention last week. Patrick Barta reported that – contrary to the perception of many – Chinese and Indian state oil companies haven’t been bidding up the price of the world’s remaining oil reserves.
Chinese oil companies are a bit bigger than they used to be, so they have a bigger impact on world markets. But their acquisitions – at least according to Wood Mackenzie – aren’t much larger than those of similar sized Western oil companies.
The report, written by consultancy Wood Mackenzie and recently distributed to its clients, says Asian oil companies such as Cnooc Ltd. of China have spent far less on acquisitions in recent years than a group of Western counterparts of similar size. ….
According to Wood Mackenzie, though, Asia's five most aggressive oil companies completed acquisitions totaling just $13 billion from 2001 through 2005. … By contrast, a group of five Western companies with comparable upstream assets … spent about $33 billion on acquisitions during the same period.
Wood McKenzie also says that Chinese companies aren’t over-bidding for oil:
Asia's latest deals assume long-term oil prices in the range of $23 to $35 a barrel, the firm says, well below the current price of about $68 a barrel in early trading. By contrast, Western oil companies have made deals that assume oil prices of $40 a barrel or more.
An interesting point of view. One that certainly challenged one of my stylized facts about the world. It made a certain amount of sense to me for China to overpay for oil, not just overpay for Treasury bonds.
I don’t know enough to be able to evaluate the Wood Mackenzie argument. Critics seem to think that China is paying too much for oil in politically risky places, even if it isn’t necessarily bidding more than western oil companies. The right to develop Sudanese – or Venezuelan – oil should trade at a discount to the right to develop Canadian oil fields.
But I do think it is important to recognize that Chinese and Indian oil companies overseas reserves are tiny relative to those of Western oil companies before criticizing China’s recent buying spree. If Chinese demand grows at anything like the pace Tamara Trihn of DB forecasts, competition for the small pool of potential investments will be particularly heated so long as most oil reserves are "reserved" for national oil companies.