My last article, Statoil or: How I Learned to Follow Norway and Stabilize World Oil Prices, described the need for state-owned enterprises (SOEs) in the oil industry to follow the example of Statoil ASA, in responding to the risks of foreign ownership, corruption, and lack of diversification. This article will explore the issue of incentivizing these governments to relinquish some of the influence they hold over their industries. As a result, these countries would see more investment, and global petroleum prices would stabilize.
The Organization of Petroleum Exporting Countries (OPEC) was created as a response to the influence and domination of the world’s petroleum corporations. Wanting more control of their domestic industries, the governments of Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela formed OPEC in 1960, which was later joined by many other countries.
By forming SOEs such as Saudi Aramco, the Kuwait Petroleum Corporation, Petróleos de Venezuela, S.A. (PDVSA), OPEC members took over their oil industries. One of the main problems faced by these countries is that the government effectively owns and controls most if not all petroleum operations. Oil, in many of these cases, has become the most significant aspect of their GDP. OPEC economies are therefore reliant on high oil prices – life is good when prices are high, but not so good when prices go down.
For example, oil and gas make up 25% of Venezuela’s GDP, and up to 50% for Saudi Arabia. With oil prices in their current state and with OPEC’s maintenance of production, it is clear that many of these countries are suffering economically. Venezuela’s economy has agonized over the low oil prices of the past year as a result of global market prices, perhaps making this the most ideal time for change.
The domestic control of petroleum puts many of these governments at the mercy of the volatility of global oil prices. As per my previous article, the three main risks faced by SOEs in the oil industry are foreign ownership, corruption, and lack of diversification. In many of these cases, governments are only speaking to foreign ownership; so much so that they are completely ignoring the other risks of corruption and lack of diversification of the domestic economy. In order for SOEs in the oil industry to be successful, the three risks need to be addressed equally and a balanced approach needs to be employed.
Using Norway’s Statoil as an example, these governments should employ different tactics. While keeping a majority ownership of their oil, countries should employ more transparency in their business practices, as well as a system of checks and balances. This would mean keeping the government in control, but having different, and separate entities responsible for specific things. Having an assortment of actors, government agencies and departments keeping a check on each other, and responsible for different aspects of the industry makes it much more accountable.
Changes such as these are recognized by international businesses and governments from around the world. It would create more confidence not only in the industry, but the government and country as a whole. This will allow country to boast a lessening of corruption, which theoretically should help with foreign investment. Relinquishing some influence, as a response to the risks of corruption and lack of diversification, would increase investor confidence, and over time, would lead to more investment. In doing so, OPEC members would still reap the benefits of being ‘oil-rich’, much like Norway, but this would be done in a much more conservative way. The increased investment would make up for the potential losses experienced by the incremental regulations placed on the industry.
These changes and adjustments need to occur gradually because if done too drastically, they could lead to a trend back towards the risk of foreign ownership. If too much influence is relinquished, perhaps foreign companies will begin to take advantage and take over the industry themselves.
The goal of this article was to show that it is possible to have a balance between the three risks, and in turn maintain control, but also to see the benefits in expanding an economy across sectors and industries. Countries would continue to benefit as prices go up, but their increasingly diversified economy would create a protective cushion against fluctuating prices. Hopefully over time, this would also help to stabilize prices more generally, allowing countries, people, and businesses to expect a more ‘natural’ petroleum price.
Louis-Claude Perrault-Carré joined the Editorial Board of Freedom Observatory as an Associate Editor in July 2015. He recently completed his Honours Bachelor of Arts in Political Science at the University of Western Ontario and is currently pursuing a Master of Science in Security Risk Management at the University of Copenhagen.
This article is a cross-post from our partners at The Freedom Observatory
Image courtesy of Wikimedia