- The Washington Times - Thursday, May 4, 2006

A principal reason fuel prices are high and likely to remain so is a trend worldwide toward state ownership and control of oil resources that is raising questions about how quickly large tracts of oil and gas will be developed and made available to consumers.

While some state-owned oil companies, such as Saudi Arabia’s Aramco, readily develop their vast oil reserves to help hold down prices and satisfy the demands of consuming nations, other major tracts of oil have fallen into the hands of governments that are less attuned or outright hostile to pleas from drivers around the world who want them to continue the flow of cheap and readily available fuel.

Bolivia, with the second-largest reserves of natural gas and oil in South America, this week became the latest example of a nation to seize control of critical energy facilities that had been operated by private companies that were gearing up to produce the fuel needed by hungry markets.

Bolivian President Evo Morales’ move on Monday to send national guard troops to take over Exxon Mobil, Petrobras, Repsol and other oil companies’ facilities helped send the price of oil to near-record levels. The president scoffed at protests from companies that said the radical move would prevent future development, saying “foreign petroleum companies that announced they will freeze their investments can leave.”

Bolivia’s action shook the markets not so much because the Latin nation is a significant producer of oil — currently it is not — but because of the “psychological” impact of bottling up yet another critical reserve of fuel at a time of tight supplies, said Societe Generale analyst Deborah White.

“Nationalizations or increased state control tend to be followed by production lower than it otherwise would have been,” she said.

The American Petroleum Institute estimates that nearly 80 percent of the world’s oil reserves are owned by national oil companies and 6 percent are controlled by investor-owned corporations such as Exxon Mobil and Shell.

That trend — and the tendency of states to skimp on investment in future production so they can spend their oil riches on other projects and causes — prompted the Energy Information Administration late last year to nearly double its forecast for world oil prices, saying they would stay at high levels because of lack of investment.

The trend emerged in recent years as two of the top oil producers — Russia and Venezuela — asserted control over their oil industries, precipitating sharp drops in investment, development and production. Their actions laid the foundations for today’s soaring prices.

Venezuelan President Hugo Chavez, a left-leaning nationalist and populist whose example inspired Mr. Morales, is the most outspoken advocate of high oil prices. Venezuela sits atop the Western Hemisphere’s largest oil reserves and historically has been a top supplier of the United States.

The U.S. energy agency has concluded that since his election in 1998, Mr. Chavez’s goal has been to increase the oil revenues that sustain his government and the country’s economy through price increases rather than increased output. As a key member of the Organization of Petroleum Exporting Countries (OPEC), he regularly lobbies for production cuts to keep markets tight and prices high.

Output has fallen from a high of 3.3 million barrels a day to about 2.76 million, though analysts say Venezuela is one of only a handful of countries that could be increasing its output substantially to ease strains in world oil markets.

Mr. Chavez this year moved to take a bigger cut of profits earned by private oil companies under contract, and seized some assets of France’s Total and Italy’s Eni SpA, causing western oil companies to step back from further engagement though Venezuela needs their expertise to develop its oil fields.

Rather than using the profits from oil operations to invest in new production, as a private company would in response to high oil prices, Mr. Chavez has used the countries’ oil wealth for economic development, to aid the poor and lavish favors on friendly countries and causes. Cuba and other Caribbean and Central American countries receive oil from Venezuela on preferential terms.

Russia, whose privatization of the oil sector in the 1990s caused a rapid increase in production that catapulted it into the world’s second-largest producer behind Saudi Arabia, in 2004 moved to take control of its largest oil company, Yukos, as well as increase the state’s already sizable share of revenue and profits from oil operations. The result has been a precipitous fall in new investment and production in the oil giant.

While Russian President Vladimir Putin is not a member of OPEC or a vocal advocate of high oil prices like Mr. Chavez, he has said he views Russia’s vast oil resources as a national treasure that should be preserved and cultivated for the good of the Russian people rather than private firms. He has taken a go-slow approach to opening up unexplored and undeveloped, but potentially huge, oil reserves in eastern Siberia.

Most oil companies in OPEC members in the Middle East have been state-owned since the 1970s, when the world’s oil-rich nations first flexed their power and formed the cartel to maximize their revenues through high prices. OPEC’s control over prices was blunted during a period of rapid growth in non-OPEC oil output during the 1980s and 1990s, but it has emerged as the reigning power over the oil markets once again.

While OPEC members frequently say they aim to keep oil prices in a moderate range, the failure of most to significantly increase output in response to growing demand in recent years is what led to today’s record oil prices. Among the states with the largest oil resources under their control are Iraq, Iran and Nigeria, Africa’s largest producer.

State-owned oil companies outside of OPEC also have aimed at raising prices rather than production so as to maximize the revenue coming into government coffers. Mexico’s Pemex oil company was created in 1938 under provisions of the Mexican Constitution, which prohibits any foreign ownership of the country’s oil riches. Mexico is the world’s fifth-largest producer and a critical supplier to the United States.

“There have been complaints from Pemex managers and Mexico’s Energy Ministry that Pemex does not have sufficient funds available for exploration and investment, owing to high financial burdens placed upon the company by the Mexican government,” according to the Energy Information Administration. Investment has picked up in Mexico since 2000 under President Vincente Fox’s administration.

Even the few remaining producers like the United States that are advocates of private control have government policies that put critical oil resources out of reach for exploration and development. Environmental opposition against drilling on the outer continental shelf and in the Arctic National Wildlife Refuge has left sizable reserves unavailable there for decades.

With the vast majority of the world’s reserves controlled by powerful states, Max Schulz, senior fellow at the Manhattan Institute, said that charges in Congress that major oil companies are driving up oil prices seem bizarre.

“The real giants are the state-owned oil companies,” he said. “Compared to them, Big Oil seems like small fry.”

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