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By Robert Rapier on May 23, 2008 with 1 response

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.

  1. By Brutal Truth on May 12, 2011 at 4:42 pm

    Of course the U.S. oil industry should be nationalized and operated as a non-profit public service like many electric companies are. Think about it for a moment. Every American that buys gas from a gas station is directly affected by the price of gas. And oil affects every other industry in this country from trucking to retail to wholesale to the airlines to restaurants etc. All of it. Is the U.S. supposed to allow one single industry to literally hold every gas-buying American and every single other industry in the country hostage? Because that is precisely what is happening. Do you like paying $4/gallon for gas? Will you like paying $5 or $6/gal. or whatever it will be next year for gas?

    If you ask the average American if they want A.) to keep things the way they are and end up paying $4 or $5 or $6 or more per gallon indefinitely and getting ripped off by privately-owned capitalist oil companies; or B.) if they want to nationalize the oil companies for the good of the average American and pay $2.50/gal. or whatever they can bring the price down to when the profit margin is taken out of the picture, I would bet my life on the fact that about 98% of them would say “I don’t care if you call it the Leon Trotsky Red Proletariat Socialist Oil Company, just give me gas that I can afford to fill up my tank with without having to take out a second mortgage on my home.”

    Nationalize the oil companies NOW.

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