Mention national oil companies (NOCs) in the Middle East, Russia, Latin America, and elsewhere and you're bound to get different reactions from economists and political scientists like myself. By training, economists will rail against the inefficiencies in the energy market caused by widespread state ownership of these companies at a time of rising oil prices. OTOH, political science types will probably elaborate on how it's interesting that NOCs are being used by states as political tools to retake the "commanding heights" of the world economy at--you guessed it--a time of rising oil prices. The chart to the right from the Economist graphically illustrates the command of these NOCs over vast reserves that commercial entities simply don't have. The "allocation of scarce resources" angle and the "tools for political strategery" angle illustrate the primary interests of economists and political scientists, respectively. [UPDATE: The EIA estimates OPEC oil revenues this year will be $658B and an even higher $762B in 2008. That's a lot of money to fund geopolitical interests I'm sure you'll agree.]I bring this up because I recently got reacquainted with a series of papers presented on the matter that will be of interest to both economists and political scientists. The Baker Institute at Rice University held a symposium on "The Changing Role of National Oil Companies in International Energy Markets" last March. Definitely, go through the individual presentations if you are interested in knowing more about the likes of Venezuela's PDVSA and Saudi Arabia's Aramco. You can also read the executive summary of the proceedings that offers tantalizing tidbits to what can be found in the individual papers [see below]. Enjoy!
(1) NOCs have noncommercial objectives that differ greatly from those of the private international oil companies. These objectives, which go beyond maximization of return on capital to shareholders, include (a) oil wealth redistribution to society at large, (b) foreign and strategic policy and alliance building, (c) energy security, including assurance of domestic fuel supply and security of demand for producing countries, (d) wealth creation for the nation, (e) participation in national- level politics, and (f) industrialization and economic development.
(2) NOCs’ noncommercial objectives, while highly important to national goals, tend to interfere with the firms’ ability to produce at a technically efficient level and to maximize the overall value that could theoretically be obtained from their oil resources. In particular, a principal finding of the case studies, which is corroborated by theoretical and empirical evidence, is that the extent to which these noncommercial objectives govern the behavior of a NOC has a huge impact on its ability to replace its reserves and expand its oil and gas production.
(3) Certain institutional structures for NOC organization and regulation help to clearly define the roles and responsibilities of management and can thereby minimize the commercial impact of noncommercial objectives on an NOC’s ability to focus efficiently on its core businesses. These institutional structures can greatly reduce the prevalence of corruption and wasteful spending. In addition, the existence of multiple NOCs within a country and/or offering of publicly traded shares of the NOC in Western markets tends to improve the efficiency of the NOC.
(4) An increasing number of NOCs are financing activities through international capital markets and this is helping improve the NOCs’ compliance with international standards of corporate responsibility. The pressures of trading in public shares will increasingly bring these international institutional and accounting standards to bear on NOCs.
(5) While certain NOCs are currently enjoying strong control of the upstream sector in international energy markets, downstream refining and marketing assets in key premium consuming markets are still largely disassociated from upstream NOC operations. Thus, NOCs continue to look for opportunities to enhance vertical integration, thereby creating opportunities for IOC/NOC strategic alliances. When a primarily upstream NOC holds an asset position in the downstream market, it is able to capture the value added from the production and sale of finished products. In addition, a downstream position is a strategic advantage in that it provides security of demand, or access to market.
(6) The growing role of the NOCs in global oil markets has important policy implications for oil importing nations. To begin, if a larger share of global investment in oil production capability will be influenced in the future by noncommercial factors, then importing nations may need to adjust their national energy strategies to reduce vulnerability to changes or instability in NOC reinvestment rates. In addition, consuming nations also will have to debate the benefits and challenges of having NOCs seek security of demand and other benefits of vertical integration by positioning themselves in downstream markets through the purchase of assets in major consuming markets like the United States, Europe, and China. For consuming countries, a desirable policy will be to promote free trade and utilize multilateral frameworks such as the World Trade Organization and Energy Charter to press NOCs to adopt institutional structures that will enhance their efficiency, promote market competition and curb interference in commercial investment decisions by their national governments.
