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Oil’s Inverse Proportion

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THE WALL STREET JOURNAL: Oil’s Inverse Proportion

COMMENT FROM breakingviews 
April 16, 2008; Page C18

Russian oil production declined in the first quarter of 2008 after several years of rapid growth. That isn’t surprising; an oil industry characterized by capitalism, foreign partners and technology has given way to autarky and state control. Globally, countries closing resources to foreign participation are the principal threat to oil supplies.
 
After 2000, Russia was the principal source of new oil outside the Middle East. But since 2003, the most efficient Russian oil company, Yukos, has been dismembered, contracts with efficient foreign operators such as Royal Dutch Shell have been forcibly renegotiated, and Russia has imposed an 80% tax on revenue after the first $27-a-barrel price. Unsurprisingly, exploration activity has slackened and production may have peaked.

This has happened elsewhere. Mexico bars foreign participation in oil exploration and expropriates almost all the net revenue of its oil monopoly, Pemex; consequently Mexican production is in steep decline. Venezuela recently seized majority control of foreign oil concessions, so even with the world’s largest oil reserves, its production has declined since 2006. Nigeria taxes foreign oil companies at 98%; its production has declined 10%.

When the oil industry is open, new reserves are found and production increases. To wit, Brazil’s Petrobras participates freely with foreign companies and has discovered several large offshore fields recently. Iraq’s oil fields were opened to foreign participation after 2003, and Iraq’s estimated oil reserves have doubled to 200 billion barrels.

There are two advantages to opening an oil sector to foreign participation and avoiding punitive taxation. First, production from existing fields is increased by greater efficiency. Second, modern exploration techniques are brought to bear, often resulting in finding new fields.

With oil demand rising 1.5% annually and production from existing fields declining 7.7%, large new discoveries are required to stop prices spiraling upward. Allowing international participation in exploration and production looks essential to this process.

–Dwight Cass and Martin Hutchinson

http://online.wsj.com/article/SB120831631892818735.html

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