A Quick Look at Foreign Oil
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The concentrated distribution of the world’s most important natural resource in so many unstable and dangerous localities is truly one of modernity’s cruelest realities. Many of the most prevalent oil producing countries are hostile towards the West, despite their reliance on the U.S.’s oil demand for survival; Iran, Venezuela, Nigeria, Iraq, and Columbia to name a few.
Although neighborly Canada and Mexico are in fact the largest exporters of oil to the U.S. (providing 33% of U.S. oil imports in 2004), America’s energy needs depend greatly upon oil production in unfriendly regions of the world. Without oil from Venezuela, Nigeria, Iraq, and Colombia, the United States would suffer a 2.8 million barrel-per-day supply deficit—accounting for nearly one quarter of the U.S.’s imports and over one eighth of the U.S.’s total oil demand. Although the U.S. government has banned oil imports from Iran since 1979, a political disaster in the world’s fourth largest oil producer would cause supply problems throughout Western Europe and Asia—which would certainly ripple down into the U.S.’s oil supply chain.
Unstable and unfriendly political situations aren’t the United States’ only worry when it comes to foreign oil. Unfortunately, because the development of these foreign oil fields has been controlled by countries with mostly nationalized oil companies, resource mismanagement is a big issue. Even in Saudi Arabia, where the world’s largest oil company—Saudi Aramco—uses some of the world’s most sophisticated computers to create reservoir simulations to enhance oil production, many have argued that chronic field mismanagement has shortened the lifespan of the world’s largest oil field.
In his recent bestseller Twilight in the Desert, Matthew Simmons, an energy industry analyst with an M.B.A. from Harvard, devotes an entire book to dissecting Saudi Arabia’s resource management problems. Based on information from over 200 technical papers, Simmons argues that Saudi Arabia pursued the production of Ghawar (the world’s largest oil field, producing around 5 million barrels per day) too aggressively. By producing Ghawar at unusually high rates to maximize cash flow, Saudi Aramco effectively reduced the reservoir pressure needed to sustain production. Furthermore, a program implemented in the 1970s to use water injection to offset the drop in reservoir pressure had the negative consequence of reducing the oil yields of many of Aramco’s wells (the water migrates from the injectors to the well bore, causing the well to produce more water and less oil). Simmons’ ultimate conclusion is that Saudi oil will soon peak and begin to decline, especially if Saudi Aramco perpetuates its high production and water injection programs.
Despite all of these looming problems, when analyzed relative to oil resource management in other non-Western countries, Saudi Arabia is arguably in the best situation. The Saudi national oil company, Saudi Aramco, does a decent job at reinvesting its earnings into its business. The company puts money into large technological projects like reservoir simulation and plans to double its number of drilling rigs in 2006. Most other national oil companies put far less back into the development of their business.
In a recent article in Barron’s, the author interviewed an oil analyst on the world’s current energy situation. The interviewee, Charles Maxwell of Weeden & Company, argued that national oil companies are one of the primary contributors in the approaching energy crisis. Maxwell figured that over 75% of the world’s oil production comes from national oil companies—and many of these companies put their earnings towards “support[ing] the national Treasuries and the various political constituencies that are in favor in the various countries” instead of reinvesting them in asset development. Without proper reinvestment, many foreign oil prospects are not properly maintained. Oil fields that would last the better part of a century in the United States peter out early in other parts of the world.
Unfortunately, it would be difficult to un-nationalize many of the current national oil companies. Governments significantly rely on oil revenues to operate. A strike by workers of Venezuela’s national oil company, Petróleos de Venezuela, nearly crippled the Venezuelan government in 2002. Venezuelan president Hugo Chávez replaced 19,000 Petróleos employees before reinstating normal operation and establishing stability. Iran, Saudi Arabia, Brazil and many other governments would be very reluctant to relinquish control of their national oil companies—as they’d also have to cut government programs that their constituencies have grown to expect.
In fact, the group of national oil companies is expanding, with the recent addition of Bolivia. After announcing plans to nationalize oil and gas resources within his country in May 2006, President Evo Morales celebrated the finalization of the consolidation just this past week. Morales expects the nationalization to bring in $1 billion in revenue for the government each year. Although the Bolivian arrangement will hardly affect the United States’ petroleum supply, Bolivia is an important natural gas producer for much of South America.
Luckily, this growing dependence of foreign governments on oil revenue somewhat counterbalances the U.S.’s dependence on foreign oil production. Venezuela, Nigeria, and Iraq are particularly reliant on U.S. demand—as the destination of over 40% of their exports. In the short-term, this economic balance should provide security for America’s energy market.
In the long term, however, United States consumers must not trust the capability of foreign nationalized oil companies to keep up with the world’s growing demand for energy. In addition to encouraging an expansion of private research on alternative energy sources, the United States needs to assess enhancements to its own petroleum resources. Opening-up the Arctic National Wildlife Refuge and offshore areas in California and the East Coast needs to be considered—as American oil companies are particularly adept at maximizing the recovery of domestic petroleum resources. The United States government also needs to develop international policies that discourage the nationalization of oil companies, or at least allow American oil companies to gain a share of operations in such countries. Western expertise is absolutely necessary to ensure that oil production from the world’s remaining resources is maximized. It’s the only way to effectively fight back the peak of oil.
