ISSUE: Autumn 1976
Three years have elapsed since the Arab oil embargo and oil price explosion shattered the political and economic foundations that had supported the post-World War II era of cheap energy. But whatever the cost to consumers, however incalculable the price paid by industry worldwide, this much is clear: the multinational oil industry has survived the shocks of supply interruption and price explosion. The private oil companies, most of which are American-based, still control gigantic, far-flung distribution systems that supply petroleum products to consumers in non-Communist countries throughout the world. Moreover, several of the larger companies are now, in reality, energy companies, possessing substantial capabilities in other fossil and nuclear fuels.
The oil industry did not, however, escape unscathed from the shocks of 1973—74. Most importantly, the companies lost their ability to reap large profits from sales of the crude oil they produced at very low costs in the Organization of Petroleum Exporting Countries (OPEC). These profits and much more are now being mostly captured by the governments of the producer countries. In addition, during the Arab oil embargo, the companies aroused fears in Western Europe and Japan about the “fairness” of their allocations of scarce supplies. Most consumer country governments are now satisfied that the private oil companies did not generally exploit the shortage to maximize their financial gain but rather made reasonable efforts to distribute the overall supply shortfall pro rata worldwide. (This approach, of course, displeased countries such as France which, because of its pro-Arab policies, thought itself entitled to preferred treatment from the private companies. ) Nevertheless, many of the companies were condemned for their “obscene” profits in 1974, profits resulting mainly from one-time inventory write-ups after the OPEC price increases. And then several oil companies were exposed and denounced for their illegal political contributions in the United States and acts of bribery abroad, although such conduct was by no means confined to the oil industry.
What should be the future role of private multinational oil companies in the new world energy situation? Since the embargo and price rise, every non-Communist government has faced this perplexing question from its own particular national perspective. Yet few governments have developed definitive answers. The U. S. is a prime example of prolonged indecision on this issue. Within America, the Arab oil embargo led to a declaration of “energy independence” (variously defined) as the long-term goal, and provoked an endless national debate about the proper role of the price mechanism and the free market in achieving that goal. Couched in terms of economic ideology, the debate between a Republican President and a Democratic-controlled Congress has tended to obscure many of the issues and alternatives for the private and public sectors in meeting future energy demand in the U. S. and throughout the non-Communist world.
At the end of 1975, the Ford Administration and the Congress finally agreed on a complex formula, embodied in the Energy Policy and Conservation Act, for the gradual decontrol, over a 40-month period, of prices for crude oil produced in the U. S. , maintaining pervasive regulation of the industry in the meantime. But no comparable agreement has been reached on natural gas prices, despite continued declining production and forecasts of increasing shortages in many parts of the country. Moreover, a government-industry relationship still needs to be developed in order to facilitate the prompt and effective commercialization of new energy technologies that are being developed with billions of dollars of annual support from the taxpayers. Finally, legislation to compel the dismembering of large, vertically integrated, oil companies into separate producing, refining, and marketing companies has been considered repeatedly in the Congress. Oil company divestiture has now become an important U. S. domestic issue even as the integrated American companies are viewed with envy by the governments of many other oil importing countries.
In the Organization for Economic Development and Cooperation (OEDC) countries generally, there seems to be a recognition that the private multinational oil companies have an indispensable role for the near future at least. The world market simply cannot function without experienced operators,” and there are today no capable replacements for the private companies. Moreover, many of the OPEC governments seem to recognize the desirability of a continued role for private oil companies within, as well as outside, their countries. Nevertheless, clarification of government policies toward the private multinational oil companies seems urgent. Private enterprise can live with considerable technical and economic uncertainty, but it may be stifled by prolonged and widespread political uncertainty.
The problem is complicated by the lead-times involved in implementing energy policy. The major consequences of government decisions (and non-decisions) during 1976 will not show up at the consumer level (where the votes are) until the 1980’s. It remains to be seen whether democratic political institutions can function effectively in a technological era that provides instant communication between voters and their representatives and, at the same time, requires governments to make large-scale trade-offs among economic and political interests based on long-term calculations of costs and benefits.
II
The present worldwide energy “crisis,” or period of transition, marks the culmination of certain trends that persisted from the end of World War II until the early 1970’s. The following sketch highlights only the most relevant features of an extremely complex and dynamic picture.
Two contradictory trends of cardinal importance during the three postwar decades were the growth of economic inter-dependence and the development of nationalism. Growing interdependence among nations led to, and resulted from, rapid recovery from the war’s devastation and a prolonged period of much-desired economic growth. Yet economic inter-dependence produced political insecurity as nations lost more and more control of their own economies and social destinies.
One of the most important and controversial aspects of growing economic interdependence was the development of multinational business enterprise. Multinational corporations, of which the oil companies were prime examples, succeeded in integrating all phases of economic activity from resource extraction to retail distribution of manufactured products. Private business developed the capacity to operate on a worldwide scale.
As the Soviet-American Cold War approached stalemate in the 1960’s, resurgent nationalism in Europe loosened military alliances, and the non-industrial nations of Asia, Africa, and Latin America claimed more freedom of action and began to use their political power more effectively. For a new nation carved out of a colonial empire, or for an old nation riddled with foreign concessions, nationalism meant, first of all, regaining unfettered sovereignty over natural resources.
Economic interdependence has progressed so far that most countries now seem unable to extricate themselves, At the same time nationalism, spurred largely by economic insecurity, has stalled at least temporarily the further development of an interdependent world economy, Embraced within these pervasive, though conflicting, trends, certain forces meanwhile were driving the world energy situation toward the current impasse.
On the supply side, the main force in the old energy situation was the development of immense reservoirs of low-cost oil concentrated in the Middle East. The discovery of these prolific reservoirs shifted the geo-political center of gravity of the world oil industry from the Western into the Eastern Hemisphere. Abundant reserves of low-cost oil also meant that the availability of energy would not be a factor limiting the postwar economic recovery of Western Europe and Japan.
On the demand side, the main force was the consumer response to cheap oil. For nearly three decades after World War II, with few interruptions, the retail prices of petroleum products declined relative to other energy sources and to prices generally. The overwhelming response was rapid and sustained growth in consumer demand for petroleum products, including a widespread shift from coal to cheaper and cleaner oil in many industries. Cheap oil fueled the emergence of consumer-oriented, affluent societies in Western Europe and Japan, and accelerated initial industrialization in many of the less developed countries. Finally, cheap foreign oil proved an irresistible temptation to the United States, which scrapped import controls and quickly became the world’s largest oil importer in the early 1970’s.
A third major force in the old energy situation was growth in competition within the world oil industry itself. Immediately after World War II, the seven largest multinational oil companies—the so-called “majors,” five American-based (Exxon, Gulf, Mobil, Socal, and Texaco), one British (BP) and one British-Dutch (Shell)—were successful in establishing substantial control over the world oil market. Control was accomplished through a variety of complex joint ventures covering development of the companies’ concessions in the Middle East and elsewhere.
By regulating world production, the seven majors were able for the most part to avoid an oil glut. They were also able to create and maintain a substantial gap between their crude oil costs and the prices they charged for sales to their refining affiliates, to third companies, or to each other. In short, crude oil was the profit center for the vertically integrated oil companies. The majors retained most of their earnings which each used to finance its expansion in a worldwide rivalry with the others for market shares, while minimizing price competition.
But the gap between crude oil costs and prices attracted into the world oil market two kinds of new entrants: private independent companies, many of which were not previously integrated vertically, and national oil companies, owned or controlled by various West European governments. The structure of the world oil market became more competitive as the market share controlled by the seven majors diminished from more than 95 per cent in 1950 to less than 80 per cent in the early 1970’s. Competition put downward pressure on crude oil prices. The private sector of the world oil industry also became more Americanized. During and immediately after World War II, the U. S. government played an aggressive diplomatic role in helping the American majors establish themselves in the world market, largely at the expense of BP and Shell. Subsequently, most of the newcomers in the world oil market, such as Continental, Getty, Occidental, and Phillips, were also American-based.
The high growth rate in demand for oil worldwide, the growing dependence of many countries on a relatively few foreign oil sources, and the downward pressure of competition on prices created an economic situation where cooperation among the governments of the largest oil exporting countries would be highly desirable from their viewpoint. The development of strongly nationalistic governments in most of the exporting countries and the strengthening of Arab unity against Israel, especially after the large Israeli territorial gains in the 1967 war, created a political situation in which profound differences in economic development, national interests, and cultural outlooks among the largest oil importers could be submerged. Thus OPEC, which was formed in 1960, emerged in the early 1970’s as an effective inter-governmental cartel.
The 1973 Yom Kippur War suddenly presented the opportunity for an enormous jump in world oil prices. Libya and Iran in particular were prepared, boldly seized the moment, and exploited the ensuing disarray within the industry and the consumer countries to escalate prices rapidly upward through a series of quick, uncoordinated leap frogs. Thereafter, OPEC’s 13 member countries consolidated their power to fix the price of oil on which the rest of the world depends.
The result was a dramatic shift in the political balance of power in favor of OPEC and against the industrial countries. The shift in political power is just as important as the economic consequence of an abrupt end to an era of cheap oil.
III
With these historical trends and recent reversals in mind, let us consider the energy postures and prospects of various countries and the current capabilities of the world oil industry. Countries may be divided very roughly into three groups: low-cost producers with export potential, high-cost producers with potential for developing a substantial degree of self-sufficiency, and importers without self-sufficient potential. Such a categorization correctly focuses on the continuing pivotal role of oil in a world perspective. Oil remains the low cost energy option, although OPEC has priced the option very high.
The low-cost producers with export potential include principally the OPEC countries. The current very high oil price level masks considerable variation in production costs within OPEC itself. Some oil and gas resources are also producible at low historic costs in a number of non-OPEC countries, but these reserves are being produced primarily for domestic consumption, and any exports are at OPEC price levels.
High-cost producers with self-sufficient potential include countries such as: Norway (some oil exports), Canada (after cutting off oil and gas exports to the U. S. and expanding its West-East transport system), Great Britain (after North Sea oil and gas development), and perhaps Australia.
The United States may also be classified as a high-cost producer. While the U. S. is unlikely to become largely self-sufficient in energy by the mid-1980’s, it could nevertheless become quite invulnerable to foreign oil supply interruptions by that time. This would require a strategic oil reserve and a combination of steps both to expand domestic energy supplies and to restrain demand growth. Although a start has been made in this direction, the political will to curtail demand seems unlikely to develop without another devastating oil supply interruption.
Large energy importers include most of the countries of Western Europe and, of course, Japan for the foreseeable future. In addition, most of the resource-poor, less developed countries fall into this category.
The distinctly different resource supplies of countries in each of the three groups outlined above is likely to condition the basic energy policy goals of their governments. For governments of countries within the low-cost OPEC producer group, a reasonable minimum objective in the decade ahead would be to maintain the status quo in real prices for their oil exports. A maximum goal would be further escalation in oil prices, as economic recovery in the industrial countries causes demands to grow, even at current prices. For governments of countries within the high-cost producer group, a reasonable objective would be to develop maximum self-sufficiency at costs equal to current OPEC price levels. A country such as the United States, which has security commitments to Israel, might even be willing to pay a premium above current OPEC prices to achieve a position of oil supply invulnerability. For governments in the importer group, however, the minimum objective would be to improve security of foreign supply while stabilizing prices. The maximum objective of countries in this category would be to improve supply security and reduce prices. Viewing the situation as a whole, the objectives of countries in each group appear to be reasonably complementary. A key issue is whether the high-cost producers will in fact be able to achieve substantial self-sufficiency in energy in the next decade. If not, OPEC’s position is likely to become even stronger, and the large importers will become more insecure.
The United States and Great Britain merit special mention in this regard. These two countries are currently large oil importers. The U. S. has limited additional oil and gas resources, but it has large undeveloped coal reserves and substantial uranium reserves (although the uranium supply picture is cloudy at present, which contributes to the uncertainty surrounding the U. S. nuclear power program). Britain has substantial oil and gas reserves in the North Sea and also a good deal of coal. But the costs of developing these energy resources in either country will be much higher than the costs of expanding, for example, Saudi Arabian oil production, especially in view of the idle Saudi installed facilities. Finally, the vast majority of the private oil companies, including all seven of the majors and most of the independents, are based in one country or the other. With these assets, both the U. S. and Great Britain have opportunities to utilize their untapped resources in the 1980’s. If either country fails to do so, it will be a major failure of government policy.
The worldwide oil industry has a fuel cycle composed of a complex series of interrelated steps: exploration, development of discovered fields, crude oil (and/or gas) production, crude oil transport (by tanker or pipeline), crude oil refining into petroleum products, petroleum products transport (by tanker, pipeline, rail, barge, or truck), wholesale distribution, and retail marketing. Each oil company operating in the world market has its own distinctive strengths and weaknesses. This is true of the seven largest majors as well as the newcomers. For example, BP and Gulf have been strong in crude oil while Shell and Exxon have been especially aggressive in marketing. Occidental was almost entirely dependent on Libya for crude oil in 1973. This made it an especially vulnerable target for a unilateral price increase by Colonel Quaddafi.
Various private oil companies are also diversified, being engaged in manufacturing and marketing petrochemical products, in operations in various parts of other energy fuel cycles (natural gas, coal, and nuclear), and in other activities that are unrelated or indirectly related to energy (for example, tourism and real estate development). Here again, there is wide variation among companies. Socal has tended to be the most conservative of the majors, sticking mainly to oil and gas; Exxon has invested heavily in coal, uranium, and uranium enrichment; and Gulf and Shell are partners with Allied Chemical in constructing the largest commercial nuclear fuel reprocessing plant in the U. S. Moreover, the major oil companies are coming to play large roles in the overall industrial development of producer countries where they have historical ties.
Existing capabilities of the world oil industry to refine and transport its product are largely in private hands in the non-Communist countries. More than 80 per cent of OPEC exports flows through private channels to consumers throughout the non-Communist world. There are few national companies with substantial transnational capabilities (CFP in France and ENI in Italy are the two main exceptions). Moreover, though easy to launch on paper, a national oil company with an operational capability may take a decade or more to develop. Even then, a national company may not be economically competitive. On the other hand, smaller private companies have often proved themselves to be quite effective competitors of the larger companies in sectors of the industry where entry is relatively free of barriers.
As governments shape policies applicable to private activities in the oil industry, they should take account of the consequences of their policies for the worldwide fuel cycle as a whole and for the structure of the private sector, including the relative strengths of the self-sufficient large majors and the smaller companies, many of which are substantially dependent on the majors for their crude oil supplies. Governments should also consider the evolution of the energy industry as a whole, including the trend of the majors and some large independents to diversify their operations. Perhaps most important, governments should bear in mind that they are dealing with an industry that currently possesses a truly transnational character. Despite their capabilities, the private multinational oil companies are highly visible and vulnerable targets in an environment that must seem to them to be full of hostile governments, abroad and also at home. Governments are quite capable of wrecking the world oil industry.
IV
The basic issues involved in the development of government-oil company relationships may be viewed from the diverse perspectives of the three groups of countries considered previously and also from the viewpoint of private sector incentives.
In the low-cost oil producing countries (OPEC), the old concession agreements are now largely irrelevant. In most cases, these agreements have been replaced by government/company relationships that make the oil companies substantially the service contractors for the producer governments. The government/company relationship of owner/ service contractor seems well established and is likely to be quite stable at least in the decade ahead. One important issue arising out of this relationship is whether the governments of the OPEC producers and their service contractors have a mutual interest in cartel maintenance. The private companies, especially the seven integrated majors, would seem to have substantial incentives to help OPEC maintain a reasonably effective cartel. Especially in view of current high oil prices, the cartel is necessary in order to avoid rampant competition from developing within the oil industry. At the same time, an effective cartel among low-cost producers is necessary to make profitable the activities of private companies aimed at developing high-cost energy resources outside OPEC.
Thus during the rest of the 1970’s and the 80’s, OPEC may play a role in world production allocation analogous to the role of the Texas Railroad Commission in the U. S. domestic oil market in the 1930’s and 40’s. Indeed, the majors themselves, through their overlapping joint ventures, were quite effective in playing this role until competition eroded their control and OPEC supplanted them. One lesson to be learned from this experience is that governments are more effective than private companies at price-gouging consumers.
While incentives appear to exist for the private multi-national oil companies not to undercut the OPEC cartel, there would seem to be diminished incentives for the private sector to expand low-cost oil production capacity within OPEC itself. OPEC already has a large idle production capacity, 15—20 per cent in 1976. The private companies probably would want this crude oil production capacity employed up to the point where their own spare transport, refining, and distribution capacities are once again fully utilized. Still it seems unlikely that the producer governments would permit private companies to capture much of the marginal monopoly profits realizable on sales of expanded OPEC output. Therefore, private companies may be less than eager to see OPEC’s existing productive capacity greatly expanded, although some producer country governments with large revenue requirements would benefit from the greater output.
A second basic issue arising out of the new producer government/private company relationship is whether the position of the majors within OPEC has been strengthened or weakened in relation to the independents and the national oil companies of industrial country importers. In other words, are there private sector incentives to compete for OPEC’s output? If such incentives exist, they could put upward pressure on OPEC prices as long as the cartel is maintained.
On balance, OPEC and the majors would now seem to have mutual incentives to limit the number of companies with access to OPEC crude oil and to maintain their historic supply relationships. On the OPEC side, these relationships provide the means for stabilizing the market. The producer governments may reap most of the profits of vertical integration without incurring the marketing risks themselves. Arrangements may even be worked out so that OPEC governments can continue to receive a share of the company tax benefits from the home country. Hence most producers have lost interest in participation in downstream oil company activities. On the company side, large profits may no longer be realized at the wellhead. But with OPEC’s cooperation in limiting the number of companies with access to crude oil, the major companies may now realize substantial profits at the refinery or the gas pump. Thus the relationship of OPEC governments to the major oil companies may strengthen the position of the majors in relation to the newcomers. These possibilities are partly responsible for the increased concern in oil importing countries over the consequences of the vertical integration of the major oil companies and thus for various divestiture proposals.
Turning to high-cost energy development, a relatively large number of non-OPEC countries have prospects for substantial development. In each case, the primary purpose of development would be to substitute domestic energy production for high-priced imported oil. In most cases, the government owns the energy resource in the ground, and the private sector owns the capability to develop and produce it. This is certainly true of the U. S. , where much of the on-shore reserves of coal and uranium are located on federal lands and, of course, the oil and gas resources of the outercontinental shelves are federally owned.
The incentives in both the governmental and private sectors to strike a workable bargain for energy resource development would seem high in most countries. The government of the high-cost producer country may substantially improve the energy security and balance of payments position of its country (and create jobs for its people). Private companies may have an opportunity to earn “reasonable” profits at least, and perhaps something more if they are willing to assume most of the investment risks.
In the new energy situation, the governments of potential high-cost energy producers would have an interest in maintaining the OPEC oil price at a level roughly comparable to the price of their alternate domestic fuels. OPEC price maintenance would prevent the oil importers from gaining an economic advantage in general world trade over the high-cost energy producers. Moreover, an effective OPEC cartel is necessary to discourage private sector investment in expanding output in OPEC countries and to create private incentives for investment in high-cost energy development.
One step the U. S. government might take to buttress the situation would be to eliminate tax or other incentives for American-based private companies to make further investments in OPEC countries. With this in mind, the U. S. tax laws were revised in late 1974 to restrict the availability of a credit against U. S. income tax for payments to foreign governments of a character like the OPEC governments’ take per barrel produced.
Perhaps the most important question in relation to the development of high-cost energy resources is the relative bargaining strengths of the high-cost producer country governments and the private multinational oil companies. Private capital, key equipment, and technical knowledge are likely to be in short supply. This would seem to put the private sector in a strong bargaining position. The governments of the potential high-cost producer countries which do not recognize and take into account the strength of the private sector’s bargaining position—and their own weakness—may find their potential energy production largely undeveloped in the mid-1980’s. On the other hand, it would seem that private companies would have high incentives to explore for, develop, and produce additional energy supplies wherever the government concerned adopts relatively attractive policies.
The private sector’s position also contains certain major weaknesses which must be carefully weighed in developing an appropriate government/company relationship. In the first place, the private companies face the risk of a substantial drop in OPEC oil prices. This risk may be viewed as acceptable by the companies in the near term both because of the likelihood of successful price maintenance by OPEC and because of the moderate rate at which high-cost productive capacity can be brought into being outside OPEC, even if the governments concerned adopt attractive policies. There would seem to be a trade-off in this regard. In making high-cost energy investments, private companies might be prepared to assume the risk of a drop in OPEC oil prices if host country investment policy were sufficiently laissez faire or private profit-oriented. The more hedged the government policy became, the more safeguards against a fall in OPEC prices would be required to attract private capital and knowledge.
A second weakness of the private sector’s position lies in the drastically reduced ability of individual firms to finance high-cost development and production largely out of their retained corporate earnings. Financing future expansion largely from retained earnings proved effective for the development of low-cost world oil reserves. This method alone does not seem feasible for development of high-cost energy resources requiring much more capital-intensive technology. This will be a major problem for the larger companies and might tend to exclude smaller companies from participation. Substantial and continuous resort to external private financing will reduce the autonomy previously enjoyed by the large oil companies. Moreover, some form of government financial assistance to the private sector for many high-cost energy resource development projects may prove to be essential. President Ford’s proposal in September 1975 for the establishment of a federal corporation, the Energy Independence Authority, to provide up to $100 billion in financial guarantees was developed in recognition of this problem. While such a grandiose approach is unlikely to be implemented, federal financial assistance on a project-by-project basis may be necessary.
As far as high-cost energy resource development is concerned, it is not a question of whether government or the private sector should do the job alone. Nor is it a question of whether the private sector will earn unconscionable profits in the process. Instead, the real issue is the nature of an essential partnership in which government and industry both have essential and active roles to play.
Where does the stabilization of OPEC and the development of high-cost energy resources by non-OPEC producers leave the resource-poor industrial countries? The economically powerful countries such as France, the Federal Republic of Germany, and Japan are included in this group. Governments in these countries are likely to object to retail energy prices which result in having their consumers pay enormous monopoly profits to the OPEC governments and also subsidize development of high-cost energy resources in industrial country competitors. The governments of large importers will be pressured by their consumers to keep private sector refining and operating profit margins as low as possible. Nevertheless, in the importing countries and in consumer markets generally, the private sector as a whole remains in a relatively strong position. The main source of private sector strength is control of the logistical system—tankers, refineries, and pipelines. If in current circumstances an importer government were to nationalize those parts of the oil industry within its country, it could find itself largely at the mercy of the private multinational oil companies outside on which the country must continue to depend for the bulk of its oil supplies.
Countries such as France and Italy, which have national oil companies with actual operational capabilities and long experience, are in a somewhat different position in this respect from countries such as West Germany and Japan. Moreover, in less developed countries a government, such as India’s, may nationalize foreign privately owned refining and marketing facilities and offer these outlets to the national oil company of an exporter, such as Iran, in exchange for the Iranian equity oil it imports.
In any event, in refining and marketing, the large vertically integrated companies are now in a far stronger position in relation to the independents than before the 1973—74 oil price rise. It is noteworthy in this regard that a primary purpose of the U. S. Federal Energy Administration’s petroleum allocation program is to maintain market conditions in which the independent companies can survive.
V
As non-OPEC countries move to define more clearly their relationships with the multinational oil companies, a common issue will be whether government-industry relationships should be independently determined within each country or whether some international coordination is desirable. Here there is a variety of considerations.
Time may be of the essence. No government should delay striking a bargain with the private sector simply because other governments cannot make up their minds what to do. On the one hand, the private companies would probably prefer to keep the high-cost producer governments apart so they can have opportunities to play one against another and thereafter concentrate their resources where the deal looks the most profitable. On the other hand, if the governments principally involved could coordinate their policies, they might be able to obtain initially somewhat better terms from the companies. Furthermore, an internationally coordinated approach may be marginally helpful in strengthening each government’s hand in dealing with its own domestic body politic.
Another important reason for international policy coordination in this field is to ensure that, in the process of individually working out new relationships with the multinational oil companies, the governments involved do not inadvertently squeeze the private sector so much that the major companies lose their capacity for transnational operations on a global scale. This might occur if a number of important countries were to adopt conflicting regulatory approaches, or if they adopted regulatory schemes that were too tight and nationally oriented.
There is a widespread tendency among non-OPEC governments toward requiring increased “transparency” of oil company operations. A major example of this trend is to be found in the International Energy Agreement concluded in November 1974 with most of the OECD countries, except France, as participants. The agreement calls for development of an extensive and detailed oil market information system and establishes a framework for consultation between participating countries and individual oil companies.
Increased transparency of oil industry operations might strengthen confidence within the participating countries in the fairness of oil company operations, especially as regards imports and marketing. However, implementation of these provisions of the agreement might have adverse impacts on the competitiveness of the industry and also provide an excuse for fishing expeditions by various governments which intend to develop more interventionist policies toward the private sector. Though intended to facilitate cooperation, world oil industry transparency, if pushed too far, might generate tensions among the importing countries and between importing countries and the companies.
VI
Despite the current strengths of the multinational oil companies, these private corporations are vulnerable. Any national government may nationalize the private sector within its jurisdiction and, short of nationalization, it may reduce private incentives and bring even the largest private company to heel through pervasive regulation. The more extreme OPEC governments, such as Libya and Iraq, have proved that point. But the government that does so would be well advised to have already in being an efficient replacement for the private companies. This is especially true if the country is already industrialized, and its people are accustomed to ample supplies of energy. If the environment becomes too hostile or economically unattractive, private companies may decide to leave as Exxon and BP have left Italy.
The private multinational oil companies contain valuable assets in the capital and knowledge they control. These assets should be efficiently employed in the new world energy situation. Multinational oil companies have traditionally served as middlemen in the world oil market, performing the essential operations between oil in the ground and gasoline in automobiles and fuel oil in furnaces. Despite the OPEC takeovers at the production end, the private companies continue to have an indispensable middleman role to play. Instead of each side in the producer/consumer country conflict attempting to force the private multinational oil companies into becoming their exclusive agents, the private companies might play a very important role as intermediaries and joint agents for the performance of specific functions in the world oil market and more generally in the interdependent world energy situation. Such a role can only be played, however, if both producer and consumer country governments exercise some self-restraint and permit the private companies to continue to enjoy a degree of freedom of action, though less than in the past. Moreover, any hasty decision to break up the major multi-national oil companies into separate production, refining, and marketing functions may well result in substantial losses in security of supply and logistical efficiency that are not offset by gains in a more competitive industry.
An energy economy is likely to be permeated with politics, regardless of the specific features of the controlling government/industry relationship. Oil and politics mix readily. Of all the government policy options available, laissez-faire has been used the least. The private oil companies are frequently seeking subsidies or support of one kind or another, and most politicians view the oil business as too important to leave to the businessmen. Nevertheless, the efficient operation on a global scale of any fuel cycle, whether oil, gas or nuclear, requires expert, highly centralized, yet flexible management. The private multinational corporation offers a vehicle for centralized economic management in a decentralized international political system.
