Right, Power, and Production Capacity

In an article dated 18 August 2008, “As Oil Giants Lose Influence, Supply Drops,” New York Times reporter Jad Mouawad again pooh-poohs the idea of peak oil while presenting recent evidence of it.

(If you’re looking for an explanation of peak oil, an excellent place to start reading is Benjamin Kunkel’s article “World without Oil, Amen,” which appeared in the August issue of GQ.)

Mouawad admits that demand has been exceeding supply. “Oil production has failed to catch up with surging consumption in recent years, a disparity that propelled oil prices to records this year,” he writes. And he admits that few expect the situation to get better over the next decade. But in his attempts to explain this phenomenon, he has no truck with the idea that humans may already have found most of the world’s oil and may already have taken about half of it out of the ground.

His article focuses rather on the especially low output of the Western oil companies: Exxon Mobil, BP, Royal Dutch Shell, Chevron, Conoco Phillips, Total of France, and Eni of Italy. Once they were giants, he writes, dominating the industry, but now they are responsible for just 13 percent of the world’s oil production. And that’s the problem. The oil has been taken away from them!

Sluggish supplies have prompted a cottage industry of doomsday predictions that the world’s oil production has reached a peak. But many energy experts say these “peak oil” theories are misplaced. They say the world is not running out of oil—rather, the companies that know the most about how to produce oil are running out of places to drill.

“There is still a lot of oil to develop out there, which is why we don’t call this geological peak oil, especially in places like Venezuela, Russia, Iran and Iraq,” said Arjun Murti, an energy analyst at Goldman Sachs. “What we have now is geopolitical peak oil.”

Third World nations have had the gall to nationalize their oil—taking it out of the deft and expert hands of the West and fumbling at it with their own dirty fingers instead. “Countries like Russia, Algeria, Nigeria and Angola have recently sought to renegotiate their contracts with foreign investors to capture a bigger share of the profits,” Mouawad writes.

This is a clever explanation, but it would only have a chance of being a true one if nationalization of oil assets were a new factor in world affairs. And it is not—by a long shot. Consider Mouawad’s own admission that the Western companies today control just 13 percent of the world’s oil. If their share is so low, why on earth would anyone think that their control over oil assets is essential? It’s entirely possible for the terms of oil’s ownership to change without any change in the company that handles the drilling and refining, after all. But even if the drilling and refining, too, change hands, all need not grind to a halt. Oil’s new owners have as great an interest in getting it to market as its old ones did.

Consider, too, a few moments in history:

1938 Mexico nationalizes its oil industry
1943 Venezuela demands 50 percent of the profits of oil produced there
1950 Saudi Arabia demands 50 percent of Aramco’s profits
1972 Iraq nationalizes its oil
1973 Libya nationalizes its oil

This is not an exhaustive list, just a sampling from notes I took recently while reading of Karen R. Merrill’s The Oil Crisis of 1973–1974 (Bedford St. Martin’s, 2007). But I think the list suffices to put paid to the idea that nationalization of oil assets is a new phenomenon. It has been around too long to be the cause of low oil production a decade from now. The industry has had more than half a century to adjust to the fact that sometimes countries decide they want a bigger piece of the pie.

Merrill, by the way, reprints a transcript of a 1972 meeting during which OPEC nations demanded equity in—that is, a share in the ownership of—the Western companies pumping oil of their wells. It’s pretty hilarious. The Westerners try valiantly to argue that the Arabs have already signed away their oil and can’t get any more for it.

A. C. DeCrane (Texaco): If a country has exercised its sovereignty by granting concession rights, why shouldn’t the party who has relied on the agreements feel that he has a right to question nationalization? You cannot ignore legal rights given by contract.

A. Z. Yamani (Saudi Arabia): You are exaggerating your rights. An agreement with the Government does not give immunity from nationalization and a state cannot bind its successor not to nationalize—even if they have promised not to do so. The International Court of Justice has given many decisions recognizing the right to nationalize. The U. N. resolution recognizes the right to natural resources. However we are not here to discuss nationalization. . . . We are reasonable and responsible. Circumstances of thirty years ago have changed. There are hundreds of cases justifying the doctrine [of changing agreements once circumstances have changed]. It is not just something in our imagination that we wish to discuss.

Hassan Kamel (Qatar): The principle allowing a nation to nationalize its natural resources is well recognized and reaffirmed by the UN. OPEC Resolution 90 of 1968 established a principle of acquiring a reasonable participation [in ownership of oil companies]. . . .

DeCrane: An OPEC resolution cannot create a legal right. Changes may be give rise to discussions and to changes to agreements, freely negotiated but not from any legal right. There is no legal right in our opinion to force us to agree. . . .

Yamani: I don’t care about your legal views provided you are prepared to discuss in a reasonable and practical manner. If you say there is no right to ask for participation then that is the end of the matter. If you are prepared to discuss, then we will. We have the power to move in other directions.

DeCrane: It is very important to distinguish between a right and a power.

Yamani: Good, I am glad we understand each other. For example, I own this glass and I have the right to break it. Don’t make me nervous or I will use my power.

A. R. Martin (Gulf): I would like to clarify our views on sovereignty over your resources. You used it to enter into agreements and you do not have the right to take the right you have granted back again. International law does not recognize such a right.

Yamani: Now I am using my right. If you get stubborn, I may use my power. [Merrill, The Oil Crisis, pp. 44–47.]

One can’t help but think that if the American Indians had had a Yamani on their negotiating team, perhaps the political geography of the United States would have turned out differently.

2 thoughts on “Right, Power, and Production Capacity”

  1. In defense of the American Indians negotiating skills, I think their history is a better example of rights being ignored by the greater power. What was it that Jackson said about the supreme court decision recognizing Cherokee sovereign lands, "John Marshall has made his decision, now let him enforce it!"
    The Saudis should be glad Texaco and company didn't have the U.S. government behind them.

  2. Mike: You're absolutely right; they aren't really parallel cases. I suppose what I meant by my joke was more along the lines of, What if American Indians had had the same power to point out the legalistic bad faith of U.S. negotiators?

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