Alex Brandon/AP
The Discoverer Deep Seas drill ship sits on station off the coast of Louisiana.

America’s Energy Companies Gain Advantage with Dropping Oil Prices

April 01, 2009 01:00 PM
by Anne Szustek
Declining oil prices around the world have given Western oil companies more leeway in negotiating with countries whose economies rely heavily on liquid gold.

American Oil Companies Carve New Niches Amid Lower Commodities Prices

As late as last year, developing nations with large oil reserves such as Venezuela, Libya and Russia enjoyed triple-digit oil prices and lorded it over Western oil companies. But as the Associated Press points out, “much of that money, rather than going back into the oil industry, was spent on unrelated political and social programs.”

Amy Jaffe, an energy expert at the James A. Baker Institute for Public Policy at Houston’s Rice University, told the AP, “These national companies were saying, ‘What the hell do we need the majors for? We’ve got gobs of cash.”
Now with oil prices hovering at around less than half that amount, these countries lack capital to develop their oil fields. Western major oil companies, however, have the funds and the technology to follow suit—meaning more opportunity for foreign investment and for America’s “Big Oil” to reverse years of declining output and create oil wealth to circulate within the United States.

This isn’t to say that there isn’t inherent political risk in international oil field development ventures. Douglas McIntyre wrote in Daily Finance that “If the price of oil moves back toward $100, and it will at some point as supplies drop over the years and the global economy recovers,” Venezuelan President Chavez, a professed adversary of the United States, “will once again have the leverage to make oil companies with assets in his country operate on his terms.”

In the meantime, however, this current situation bodes well for ExxonMobil and ConocoPhillips, particularly with regard to the Orinoco River Basin.

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Background: Nationalization and sovereign wealth funds in oil economies

On May Day of 2007, yelling “down with the U.S. Empire,” Chavez nationalized Venezuela’s Orinoco River Basin oil field, the country’s last remaining privately run oil reserves.

U.S. oil companies ExxonMobil and ConocoPhillips are still in international arbitration over the matter. But because Orinoco’s crude is thick and tarlike, requiring a great deal of refinement to make it marketable, Venezuela will most likely remain dependent on the resources of foreign investors.

Weakening commodities prices have also affected sovereign wealth funds. Also known as SWFs, they have been in use since the 1950s as a way to hedge national coffers against economic downturns. According to the International Monetary Fund, among the world’s largest users of SWFs are the UAE, Norway, Saudi Arabia, China, Kuwait and Russia, which all have significant oil wealth. The two richest of the UAE’s seven emirates—Abu Dhabi and Dubai—as of last summer had some $5 billion a week to spend on foreign investments, thanks to their sovereign wealth funds. Dubai governmental investment arms purchased major stakes of foreign companies, including Barneys New York, British hotel chain Travelodge and U.S. hedge fund Och-Ziff Management.

But now, in addition to the plummeting oil prices, the credit crunch has sapped Dubai’s real estate market, which currently constitutes the core of the emirate’s wealth, and those foreign investments are no longer looking so valuable. In March 2009, David Jackson, the CEO of Istithmar, the investment wing of Dubai’s government, went on the defensive in an interview with Women’s Wear Daily, denying it was trying to sell off Barneys in the wake of waning retail sales.

Related Topic: Conserving oil

The United States currently consumes 21 million barrels of oil per day, nearly 25 percent of total worldwide consumption. Thus, if the supply of oil does drop, only a drastic reduction in U.S. demand can avert a shortfall.

 Taking preventative steps to reduce individual energy consumption is the most sensible response. FindingDulcinea outlines 10 ways how.

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