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Business Week: The Problem’s Not Peak Oil, It’s Politics

JULY 9, 2007 

Go-it-alone governments are choking back output to perilous levels

Some “peak oil” cassandras warn that global energy production will soon fall into permanent decline. But a more immediate danger to world oil supplies may be the tempestuous politics of many producing countries. Witness Venezuela’s move to wrest control of key oil projects from global companies on June 26. The move echoes steps taken in other nations that will likely either decrease production or slow its growth in coming years. “The oil is in the ground, but serious doubts are being raised about whether countries have the desire and means to produce it,” says Leo Drollas, deputy director of the Center for Global Energy Studies, a London think tank.

Right now, Venezuela is creating the biggest doubts. Its output has declined by about 25%, to 2.4 million barrels per day, since populist President Hugo Chávez came to power in 1999. The main reason: Chávez fired 75% of the managers at state oil company Petróleos de Venezuela (PDVSA) after a strike in 2003. That decision left PDVSA overstretched and ineffective. The plunge would have been disastrous had it not been for increased investment by foreigners. Yet Chávez is making life so difficult for the oil majors that two of them—Exxon Mobil Corp. (XOM ) and ConocoPhillips (COP )—are now walking away. This latest episode is bound to limit future interest in Venezuela and could well push the country’s crude production, which had been recovering, back into decline.

Venezuela is far from the only producer country that’s giving Big Oil nightmares. On June 22, Russia forced BP (BP ) to sell a controlling stake in a massive east Siberian gas field called Kovykta for around $700 million—a fraction of the project’s potential value. Last year, Moscow strong-armed Royal Dutch Shell PLC (RDS ) into giving up control of its big Sakhalin II gas project in the Far East, and it’s now battling ExxonMobil over a similar field nearby. The Kremlin’s energy policies have already contributed to slowing growth in Russian output: Production is rising at 2% annually, down from double-digit rates a few years ago. And the International Energy Agency says Russia’s production may top out at about 10.5 million bbl. daily—well below the expected peak output of 12 million bbl. per day that some experts had predicted, though still above today’s level of 9.9 million bbl.

Political rivalries and tumult in other nations are also keeping a lid on supplies. Violence in Iraq means production there remains below prewar levels. Iran’s exhausted domestic industry faces declines without outside help, but the country’s jousting with Washington gives even non-U.S. investors pause. Mexico faces a fall in output because it is starving Pemex, its national oil company, for capital while barring foreign investors from the sector. “You start getting into some really interesting questions [about where future supplies will come from] if countries don’t increase investment,” says David Kirsch, an analyst at Washington consultants PFC Energy.

Those questions matter for oil producers and users alike. Consumption is growing fast, and without investment in new fields the industry’s output would fall by about 3% annually. So every year the world needs new capacity of almost 4 million bbl. per day just to keep up. Western oil companies have the technology and knowhow to help countries with hard-to-tap resources get their crude out of the ground. But with today’s high prices, Russia, Venezuela, and others with large reserves don’t see the point in ceding profits to the giants. These countries prefer to let national oil companies such as PDVSA, Pemex, and Russia’s Gazprom extract the wealth—even if it they’re not quite as efficient as the foreigners.

This may make sense for the resource-rich countries. Building up a domestic industry and curbing reliance on outsiders could well serve their national interests. But for oil and gas consumers in the U.S., Europe, and Japan, that means a growing dependence on producers that don’t share their interests—and likely more years of high prices due to limited supplies, regardless of whether or not global output has reached its peak. and its sister websites,,,,, and are all owned by John Donovan. There is also a Wikipedia article.

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