The Next Time You Hear the Name "Big Oil"

In recent years, and especially this year, the name "Big Oil" has been used ad nauseam, and often in a derogatory way by folks on the political left. The most common refrain has no doubt been decrying the "big profits of Big Oil". The referents of "Big Oil" almost always seem to be the big corporations, such as Exxon Mobil, that are well known in America and the rest of the West. Debate is sometimes had over just how big the profits have been in the past year or two -- with one side focusing on how much total profit was earned, while the other side notes that the profit margins that are being earned aren't really that high compared to many other industries.

But what I almost never hear or read is anyone use the name "Big Oil" to describe the truly big oil corporations of the world. Yes, Exxon Mobil is the world's most valuable listed company, with a market capitalisation of $412 billion. What doesn't get mentioned often though is that Exxon is only 14th amongst big oil companies in terms of how much oil it has left in the ground. And the 13 higher-ranked companies are not other large Western oil corporations like BP for example. So who are they? They are National Oil Companies (NOCs): partially or wholly state-owned firms through which governments retain the profits from oil production.

I've always known, in a vague sense, that this was the reality. But an August 12th article in the Economist, "Oil's Dark Secret" (sorry, subscription required), really made clear just what that reality is. The sub-head for the article summarizes it nicely: "Most of the world's oil reserves are in the hands of state-run companies, many of which are run badly." Or how about this as a summary, from the first paragraph: "Because these national champions control as much as 90% of the world's oil and gas, they can do far more than the likes of Exxon to assuage the current worries about supply and to influence the accompanying record prices. But like most state-owned firms, they are prone to over-staffing, underinvestment, political interference and corruption."

Which countries are the ones that have these truly massive "Big Oil" so-called companies? I'm sure you could guess: Saudi Arabai, Iran, Russia, Venezuela, Nigeria, and others.

The article begins with some description of the problems of Venezuela's PDVSA entity. It also highlights problems in other NOCs. One example is Iran, "which has more oil and gas than all other countries save Saudi Arabia and Russia, [but] pumps less today than it did in 1979, when the new Islamic government threw foreigners out." Several similar examples are given; consider this amazing case: "Underinvestment is the most widespread problem of all. Indonesia has become a net importer of oil, despite big reserves, thanks to the failure of state-run Pertamina to develop new fields. The fact that NOCs are sitting on the vast majority of the world's oil but pumping only about half of global output suggests a systematic failure to invest."

And what are the prospects for improvement? Short of something radical happening, "The NOCs will gradually become even more dominant as oil production dwindles in areas which are open to all comers, such as the North Sea and the Gulf of Mexico. New oil is most likely to be found in the NOCs' territory, precisely because it is largely out of bounds to multinationals such as Exxon or BP, and so has not yet been thoroughly raked over. In the future, therefore, oil production will be even more concentrated in the hands of the national firms of Russia and the Persian Gulf."

So the next time you hear the name "Big Oil" tossed around, just remember that Exxon Mobil and its brethren -- as large as they are -- are blips on the map compared with the truly "Big Oil" companies that are run by statist governments, and generally quite badly run at that. And ask yourself: why do the businesses from the relatively capitalist nations get accused of profiteering and controlling gas prices, but there is no mention of the truly big oil companies that are run by such governments?