The fact of the matter is, Big Oil — BP, Exxon, Shell, Chevron, and Total — are making windfall profits due to the price of crude, but not replacing what they’re selling in a sustainable manner, which will ultimately lead to their demise. This leaves powerful, sometimes hostile nations with the lion’s share of oil reserves.
Proven reserves of National Oil Companies (NOCs), which are companies owned by the country they are based in and therefore own all oil reserves within their borders, currently make up 80% of the world total, with international (or private) oil companies (IOCs) holding the rest. Of that remaining 20%, Big Oil owns an even smaller percentage.
Investments in exploration have more or less plateaued as well. Through 2006, the Big Five have increased dividend payments to shareholders and bought back a lot of stock, but their investments to replace their reserves have remained flat. Development investments — cheap investments in current fields to increase output capacity, but not reserves — have seen an increase in capital expenditure as well.
What does this all mean? It means that the Organization of Petroleum Exporting Countries (OPEC), of which the biggest producers lie in the Middle East, will ultimately control a large portion of the world’s oil in the coming decades and there is nothing we can do about it.
Big Oil doesn’t reinvest much of its money in reserves because most large, easy to produce fields have been discovered and nationalized by the countries that contain them. So what’s a desperate oil giant like BP or Exxon to do? Invest timidly in risky and expensive projects that often times end in tragedy, like the BP Deep water Horizon spill, the Exxon Valdez spill, and most recently, the pipeline burst in Arkansas? Become service companies that help NOCs pull oil out of the ground for a fee? Or simply brown nose their shareholders with dividends and drain the tank slowly?
As NOCs shore up their resources, the world will increasingly rely on OPEC to make up the increased demand coming from China and India in their endless thirst for non-renewable energy. Saudi Arabia — the world’s “swing” producer based on its unique ability to turn production up and down at will — is going to have a major stake as oil consumption moves west to east, and therefore increased political power as well.
Saudi Arabia is not hostile to U.S. interests, but Iran, with the fourth largest proven reserves in the world, is. Sooner rather than later, the U.S. will need to fix its Iran issue before it figures out a way to maximize its oil capacity, which is far more geopolitically powerful than a few nuclear weapons.
Ultimately, there has never been a better time for the U.S. to stop screwing around with Big Oil and its increasingly risky habits, and instead focus on renewables and alternatives. If it can do that, temper its relationship with Middle Eastern producers, and let Big Oil’s terminal death sentence run its course, many foreign policy issues of today will all but disappear.