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Oil producers reach for more power
Consuming nations are struggling to find valid energy strategies, but oil-producing nations have a plan. They'll control the price of refined petroleum, just as they control the price of crude.
By Jim Jubak
Well, at least somebody in the world has an energy strategy in place.
Unfortunately, for those of us who live in net oil-consuming countries, it's the oil-producing countries that have the plan.
It will give oil producers more control over the world's oil supplies. And it will put them in a position to control the price of refined petroleum products, just as they now control the price of crude oil.
And, quite frankly, I don't see any reason why the oil producer's energy strategy shouldn't succeed. No government in any oil-consuming country has come up with a strategy for fighting back.
In today's column, I'll explain the oil-producing countries' energy strategy. It's pretty depressing reading.
But I don't think we need to despair. Fortunately for us, we don't have to wait around for our governments to save us from freezing in the dark. As investors we can develop our own energy strategies and feed them with our own dollars. Individually, those dollars don't begin to match up with the money that governments have to spend, but collectively I think we've got more than enough cash to do the job. And in my next column, I'll outline some investing opportunities that will make money and can help oil consumers take back control of our own future.
Our plans
By now we're all familiar with the piecemeal and startlingly lame excuses for a comprehensive energy strategy that the oil-consuming countries have come up with.
In the U.S., the strategy, as articulated by President Bush, is to put all our hopes in new technologies like straw-grass ethanol, hybrid cars and coal-to-oil plants that might bear fruit over the next 15 years. And in the meantime, we'll all think about driving less.
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It's easy to poke fun at a plan that seems to have been brainstormed by a committee of ostriches with their heads buried in the, well, sand. But it's not like our economic allies and competitors have done a whole lot better.
The European Union has a two-pronged approach:- Produce more energy from nuclear plants and from renewable sources like wind and solar.
- Buy more natural gas from the Russians.
I only see one tiny problem with each prong:- The European Union says member countries are falling way behind their relatively modest targets for nonpetroleum energy sources.
- Russia's promise to be a reliable energy supplier is close to worthless.
China has come up with its own two-part strategy. Part One involves cozying up with any pariah regime that happens to sit on oil. So the Chinese are going to supply patrol boats to the Nigerian government so it can quash the rebellion in the oil-rich Niger delta. Last year, China signed an $800 million deal for 30,000 barrels a day of Nigerian oil. Arms for oil, anybody?
Of course, any government that is counting on the governments of countries such as Nigeria and Iran to honor deals is doing some major wishful thinking of its own.
Part Two of the Chinese strategy is predicated on building as many new nuclear power plants as it can, as quickly as it can. The nuclear industry promises that the new generation plants are a huge improvement over the last generation. China looks like it has signed on as a massive testing ground for this next-generation technology.
Their plans
Against that backdrop, the energy strategy set out by the world's net oil exporters is a model of clear thinking and simplicity. It, too, has two parts.
First, seize greater effective control of all the oil inside the national borders of the oil producers in the name of national oil companies.
Second, build new refineries in Saudi Arabia and the rest of the Persian Gulf to become the main global exporter of finished petroleum products such as gasoline, heating oil and jet fuel.
Strong arms at work
I'll start with Part One.
Because about 80% of global oil reserves are already under the control of the national oil companies of Venezuela, Mexico, Saudi Arabia, etc., this may not seem like a big strategic change. But it is, because the oil-producing countries are intent on changing the terms of the agreements that allow Western companies such as ExxonMobil (XOM, news, msgs) and Chevron (CVX, news, msgs) to produce and sell oil from their national reserves.
Demands for increased royalties from Western oil companies have taken up most of the headlines. In Venezuela, the world's fifth-largest oil exporter, for example, the government has raised oil royalties to 30% from 1%. And the government is demanding that Western oil companies pay what it calculates as $363 million in back taxes.
That change isn't an isolated case, either. For example, New Bolivian president Evo Morales has said that Spanish oil company Repsol (REP, news, msgs) should pay royalties of 50%.
Those royalty rates aren't by their nature ridiculous. Norway, after all, charges a 70% royalty for its North Sea oil.
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