By Daniel Litvin – This article was originally published by Prosect magazine – Click here to view.
Are we entering a new chapter in the history of relations between oil firms and poor countries?
In nationalising his country’s gas industry, Evo Morales, Bolivia’s populist left-wing president, has joined Latin America’s other anti-capitalist leader, Hugo Chávez of Venezuela, in opening a new episode in the century-long relationship between big energy firms and developing countries – a global historical drama whose lessons appear today to have been partly forgotten by both sides.
The drama has so far run to four episodes. In the first, which ran from the early to mid-20th century, “big oil” was triumphant: the western firms, in alliance with the western imperial powers, established control over much of the oil resources of the developing world, also controlling governments in many regions. In the second episode, from roughly the 1950s to the 1970s, energy-rich developing countries hit back, booting out the western firms by means of nationalisation and expropriation, and also – through Opec, the oil producers’ cartel – hiking up oil prices. In the third episode, from roughly the 1980s to early 2000s, big oil was resurgent for a time again: a number of energy-rich countries, starved of investment and technology, invited the firms back in to help exploit their resources.
The fourth episode brings us to the present: emboldened by higher oil and gas prices, some of the energy states are once again hitting back. These include not just Venezuela and Bolivia; Ecuador and Russia, for example, have also recently increased state control over energy. Energy-rich states also have more bargaining power: western firms, such as Shell and Exxon, have to compete for access to reserves with Chinese and other developing-world energy multinationals.
So what might countries such as Venezuela and Bolivia learn from reviewing some of the previous episodes? It is not that the rationale for their actions is necessarily wrong. At times of high prices, it may make sense to claw back more profits from oil firms – after all, Gordon Brown has imposed a windfall tax on oil firms in Britain. Similarly, it is possible for states to re-establish their ownership of resources without losing all the benefits of foreign involvement: foreign engineers can be hired where necessary, for example, or foreign companies contracted to undertake specific tasks. Some state-owned oil giants, such as Saudi Arabia’s Aramco, have managed adequately on their own in this way.
In general, though, the main lesson from episode two is that taking away control from foreign firms can backfire if you are not well prepared. Fired up by anti-western rhetoric, political leaders of energy states neglected the economic reality of how best to develop their countries’ resources. Big private-sector oil firms brought – and still often bring – a combination of managerial and other skills, advanced technology and access to capital, which is lacking at home. Many nationalised energy industries became inefficient bureaucracies in the 1960s and 1970s, with hiring and investment decisions dictated by patronage and politics. Oil production, in turn, often stagnated.
The wealth generated by oil, furthermore, often failed to trigger broad-based economic development. Development turned out to depend not on who owned the resources but on national economic policies and standards of governance – and these remained abysmal in many oil-rich states. Meanwhile, the western oil firms busied themselves finding and producing oil in other regions, such as the North sea. This caused Opec’s market share to decline.
All these factors help to explain the transition to episode three: a number of oil-rich states, financially exhausted, turned once again to big oil to help revive their energy industries. This holds a possible lesson for Morales, Chávez and other energy nationalists: whatever the political appeal of thumping the foreign firms, if you eject them or deter them entirely, your countries may be forced into a bigger surrender to the firms at some future stage.
But if there are history lessons for energy-rich states, the same is true for the oil firms. If they had remembered the depth of nationalist currents from episode two, for example, they would have been less quick to assume that governments such as Venezuela’s had been irreversibly won over to the benefits of foreign investment in the 1990s, and hence might have expanded more cautiously in developing countries during this period. They also might have headed off, or reduced the severity of, the current backlash by focusing even harder on boosting local economic benefits. The business consequences of alienating host nations should have remained at the top of their minds during episode three.
With episode four, the new backlash, now under way, the international energy firms also need to recall past lessons in how to respond to leaders such as Chávez and Morales. During the first backlash, western firms and governments often fuelled the flames of host-country nationalism. Developing countries’ attempts to revise contracts, or nationalise assets, often provoked hardball western tactics, such as legal action, support for opposition politicians, and even sponsorship of coups – which in turn stored up future problems. In Iran in 1953, for example, the CIA and MI6 backed a coup to topple an Iranian government which had nationalised British oil interests. This helped safeguard western assets for a while, but also fuelled anti-western feeling in Iran, giving extra momentum to later nationalist waves. When Islamic clerics took power in 1979, they lost little time in fully nationalising Iran’s oil industry.
Early indications of how western firms and governments are responding to today’s backlash are mixed. Shell has recently argued that oil nationalism is a “new reality,” which must be accepted. Other big companies are adopting a less accommodating approach. The US government, meanwhile, seems to be open to the possibility of regime change: the Bush administration was reluctant to condemn a failed coup against Chávez in 2002, though it denies having actually being involved in it. Chávez has used public suspicions of US involvement to strengthen his own popular image as a defender of Venezuelan sovereignty.
It may be, in short, that certain western actions are already helping fuel a further backlash, making it more likely that episode four will last for some years – just as the actions of leaders such as Chavez may be laying the groundwork for an eventual episode five: “the return of big oil.”