MONTHLY FOCUS NO 7 - 2011
The New Resource Nationalism and Oil Security
By LIM Soo-Ho
August 2011
I. The Revival of Resource Nationalism
This report examines the state of contemporary resource nationalism in the oil market to
analyze its impact on global supply and demand, and finds that today’s resource
nationalism is significantly different in character from previous incarnations. If the
resource nationalism of the 20th century was ideologically tinged, today’s resource
nationalism is more about pragmatic considerations of national gain. This report
accordingly focuses on three aspects of the formalization of the new resource
nationalism in current policy, including nationalization of oil production, globalization
of nationally owned oil companies (NOCs), and the dilemmas surrounding
“weaponization” of oil resources.
This study also offers a novel perspective on the impact of resource nationalism on the
global oil supply. The fortunes of the new resource nationalism are closely tied to oil
prices, which until recently seemed on the verge of marginalization as oil prices fell.
This forecast however, has turned out to be premature, as upward movement in oil
prices is likely to continue over the long term. This study thus contends that the revival
of resource nationalism is likely to bring higher oil prices on the production, investment
and consumption sides, possibly leading to long-term adverse effects on the world oil
supply.
Categories of New Resource Nationalism
“Resource nationalism” per se refers to a policy of expanding state intervention in
natural resources. It further refers to the phenomenon of “resource weaponization,” i.e.
the use of natural resources as leverage to accomplish political aims. The “New
Resource Nationalism” can be classified into four categories according to its
backgrounds, goals, and means.
The first type of resource nationalism is “revolutionary resource nationalism,” and
typically arises from domestic political and social upheavals. This type of resource
nationalism presents itself as a new development strategy to replace market centered
neo-liberalism. Its main goal is to reclaim control of natural resources obtained by
foreign investors after neo-liberal reforms in the 1990s, and favors unilateral
nationalization as its preferred method.
The second and third types are “economic resource nationalism” and “soft resource
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nationalism,” and are both driven mostly out of a desire to maximize profits from rising
oil prices. These forms of resource nationalism aim to increase government revenues
from natural resources rather than bringing them under direct government control.
Increases in government ownership of resources are more limited in this model, falling
well short of outright nationalization.
Lastly, there is “legacy resource nationalism,” where cultural characteristics and
national sentiments make foreign investment in natural resources extremely difficult.
This is not a new phenomenon, but rather reflects the persistence of 20th century
resource nationalism in local sociocultural norms.
Table 1. Categories and Examples of New Resource Nationalism
New Resource Nationalism
Classification
Origin
Goals
Means
Continuation of
Old Resource
Nationalism
Soft resource Legacy resource
nationalism
nationalism
High oil prices Internalized
rejection of foreign
investment
Fiscal revenue
and prevention
of misuse of
natural
resources
Tax increases Prohibition on
and intensified foreign investment
regulations
Revolutionary resource Economic resource
nationalism
nationalism
Socio-political
High oil prices
upheavals and high oil
prices
Control of natural
Fiscal revenue
resources and fiscal
revenue
(weaponization of
resources)
Nationalization, tax
Limited increase in
increases, intensified government
regulations, and
ownership, tax
unilateral changes to increases, intensified
original contract terms regulations, and
unilateral changes to
original contract terms
Russia, Venezuela,
Kazakhstan and
Brazil and
Bolivia and Ecuador
Mongolia
OECD
countries
(notably Britain
and Australia)
Many oil
producing Middle
Major
East countries,
examples
including Saudi
Arabia, and
Mexico
Source: Redrawn on the basis of Bremmer, I. & Johnston, R. (2009). The Rise and Fall of
Resource Nationalism. Survival, 51(2), pp. 149-158.
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Historical Development of Resource Nationalism
Resource nationalism spurred by Iran’s oil nationalization in 1951 spread to most thirdworld oil producing countries in the Middle East, Africa, and Latin America during the
1960s and 1970s. As a result, control of world oil reserves shifted from a handful of
large international oil companies (IOCs) to the governments of OPEC member states.
Moreover, OPEC legitimized an international petroleum order dominated by oil
producing countries through a series of jointly enacted weaponization policies and cartel
activities, including cuts in oil production quotas, oil price increases, and oil export
embargos.
Such OPEC policies however, resulted in market backlashes. In response to the two oil
shocks of the 1970s, oil consuming states like the United States, Europe, and Japan
began working to reduce their oil consumption and increase their alternative energy
development, while increasing exploration and production activities in non-OPEC oil
fields. Consequently, supply eventually far exceeded demand, resulting in a long term
oil glut from the mid-80s onwards. The world oil market then shifted 180 degrees from
a producer-driven to a consumer-driven market, causing resource nationalism to enter a
dormant period. In particular, during the 1990s when a wave of economic neoliberalism swept the globe, the great majority of oil producing countries (excluding
Saudi Arabia and Mexico), loosened state control over national petroleum resources and
allowed foreign investment in their respective NOCs.
From the 2000s, however, resource nationalism reemerged as surging oil demand in
emerging economies brought the return of high-oil-prices. New resource nationalism in
the 21st century has been led by Latin American leftist regimes, as exemplified by
Venezuela and Bolivia, and also by Putin-era Russia. In these regions resource
nationalism has manifested itself in its most dramatic form as renationalization and
weaponization. Other measures in other countries, if less radical ones, include hefty
increases in taxes and stringent regulations. These re-nationalizing tendencies have been
implemented in many oil producing nations, including some members of the OECD.
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Figure 1. Annual Demand for Oil and Oil Prices (1996-2011)
140
U.S Dollar/B (Real Price 2009)
120
100
80
60
40
20
Jan-96
Jul-96
Jan-97
Jul-97
Jan-98
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Jan-02
Jul-02
Jan-03
Jul-03
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
0
Note: Figures based on Brent crude.
Source: Based on figures from the IEA (demand), and BP (prices).
Figure 2. Monthly Trend in Oil Prices (Jan. 1996 – April 2011)
10,000
120
9,000
100
8,000
10,000 B/D
80
6,000
5,000
60
4,000
40
3,000
2,000
20
1,000
Note: Figures based on Brent crude.
Source: Based on figures from the IEA (demand), and BP (prices).
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2011(1Q)
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
-
1996
-
U.S Dollar /B (Real Price 2009)
7,000
II. Characteristics of New Resource Nationalism
Pragmatic Nationalization and Limited Openness to Foreign Investment
The first wave of nationalization in the 1970s was achieved through flat expulsion of
foreign firms, confiscation of their oil assets, and subsequent prohibition of foreign
investment in oil. Such full-scale expropriation of foreign-owned oil assets have
become at present a less desirable method for many nations in favor of more pragmatic,
piecemeal approaches that allow governments to increase their ownership in national oil
resources. These approaches include revision of laws on foreign participation in the oil
industry and compulsory renegotiation of existing contracts, as well as the extraction of
additional profits through a raft of tax hikes on foreign oil operations. In particular, the
participation of both foreign-owned NOCs and IOCs in petroleum exploration and
development projects have actually been promoted to the degree the host government
maintains control.
Bolivia’s renationalization policy under the Morales government for example is a
representative example of “revolutionary resource nationalism,” though even it has been
characterized by the pursuit of profit sharing with foreign companies with simultaneous
reconfirmation of state ownership of oil resources, and guarantees on managerial rights
to private capital. Despite a continuous stream of inflammatory anti-Western rhetoric,
the Hugo Chavez administration in Venezuela has also encouraged foreign oil
companies to participate in joint investment on the condition that its state-run NOC,
“PDVSA,” will hold more than a minimum 51-percent stake in all joint venture projects
involving oil exploration, production, transportation, and delivery. In other words,
though both Bolivia and Venezuela have shown signs of “revolutionary resource
nationalism,” including arbitrary changes in contracts and limited nationalization, they
have also employed pragmatic methods to secure both managerial rights and foreign
investment.
While “revolutionary resource nationalism” turned to renationalization in the early
2000s, countries that have practiced “legacy resource nationalism” since nationalization
in the 1970s have recently opened their doors to foreign investors to a limited extent.
Kuwait now allows foreign oil companies to invest in seven or eight oil fields, while
Iran’s five oil fields remain open to foreign investment. To put it simply, as the 2000s
progressed, the two extremes found within oil producing nations in the 1980s and
1990s: i.e. active recruitment and outright prohibition of foreign investment, have
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tended to converge toward the center.
Internationalization of National Oil Companies
“Internationalization of NOCs” refers to the increasing number of joint projects where
NOCs engage in joint ventures with other NOCs and IOCs. It is a characteristic feature
of the new resource nationalism. Among the world’s top 50 oil companies, five NOCs,
including Saudi Aramco, NIOC of Iran, PDVSA of Venezuela, CNPC of China, and
Gazprom of Russia greatly increased joint ventures at home and abroad, equity alliances,
and operation and service contracts from 1997-2007. Despite the resurgence of resource
nationalist policies, both joint ventures and equity alliances with IOCs have increased in
oil producing countries. This is because resource nationalism has favored foreign
investment as long as governments retain control over their natural resources.
Collaboration between NOCs, including in cartel format, has also become a notable
characteristic of the new resource nationalism. From 1997-2007, resource projects in
which the aforementioned five NOCs engaged in joint ventures with other NOCs
increased fivefold. Joint NOC-IOC projects almost doubled during the same period,
while “hybrid NOCs (hNOCs),” which split ownership between NOCs, their
governments, and private firms have increased more than ten-fold. This indicates that
the trend toward resource nationalism and internationalization are both occurring at the
same time.
Figure 3. External Corporate Relations of the Top 5 NOCs for 1997 and 2007 by
Ownership Format
No. of times
60
50
1997
2007
40
30
20
10
0
NOC-NOC
NOC-IOC
Hybrid-NOC
Hybrid-IOC
Hybrid-Hybrid
Source: Graaff, N. Development (2011). “A Global Energy Network? The Expansion and
Integration of Non-Triad National Oil Companies.” Global networks, 11(2), 262-283.
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Resource Weaponization and the Dilemmas of Collective Action
Resource weaponization in the form taken by the OPEC cartel in the 1970s has
appeared in only a few countries, and only to a limited degree. In the early 2000s, only a
few countries like Venezuela, Iran, and Iraq have openly threatened, or carried out,
weaponization of oil resources. Such attempts, however, have failed to cause any
measurable impact on international oil prices. The main reason that such overt
weaponization has had little effect is because major oil producing countries are
generally unsympathetic to the aims of those making threats. In particular, whenever
any other producer state has made signals that it was considering weaponization, Saudi
Arabia has neutralized every attempt by increasing its own oil production.
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Table 2. Oil Supply Crises after World War II
Suez Crisis
Third Middle
East war
(Embargo on
exports of Middle
East oil)
Fourth Middle
East war (Middle
Eastern oil
producers raised
prices, reduced
production, and
prohibited
exports)
Iranian
revolution
11/1956-3/1957
6/1967-8/1967
4
2
Supply
Disruption
(1 million
barrels/day)
2.0
2.0
10/1973-3/1974
6
4.3
3.29
(1973)11.58
(1974)
11/1978-4/1979
6
5.6
Iran-Iraq war
10/1980-1/1981
3
4.1
Iraqi invasion of
Kuwait
8/1990-1/1991
6
4.3
Suspension of
Iraqi oil exports
6/2001-7/2001
1
2.1
Suspension of
Iraqi oil exports
4/2002-5/2002
1
0.8
General strike in
Venezuela
12/2002-3/2003
3
2.6
Iraq war
3/2003-12/2003
9
2.3
Hurricane
Katrina
9/2005
1
1.5
14.02
(1978)31.61
(1979)
31.61
(1979)36.83
(1980)
18.23
(1989)23.73
(1990)
28.62
(5/2001)27.95
(6/2001)25.08
(7/2001)
23.96
(3/2002)26.13
(4/2002)25.66
(5/2002)24.43
(6/2002)
24.25 (11/2002)
28.25
(12/2002)30.81
(1/2003)32.66
(2/2003)30.29
(3/2003)
30.29
(3/2003)24.87
(4/2003)29.9
(12/2003)31.33
(1/2004)
64.39
(8/2005)62.82
(9/2005)58.53
(10/2005)
96.78 (1/2011)
123.26 (4/2011)
Causes for
Supply
Disruptions
Duration
(months)
Time
Change in Oil
Prices
(Brent crude,
nominal dollars)
—
—
Middle East
2/2011-4/2011
4
0.8
democracy
(current)
protests
Source: IEA (2007). Oil Supply Security. p. 19; figures were restructured using BP price data.
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The absence of collective action by oil producing countries is mostly due to the lack of
a common ideology between oil producing nations. The collective action of OPEC in
the 1970s was based upon an ideology of “North-South justice” (pitting the developed
world versus the developing world), as well as a new development model that departed
from economic dependency. Such clear ideology no longer exists today.
“Learning effects” from the past also pose a hurdle to any collective action. The current
OPEC member states all maintain memories of the 1970s, when their cartel activities
produced adverse consequences for themselves. In addition, unlike the 1970s, major oil
importers like the United States, Europe, and Japan have prepared countermeasures,
including a strategic petroleum reserve system that can provide a cushion against
sudden market disruptions. As global climate change spurs the development of
renewable energy and nuclear power to replace fossil fuels, it will become increasingly
difficult for oil producing countries to engage in collective action because such steps
will likely further accelerate alternative energy development.
III. Resource Nationalism in the Age of High Oil Prices
The Arrival of Long-Term High-Oil Prices
Global oil markets entered a phase of long-term high oil prices by the early 2000s. Such
changes reflect fundamental changes of fast growing demand and slow growing
supplies, and do not reflect temporary fluctuations. High oil prices are here to stay,
regardless of short-term volatility arising from speculation, cyclical changes, and
geopolitical instability.1
In fact, the present trend toward long-term high oil prices will likely only intensify.
According to the International Energy Agency (IEA), oil prices can remain at current
levels only if each nation makes a substantial reduction in its fossil fuel consumption
(450 Scenario), in accordance with the Copenhagen Climate Change Agreement (made
in December 2009). The IEA predicts price spikes if countries around the world
continue the status quo (Current Policies Scenario), or make only slight improvements
in their new energy policies (New Policies Scenario), well below that of the 450
1
IMF (2011). World Economic Outlook, Tensions from the Two-Speed Recovery: Unemployment,
Commodities, and Capital Flows. pp. 89-124
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Scenario intended to abate greenhouse gas emissions.2
Figure 4. Long term Oil Demand and Price Outlook
Source: IEA (2010). World Energy Outlook 2010, p.72, 102.
Impact on Global Oil Supply and Demand
Resource nationalism is not simple profiteering from high oil prices but constitutes an
active attempt to make high oil prices permanent. First, from a global perspective,
resource nationalism indicates the growing influence of NOCs on the world oil supply.
As oil prices climb, IOCs generally ramp up production to profit from high prices.
NOCs, however, tailor their output decisions in accordance with their national
government’s long-term strategic calculations. As increased production would drive oil
prices down, NOCs attempt to curb output increases to keep prices and profits high over
the long run. Conversely, if price hikes continue due to production shortfalls, a phase of
long-term low oil prices begins with falling oil demand. OPEC production quotas,
therefore, are always being adjusted to maintain “optimum high prices” by keeping an
“optimal” balance between supply and demand. However, if the spread of resource
nationalism expands the future share of NOCs in the global oil supply at the expense of
a declining share of IOCs, price elasticity will decrease and high oil prices will remain.
This, in turn, stimulates further resource nationalism.
Secondly, lowering oil prices over the long run requires increased production capacity
through expansion of investment in the upstream oil sector. Resource nationalism,
however, has been instrumental in restricting investment in IOCs through equity
constraints, regulations and tax hikes. Since resource nationalism has been strongest in
2
IEA (2010). World Energy Outlook 2010. p.63
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oil-rich countries with low production costs, IOCs have increasingly moved to more
costly development and production environments. As a result, over the long run,
shrinking global production capacity and rising average unit costs of production have
increased the upward pressure on oil prices. High oil prices, moreover, are likely to
decrease reliance on foreign investment in resource nationalist countries as they gain
access to more revenue. This will in turn further strengthen resource nationalist policy
and further legitimize intervention against foreign investors. Of course this creates no
issues if NOCs are able to offset declining foreign investment by expanding investment
on their own. Nevertheless, profits generated by NOCs in oil producing countries have
been used not only to sustain and expand oil production capacity but also to implement
government policies. In particular, resource nationalism has intensified pressure for
income redistribution, and in practice a significant share of the recent windfalls has been
spent on social welfare programs. NOCs are also subject to the profit goals set by their
government, which are devised to make maximum use of existing production capacity,
rather than expanding capacity for the future. This leaves little incentive for more
investments. All these tendencies are strongest in countries where the share of revenue
from oil has grown, and where resource nationalism has become more prevalent.
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Figure 5. Scale of Annual Fossil Fuel Subsidies by Country, and Share of GDP (2009)
Note: MER: Market Exchange Rate
Source: IEA (2010). World Energy Outlook 2010, p. 581.
Third, oil prices could actually decline if demand falls. Resource nationalism, however,
has complicated the situation by constraining price elasticity for demand, postponing
reductions in demand following increased oil prices. Egalitarian pressures in resource
nationalist countries also play a role, as social welfare programs, especially fuel
subsidies, have been stimulated by resource nationalism. Fuel subsidies granted to
domestic industries and citizens that provide fuel at low prices, or even below cost,
artificially boost domestic consumption and reduce oil available for export, pushing up
prices. If all fuel subsidies in the world are ended by 2020, global demand for oil is
projected to decline 5%.
It took nearly three decades for the old resource nationalism, which began with Iran’s
nationalization in 1951, to reach its apex in the second oil shock of 1979. The old
resource nationalism has only been strong enough to affect the global economy in the
last six years, with the past 23 years functioning as a period of maturation. The new
resource nationalism is barely 10 years old. High oil prices are spreading and
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intensifying resource nationalism, even as resource nationalism prolongs high oil prices
by constraining price elasticity for production, investment and consumption. It is thus
likely that high oil prices and resource nationalism will continue to reinforce each other
going forward, requiring measures that address the oil supply from a long-term point of
view.
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