Last week's announcement from Caracas that the operations of Western energy companies including BP, Chevron, Conoco, Exxon, Total and Statoil were being reduced due to continuing nationalization of oil reserves, and that the Chinese state oil giant CNPC would play a much bigger future role in exploration and production, poses a serious threat to the global oil market.
About 80 percent of the world's oil is controlled by national oil companies. Some of these state-owned enterprises operate at world-class standards, notably Petrobras of Brazil, Petronas of Malaysia and Aramco of Saudi Arabia. In those places, production is increasing.
But most of the large state firms (including CNPC) have much lower operating standards than multinationals, such as the ones leaving Venezuela. This is due largely to political interference. The inefficient bureaucracies of state-run firms are too slow and incompetent to reinvest record industry profits in the modernization of their aging oilfields. Both national oil-company executives and politicians may be corrupted by the surge in cash from high prices.
The result is a number of countries with huge oil reserves and falling production, including Iran, Iraq and Mexico. Russia and Kuwait will also stagnate unless practices change. These countries represent more than one third of the world's oil reserves.
In Venezuela, production has plummeted from a high of 3.3 million barrels per day in 1997 to 2.4 million barrels currently, more than 3 percent of global supply. If Venezuelan production is to be sustained, it must come from the complex projects in the massive Orinoco Heavy Oil Belt. Heavy-oil production is a complex challenge, requiring managers to organize huge investments and deploy cutting-edge technology. Unfortunately, the Venezuelan national oil company (NOC), Petróleos de Venezuela (PDVSA), no longer has any of these skills.
Since taking office, President Hugo Chávez has decimated PDVSA. Roughly 20,000 staffers have been fired, including some experienced managers after a bitter strike. Mismanagement is coupled with politically driven spending of oil revenues on economic subsidies at home and attempts to purchase good will abroad. While some domestic payments meet the legitimate needs of the poor, the economy is now edging toward bankruptcy. To balance the government's budget, Venezuela needs an oil price of approximately $60 per barrel.
Chávez is absolutely correct to try to get the best deal he can for his country, particularly with high oil prices. But by pushing out competent private operators in favor of less experienced state firms like CNPC, it will cost him more money to produce fewer barrels.
To thumb his nose at the United States, the natural market for his crude, and to ship it to China makes no sense. The cost of moving oil by tanker is high: the Panama Canal is too small to take the ships, and the Chinese do not have refineries capable of processing much of the heavy crudes, or dealing with the environmental consequences.
The situation in Venezuela is symbolic of a growing trend. High prices have spurred unprecedented resource nationalism, and it is no surprise that the Chinese are capitalizing on this. Politicians detest the demands of transparency and accountability that often come with multinationals. The Chinese do not ask embarrassing questions—witness Sudan, where they have ignored genocide in exchange for oil.
The implications for the world economy are potentially catastrophic. The world is not running out of oil, but it will run out of production capacity if the national companies, the new rule makers in this business, don't invest. Already, the petroleum industry is far more fragmented than it was a few years ago. Countries with large resources have an obligation to the world economy to develop their oil, not just cash checks. If they don't, the world will be unable to meet surging Asian demand. Oil-based kleptocracies will be strengthened, making these countries even less stable. The recent elections in Nigeria are an egregious example.
Washington has no influence in Caracas, but U.S. policy would appear to be made to order for Hugo Chávez. In the United States, we encourage consumption and discourage production. This is not sustainable. Before it is too late, we must effectively deal with demand, which virtually every other developed country has done, while increasing production from all sources, conventional as well as renewable. Our own politicians must stop posturing and start acting, before we are completely at the mercy of leaders like Chávez and their destructive policies.