A world of national oil companies: how and when they came to dominate the global oil industry
The global oil industry began as the struggle between oil-producing countries, oil-consuming countries, and those few powerful companies capable of making that oil economically viable. But once oil-producing countries learned the basic ins-and-outs of the oil business, these oil-producing countries seized control of their reserves and production in 'waves' of nationalization.
For the first half of the twentieth century, the three-way struggle of the modern oil industry was one between the countries where the oil was found, the countries where the oil was consumed, and the few formidable companies who had the capacity to find, extract, refine and sell it. But one side of this triangular dynamic always seemed puzzling, if not unsustainable: why wouldn’t oil-rich countries simply take control of their oil industries, rendering private (and foreign) oil companies at best peripheral, and at worst redundant?
This apparent riddle eventually did get solved: national oil companies (NOCs) in oil-producing countries were created in different ‘waves’ (below); these companies gradually learned the oil business; and inevitably, this three-sided struggle gave way, in all but a few exceptions, to the global oil industry of today where sovereign states claim rights over oil in the ground while tasking their NOCs with extracting, refining and marketing that oil, either on their own or with some outside help. In other words, while a handful of massive private oil companies (‘majors’) controlled some 85% of global reserves in 1950, today NOCs control and produce about 80% of the world’s oil.
How did NOCs come to dominate the global oil industry? In this ten-thousand-foot summary, I identify three waves in the shift from a system dominated by the vertically integrated ‘majors’ to one of production by national oil companies and sovereign state control.
The First Wave: NOCs of the ‘late industrializers’ (1900s-50s)
Inspired by budding ideas of state-led development, states—on both the producing and consuming side—saw oil as simply too strategic a commodity to leave to the market’s invisible hand. Starting in more corporatist-minded countries of Europe in the early decades of the 1900s, NOCs were created to participate directly in capital accumulation and mobilize resources for the country’s industrialization. Spurred on by the painful lessons of agro-dependency during the Great Depression, this trend migrated to the developing world, especially to states with higher degrees of capacity and at least some industrial pockets—meaning mostly Latin America. Here, these NOCs were converted into vehicles for industrialization and development. The first big break from the majors’ stranglehold occurred with Mexico’s oil nationalization (1938), but NOCs were also created in smaller oil producing-countries like Argentina, Bolivia, Brazil, and Peru, in the hopes of partnering with the capital and expertise of the majors to develop their respective oil industries. Venezuela, which emerged as a major oil producer in the 1930s, largely stayed on the sidelines of this nationalizing trend. That brings us to the next wave.
The Second Wave: NOCs of the oil-rich ‘rentier states’ (1960-70)
States, whose finances over the years came to depend on the rents that oil production yielded, were under no illusion of what they’d need to do to gain greater revenue and decision-making control over their respective oil industries. But the challenge of nationalization was always the same: after cutting the Gordian knot with the majors , how to successfully maintain the flow of oil and find markets for that oil (meaning, the rich economies of Europe, North America and Japan)? The five most significant producers of this subset—Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela—formed a cartel of major oil producers known as OPEC (the Organization of Petroleum Exporting Countries) in 1960. They also created NOCs, first to learn the oil business, pushing the majors and ‘independents’—a group of smaller yet still powerful private oil companies who emerged in the 1960s (especially in Libya)—to restructure their agreements as some form of joint-venture, effectively making the oil-producing NOCs partners of the foreign oil companies. And finally—whether by design or by circumstance—the big oil-producing countries took over their respective oil industries outright.
This rash of oil nationalizations in the world’s most oil-rich regions, which began as a trickle several decades before and always loomed over the majors as an apocalyptic possibility, finally turned into a flood by the early 1970s. The result was a tectonic shift in the oil industry, including the two price ‘shocks’ (1973 and 1979) in the process. This wave of nationalization included all of OPEC’s members, whose membership mushroomed to over a dozen. But nationalization itself was not uniform process, in some places taking more radical forms (such as Libya and Algeria) while in others more moderate, gradual forms (such as the Gulf monarchies, Venezuela and Ecuador).
The Third Wave: NOCs as products of reforming command economies (1980s-90s)
When oil prices stumbled in the early 1980s and then collapsed in the mid-1980s, oil-rich command economies were forced to open up—either gradually (China, Vietnam) or suddenly (the USSR and post-Soviet republics). Seeing oil resources as simply too important to be privatized outright, states preserved at least part of their control over the industry by creating NOCs. The performance of these NOCs varied considerably, from those that were partially privatized (that is, allowed to partner with foreign capital, list shares on foreign stock markets, and so on) and looked for business beyond their borders to those that remained almost hermetically sealed in their own economies, serving mainly as rent-generating vehicles for venal elites.
An industry of NOCs of all sizes, strengths and syndromes
By the start of the twenty-first century, NOCs had shown an enormous amount of diversity—in size, strength, and syndrome. From this point, I identify two divergent trends, both connected at least partially to the price of oil, but tied deeply to the conditions under which they were created and the states from which they sprung.
Semi-privatization or riding it out (mid-1990s-early 2000s)
Governments, especially in so-called ‘emerging economies’ whose growing economies brought about rising oil demand, saw little choice but to address the warts of inefficiency and underinvestment (and corruption) that NOCs brought. Not quite ready to part with their NOCs—or the idea thereof—these states subjected their NOCs to at least aspects of structural reform without fully ceding government control over state assets. A few of these NOCs gradually became confident enough to compete abroad (including CNPC of China, Petrobras of Brazil, Petronas of Malaysia, and Statoil of Norway). A far more common phenomenon was of oil-producing states, either sitting on such an abundance of oil (virtually all of the Gulf monarchies) or with a terminally ill NOC that no partial reform could remedy (like Pemex of Mexico, NIOC of Iran or NNPC of Nigeria), chose between inviting foreign capital (back) or riding out the low prices of the 1990s.
Oil re-nationalization (mid-2000s to mid-2010s)
The return of high—and eventually historically high (2007-08)—oil prices revived faith in state control over oil, while giving rentier states a much-needed chance to exhale. High prices, as they’d done in the 1970s, also pushed the industry into new areas or ‘frontiers’ of production. These new sources of production were almost all outside of OPEC control, the most important being the so-called ‘frackers’ of America’s shale boom and the high-cost oil of Canada’s ‘tar sands’. Some NOCs, especially those who’d undergone earlier processes of partial privatization, took part in this push into the new frontier. The biggest and most notable was Brazil’s discovery of the so-called ‘pre-salt’ fields deep under the seabed—a feat that simultaneously turned its NOC Petrobras into an award-winning industry-leader while making the company the target of a mind-boggling corruption network.
The first half of the twentieth century centered on the struggle between countries where the oil was found, the countries where oil was consumed, and those few powerful companies with the technology and knowhow to make that oil economically viable. But once oil-producing countries, after creating and empowering national oil companies, learned the basic ins-and-outs of the oil business, these oil-producing countries in all but a few cases seized control of their reserves and production, starting in the late 1930s but most radically and comprehensively in the 1970s. For the last fifty years then, a central puzzle of the global oil industry relates to the striking diversity of NOCs; in other words, what makes national oil companies so different between themselves?—whether, as ‘companies’, in their ability to perform the ‘core’ duties of the oil business, or as ‘national’ entities, in the tasks they perform for their home-states.