Nationalize the Oil Industry?

In a post I wrote just over a year ago – Peak Oil: End of the World? – I posed the following:

If you think the public is outraged now, wait until gas is $10 a gallon, people are suffering as a result, the economy is tanking, and ExxonMobil posts the first ever $100 billion annual profit.

The vast majority of the country will blame Big Oil for their woes, and they will resent that Big Oil is profiting from it. How will the public react? How will the government react? No doubt there will be legislation designed to combat the problem, but of what form? Will the government institute rationing? Will they attempt to nationalize the oil companies?

This wasn’t the first time I have mentioned the prospect, and it won’t be the last. You may have seen Representative Maxine Waters yesterday threaten to nationalize the oil industry during a house hearing on fuel prices:

Video: Maxine Waters threatens to nationalize America’s oil industry

The thing is, I can only see these calls for nationalization gaining in popularity. Our government – if it behaves in the predictable fashion that I have come to expect – is incapable of stopping the climb in prices. Long-term, prices are going higher – and oil companies will benefit. Even as oil majors struggle to replace their reserves, oil prices are rising at an even faster pace. Thus, the value of the oil that they do produce more than offsets those declines. So what I expect to see is oil companies become more and more profitable as oil prices continue to climb. The only things our government can do to stem the pain are things they can’t collectively agree to do. What they can collectively seem to do is offer pandering solutions that appease the public’s anger by “sticking it to the oil companies.”

So I foresee more calls to nationalize. If the goal is to bring prices down, it would be a disaster. If the government took over, what would they do with the profits? They would end up getting diverted down other channels. That is not sustainable, as this industry is very capital intensive. Venezuela is seeing their production decline accelerate as they fail to invest enough money back into the business.

Ironically, I wrote an essay just a few days ago on this topic for Resource Investor:

Creeping Nationalization and the Oil Industry

After pointing out that 1). Most of ExxonMobil’s profits are derived from overseas operations; and 2). Government has had a handsome windfall as well from rising prices; I lay out what I see as the risk if we creep toward nationalization:

What does the government risk by implementing creeping nationalization and open hostility toward such a key industry? One need look no further than Venezuela, where ExxonMobil and ConocoPhillips both left the country as Hugo Chavez increased taxes to the point that the risk was no longer worth the reward. Of course countries like Iran and China were more than willing to move into the void, which further diminishes the access the U.S. companies have to global oil reserves.

But with the constant threat of higher taxes hanging over their heads, it is not inconceivable that some U.S.-based oil companies would simply relocate to countries with more consistent energy policies. After all, that’s what Halliburton did, which ironically sparked political outrage from the same crowd calling for windfall profits taxes on oil companies.

Nationalizing the industry is not going to bring prices down. Using history as a guide (Venezuela, Mexico), it would likely accelerate the decline in production, driving prices even higher. But that doesn’t mean that the government won’t eventually tire of the annual rite of tongue-lashing the oil companies, and move on to more drastic action.

30 thoughts on “Nationalize the Oil Industry?”

  1. Pathetic. If the Gov’t owned the US assets of US oil companies the situation would be no different. They would still have to import 60% of the crude oil at international prices. The 40% domestic oil and gas production doesn’t make enough to subsidize gasoline production.

    I believe nationalization would make prices higher. What remained of the domestic US companies would just pack up and move to Dubai or Ireland (12.5% corporate income taxes) or Singapore taking their international assets with them.

  2. It’s ironic. our government refuses to engage in de facto nationalization (regulated monopoly) where it’s appropriate, and then tries to monopolize/nationalize competitive arenas. For example, it makes lots of sense to nationalize natural monopoly situation such as last mile telecom, power, water, sewer, and roadways. Anyplace where increasing competition results in increasing per subscriber costs. Now we have been vindictive calls for nationalization for something we could and should do without. If they really wanted to do something about high gas prices, then give automotive companies a huge tax credit for actually producing and delivering a large number of long life (10 year) electric vehicles with 100 mile battery only range. Nothing spurs innovation like a boatload of money for the suits Unfortunately, there’s no way to get this message across to our misrepresentatives.

    I’ll take mine with air-conditioning please. Safety first, energy second, I want to be cool and clearheaded when I drive.

  3. RR-
    I don’t think gasoline will ever get that expensive. Demand starts shutting down. Businesses and consumers react. Already, gasoline demand in down five percent year-over-year in California. Imagine the years ahead.
    If the Volt works (yes, I know, betting on GM is like betting on the Cubs, Mexico or Perry’s Mason’s opponent), the game is changed. It will mean we need power from the grid, not oil fields.
    Nationalization of oil fields is a terrible idea.
    However, huge X prizes for successful alternative energy sources or very low mpg cars is a great idea. Imagine a $10 billion X prize for the first manufacturer to commercialize an plug-in EV (the Volt).
    A pittance next to other US government expenditures, including the $2 billion we spent every week in Iraq (not accrual accounting, We probably are running up double that in total bills).
    I disagree with the doomsters and the self-flagallators tha somehow we cannot improve our lives.
    We do need heavy incemtives to develop domestic sources of energy, including shale, and solar, wind, geothermal, and we should probably tax imported oil.
    Is is annoying how little our presidential candidates have to offer on this score. McCain’s big idea is to stay in Iraq until 2013 at the earliest. Now there is a guy who never ran a business, met a payroll or budget on his own money, or worried about health care.

  4. Look at the graph in this article:

    Oil’s Perfect Storm May be Over

    I’ve talked about this in the past. In the 1990s there was 2 million barrels of excess capacity which allowed OPEC countries to cheat, keeping prices in check.

    You can see over 2002-2005 the surplus capacity was much lower, driving up prices. It looks like the situation is about to change.

  5. Interesting link, King. Let’s hope you’re right. I thought the most interesting part of the article was this: Goldman Sachs argues that fuel prices in most of these countries are held down by state controls, insulating demand from the effect of any global downturn [and record oil prices]. But this could change. Egypt – the most populous Arab country – has just raised petrol prices by 40pc. Rumours swept China yesterday that Beijing was preparing to lift fuel prices. While the Chinese government is unlikely to risk protests in the lead up to the Olympics, the jitters are a reminder that Asian states will have to take action sooner or later to wean their societies from subsidies. At $135/bbl something’s gotta give. Even China can only keep gas prices low for so long. When they start passing the true costs along to the consumer, demand will eventually go down.

    In the long run though, I still see oil going up. You?

  6. Were we to nationalize anything, it should be the coal-to-liquid fuel industry.

    If the US Government were to build and operate a few CTL plants in Montana, it might be a good thing. Sell the resulting fuel to energy companies at its market price and use the profit to pay down the national debt.

    The Air Force is already making plans to build a CTL plant to make domestic jet fuel near the old Glasgow AFB in Montana.

    I also wouldn’t mind seeing the government get in the nuclear power plant industry — much as France has done. The Feds might be able to eliminate most of the regulation that has made it almost impossible (and prohibitively expensive) for private utility companies to build new nuclear reactors.

    The Navy has been in the nuclear reactor business since the 1950s. Why can’t the AEC agree on a standardized nuclear reactor design that doesn’t need to be engineered specific to each site–as France has done–and start building them across the country?

  7. Hawkshaw: Exactly. The weenie French have a nuke industry that provides 80 percent of their electricity. And if they adopt PHEVs? Then what do they care about oil?
    CTL? Why not an X prize, $3 billion to first commercially viable plant in operation for one year? No gov’t agencies — we need results.
    I just gotta say it again; There is no shortage of energy sources, and once a Volt-type car is up and selling, we need less and less oil every year.
    Peak Demand is the real story of this decade. We will achieve it, and if oil does not drop below $60-80, we will maintain it.
    Kingofkaty; I think oil is going down, and if commodity funds (who have been enormous net buyers) start selling, we may have a rout. Iran is filling up tankers one after the other, there is no place to sell sour crude right now.
    This is the major threat to US energy independence: An oil price collapse, and we go right back to fat and happy, and stay very vulnerable and compromised…..

  8. We just luvvvv to stick it to the oil companies. Funny thing is, they didn’t create all this crazy demand, they’re just trying to respond to it.

    If we want to go after corporate interests, we’d be much better off going after the real estate and construction industries, and perhaps the lending industry as well. They really have worked to stimulate the demand for auto-dependent sububia full of oversized McMansions. So much of our excess energy consumption is going to fuel the artificially super-sized demand for this kind of lifestyle.

    Stop worrying about fossil-fuel subsidies, let’s eliminate the home mortgage interest deduction and correspondingly reduce taxes on savings.

    Who knows, if we started building more modest homes around smaller retail, more walk and bike friendly with less distance to travel, maybe some of those EVs might actually prove useful a lot sooner. 😉

  9. Actually, nationalizng the oil companies would be a benefit to Americans, albeit not the benefit that the pandering politicians would intend.

    Inefficiencies would rise, prices would increase, production would decrease. All great for the environment, to say the least.

    Of course, any such nationalization were it ever to occur would happen under a period of Democratic governance. And then inevitably at some later date, the Republicans would get back in the majority, and the government run oil companies would be now actually be run by… guess who? Try to stop drilling in sensitive regions under that scenario. I’m as pessimistic as Robert is about our energy politics, but the ironies are delicious sometimes.

  10. fortunately a nationalization action would require agreement/implementation by the executive branch. i don’t believe even our most “left” handed, “greenest” candidates would be so skewed in judgement[ i hope ???]

    but, if it did happen, can you see the senate pandering POLS in committee XXX go after the resposible senate oversight for energy committee for botching the job at the least economic sleight against the public[ of which there will be many].

    or for entertainent we could watch 10 years of court suits should nationalization pass legislative action[or maybe as long as it takes fuel cells to be the mainstay]. we can sue OPEC, right????

    fran

  11. I suspect that we might be in for the nationalization of several industries, due to the failure of energy-intensive businesses as oil prices rise and the economy slides into deep recession or depression. First up – the airlines consolidate until only one is left, then it becomes a government operation similar to Amtrak. As fewer people have employer-sponsored health insurance, Medicaid expands into a largely national single-payer program. The oil companies themselves may evenually face a situation where their import crude costs are so high, their development capital costs are so high, and their refining margins are so low (due to depressed demand), that they go bankrupt and are nationalized as a matter of national security.

  12. I think Congress will go for some sort of partial rationing scheme before they try the nationalization route. At some price, elected politicians will be concerned about the number of voters (working poor, elderly on fixed incomes) for whom “rationing by price” translates into their not getting enough gasoline to meet some minimal needs.

  13. Even China can only keep gas prices low for so long.

    China can fund their subsidy for a very long time. What else are they going to do with all those US dollars that keep piling up in their treasury?

  14. iftheshoefits said: “Inefficiencies would rise, prices would increase, production would decrease. All great for the environment, to say the least.”

    I think you miss the point. All of the countries with nationalized oil companies price gasoline under the market. Can you imagine a nationalized oil company in the US right now raising the price of diesel to $4/gal.

    Michael Cain said: “At some price, elected politicians will be concerned about the number of voters … for whom “rationing by price” translates into their not getting enough gasoline to meet some minimal needs.”

    Do we get to determine what their real needs are. What if we think they don’t need an Escalade? an American made car?

    Believe me, this is a slippery slope you don’t want to take a step on.

  15. I’m not sure I missed the point, FM, I was simply trying to find humor in what I perceive to be an absurd situation. I perceive nationalization of the oil indusrty as nothing short of an unmitigated disaster were it ever to happen.

    Regarding your point about pricing under market – perhaps, I’m not sure we could pull it off here. Why? Because we’re a democracy and by definition there would be too many cooks trying to run the show. I may be wrong but it seems to me that most countries that have nationalized their oil industry are dictatorships for all intents and purposes. No defense of dictatorships, but the old saying about Mussolini and trains comes to mind.

    But you may be right, in that there’s always more dollars that can be printed to compensate for the mismanagement of congressional oversight. Magic, that.

  16. I too doubt strongly that nationalization would solve any problems. But what flabbergasts me is that US lawmakers would call for such a thing. After all, the US government’s official position is that “the market” will supply everyone’s needs (like food). So calling for nationalization is akin to apostasy. Now I expect conservatives to point out that nationalization is socialism.

  17. benny and hawkshaw,

    I too am a fan of nuclear and CLT, and I would like to see them combined into a plant with nuclear providing heat and hydrogen to a CTL plant. Or providing heat for oil shale extraction.

    These things could be done with existing technology.

  18. iftheshoe fits,

    What is a McMansion? I hear often hear people use this term. And if they are envious, they are usually refering to a house that is at least 2 or 3 times bigger or more expensive than their own home. If they are a snob, they are refering to a home in their neighborhood (usually built after theirs) that is half the value their own home.

    I used to live in the inner city, the house I rented was almost 100 years old with no insulation, and a gravity furnace that was converted from coal to gas. I moved to an outer-ring suburb, and I am closer to work, my house is much more efficient, and just about everything I need is closer to my house than it was when I lived in the middle of the city. The only thing I don’t have easy access to is the plasma center, crack whores and gangs of shiftless high school drop-outs demanding respect.

    I have looked at larger homes that some would consider McMansions. Not only are they bigger than my current home, but they have hybrid or geothermal heating system, much better insulation, and very efficient appliances. I could get a bigger home with more conveniences and less energy usage.

  19. Dennis,

    You seem to have my motivations all neatly figured out from a few comments. If you’re better off, I salute you. Your approach is the exception that proves the rule, though. In my experience the design of most of modern suburban stacks the deck against what people like you and I are trying to do.

    Envy implies want but can’t have. I chose to leave Big Suburbia of my own free will, choosing to live where I could mostly tele-commute and be debt free. I’m not boasting of my own virtue, just correcting an erroneuos accusation that you made.

    Contrary to modern conventional wisdom, indebtedness is not wealth, so it’s hard to be envious of what I see. I feel not envy but sadness mostly, and some anger. Millions are now underwater and defaulting on obligations they should have never taken on. Had they not, they would be leading much happier lives. All of us would be benefiting from the reduced overall demand for precious resources, much of that demand we now see was artifically generated by insane lending and borrowing practices.

    Which was the point of my post, that’s it’s not the oil companies at the root of the problem, really. Do you actually believe that, in general, the recent housing bubble hyper-sprawl is the result of people trying to be scrupulous about their energy usage? By most accounts that I’ve read, in the bubble areas it is the newer exurbs where prices are dropping most sharply, and foreclosures are most rampant. Your situation notwithstanding, I wonder why that could be.

  20. iftheshoefits,

    I did not attempt to figure out your motivations and I made no accusation about you, I just asked the question, in your opinion, what is a McMansion?

    I agree with you about lending borrowing greed and the root of many of the current problems. But there are some very good reasons to move out to the suburbs.

  21. I know a development full of them when I see it. If that definition doesn’t satisfy you, sorry. We all use polemics in making short-hand descriptions at times, most everyone knows the phenomenon I’m referring to. For some hard-core McMansion pron, check out what’s happening in Maricopa or Buckeye AZ.

    This isn’t a housing blog. My point is that we’re locking ourselves into unsustainable consumption patterns due to the way that we build our suburbs. We have no short term answers to this, and nationalizing oil companies would accomplish nothing.

    We should become aware of this situation to avoid personally getting unduly trapped in the energy squeeze.

  22. Dennis Moore-
    And what’s wrong with crack whores? They work for a living,and seem to arrive at work by walking, thus saving energy.

  23. iftheshoefits,

    I agree this is not a housing blog so this will be my last post on this. People often go after the suburbs and urban sprawl as something wrong and unsustainable. I have lived in a small town, then the inner city and now an outer ring suburb, and from an energy point of veiw, I have never noticed much of a difference. The biggest difference has to do with the age of the home.

    Benny,
    The funny thing about the crack whores is, when I moved from a small town to the inner city, it took me about 6 months to figue out that they were hookers. I thought all those ladies were waving at me because I was a handsome young guy driving a shiny fuel efficient Honda Civic. When I figured it out, it was a real let down.

    Sorry this is so off topic, but I can’t get too excited every time Maxine Waters says something stupid.

  24. I didn’t know where to ask this question, but today I heard an interview on NPR with oil economist Phillip Verleger who said he believed last fall’s run-up in oil prices could be traced back to the way the administration was stashing away oil in the SPR—taking off the market a crucial amount of the favored light, sweet crude oil, the easiest oil to refine. Furthermore, he said there was a risk that things could get worse because in the first months of 2008, the Bush administration had plans to increase the percentage of light, sweet crude it stockpiled while reducing the share that is heavy, sour crude—more plentiful, cheaper, and harder to refine.

    He went on to say that much of the current gasoline and diesel shortage was due to the inability of refineries to accommodate sour heavy crude, but that as soon as they did, the price of gasoline would drop dramatically.

    Here’s the link to the interview:
    http://www.npr.org/templates/story/story.php?storyId=90801398

    Does this make sense?

  25. Fat Man asked, “Do we get to determine what their real needs are. What if we think they don’t need an Escalade? an American made car? Believe me, this is a slippery slope you don’t want to take a step on.”

    I’m not advocating such a plan, only suggesting that if gasoline were to quickly rise to $6/gal or so — say by the middle of 2009 — Congress would feel pressure to do something immediately. There are a limited number of things that can be done quickly — and things that are effectively rationing programs that guarantee that every voter who satisfies the right conditions can get, say, 150 gals/yr at $3/gal can be done quickly.

    As I said, I’m not advocating such a plan. But Congress critters who did not respond to such a price increase would be likely to be replaced in office by people who say they will implement such programs.

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  27. Anonymous re sour crude:

    There is some plausibility in this. Iran is producing sour crude right now it literally has no market for. It is storing oil in tankers dockside, as it cannot sell the stuff. There is a worldwide refinery building boom on now, and eventually there will be refineries that can handle sour, and that should be one of many factors driving this market down for along. long time.
    I still say this is shaping up as a replay of the 1980 spike. After that spike, global demand fell by 11 percent, and did not recover for a full 10 years — and then only when oil was cheap again.
    US demand down this year from last, by 2-3 percent, and dropping every month.
    We have seen Peak Demand in the U.S. already — soon the world (if not already).
    That is the Big Story — we hit Peak Demand well before we hit Peak Oil.
    Imagine! Worldwide adoption of PHEVs would ultimately mean a 70 percent reduction in oil demand.
    If demand is still falling when PHEVs start hitting the market — look out below. Oil could hit $20 a barrel again.
    The risk is that cheap oil will crush the alternative fuel and conservation industries…..and lead to demand growth again.
    In 20 years, our offspring will be arguing if we are running out of oil….

  28. benny “peak Demand” cole, Thanks for the answer to my earlier query. That’s the first credible sounding explanation for how fuel prices could actually come down.

  29. He went on to say that much of the current gasoline and diesel shortage was due to the inability of refineries to accommodate sour heavy crude, but that as soon as they did, the price of gasoline would drop dramatically.

    A couple of things. First, the rate of fill in the SPR has been very slow. I wrote about it recently, and concluded that it isn’t likely making any difference. If supply is so tight that taking 0.05% of the world’s daily production of the market, then prices were going up regardless.

    Second, it is true that there isn’t enough heavy, sour refining capacity. However, that capacity grows by the day. The question is, in the long-term can capacity grow faster than demand? I am not so sure that it can, especially given that refining margins have collapsed, and with them the incentive to build more heavy, sour capacity.

    Cheers, RR

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