Diplomacy is a crude story

The first chapter of “Diplomacy for dummies” would explain how the world really works.  “Energy resources create excellent opportunities to make fortunes for big business.  Big business makes big money and will make substantial bribes to governments and politicians to grease the wheels of commerce.  Governments support these efforts with low royalties.  US governments go the extra mile and will send soldiers if required in case of pesky foreign governments.  As usual, the poor will always be shafted.”

One of the most intriguing exceptions to this rule is Venezuela (a pesky foreign government), where Hugo Chavez, as an extraverted socialist, has turned the standard dynamic on its head in recent years.

His primary goal appears to be increasing the standard of living for the people of his country. To do this has meant changing the status quo for the establishment of his country and the international oil companies (IOC’s). Not a very popular idea in many circles. Increasing control and nationalization of energy resources is not a new idea. Over the years, we have seen a similar process in Mexico (1938), Iraq (1960-72), Saudi Arabia (1950-80), Iran (failed attempt 1953, success in 1973), Libya (1970), Algeria (1971), Russia (re-nationalization 2003-05), Ecuador (2006), and Bolivia (2006) as part of the list.

This continuing desire of countries wanting to control their oil resources is based on:

  • Retaining a larger share of the profits from the resource to allow financial autonomy and to increase social benefits for their citizens.
  • The realization, that in most cases, the financial and technological requirements for oil development can be obtained without giving away the ship. The model of the multi-national oil major being able to dictate terms is less common today.
  • The knowledge that their resources are limited and that control over production levels to increase or decrease production according to national objectives is crucial.

The history of colonial powers such as France, England and the United States in matters of oil gives us many rather sad instances where the military or economic weakness of oil rich states have been exploited. The example of Iran in 1951 failing to negotiate better royalty rates with the predecessor of British Petroleum is typical. When Iran nationalized the industry, Britain blockaded the export of Iranian crude with British intelligence and the CIA responsible for a coup that toppled the government in an early example of “regime change”. The Shah of Iran was re-instated and did the bidding of both British and American interests through repressive government. The fall of the Shah in 1979 led to the hostage taking at the American embassy. Subsequent behaviour by the US during the Iran-Iraq war provided further fuel to the fire. Present day relations between the US and Iran is related to “blowback” from the covert activity of the early 50’s.

Back in Venezuela, a 2002 coup attempt temporarily removed Chavez and to supporters of Chavez appears to have some links to the US. It may be some years before the allegations can be confirmed. Based on a few of the known interventions by the US in the governance of Guatemala (1950’s..), Dominican Republic (1960’s), Congo (1960’s), Cuba (1960’s), Chile (1973), Haiti (1980’s), El Salvador (1980’s), Nicaragua (1980’s), Grenada (1984), Panama (1989), it appears to be a plausible scenario. Since 2002, the rocky relations between the US and Venezuela have become even more strained. Chavez is seen as a “socialist with deep pockets” and a serious risk to US control of Central and South America countries. Support from Chavez provides those countries with some choice in their economic and political policy decisions.

The balance of power in the oil industry is changing as well. At this moment, the percentage of oil under the ownership of national oil companies (NOC’s) is roughly 85%. IOC’s such as Exxon Mobil, BP, Total, Chevron, Repsol produce only 12 million barrels a day compared to the 85 million total world output. Big oil (IOC’s) claim that they are kept out of many areas where their expertise and money would mean higher production. This is true in some cases. However, the only place where it may change is Iraq, where the invasion has had as a principle goal the privatization of oil, and the entrance of American and British oil companies. Given the $1.3 trillion cost of the war to date and the failure of the Iraqi government to pass the oil laws demanded by the US, it is not a cost-effective way to stimulate privatization.

In the future, the amount of oil that will be available to the open market may decrease in addition to geological depletion. National oil companies (China) are making contracts with oil nations, offering them billions in loans, and development technology in exchange for long-term supply contracts. In the short term, that volume may be sold on the open market. However, when shortages appear, these volumes could revert to the home country. Given this case, those buying on the open market will be the hardest hit – an area like Eastern Canada for example.

Secondly, the growth of NOC’s may continue to increase at the expense of the international oil companies. The IOC’s have not yet adjusted to the change in roles and the best use of their technology in cooperation with the NOC’s is not in place.

As the price of oil rises, exporting countries may be satisfied with lower export volumes to conserve reserves and revenues for the long term, worsening the supply problem. What will be Canada’s national strategy to declining world production? It is not clear to those of us who are the most at risk (Eastern Canada). Perhaps we could all just act surprised when the going get rough?


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