Oil Producing Nations
But Most Are Not Cashing In
By Daniel Muniz

With growing global demand and tight supplies, the prices for light sweet crude oil keeps breaking records which creates misery for everyone at the gas pump. In fact, demand is also growing for the plentiful heavy sour varieties due to the anticipation of the price hikes that the world is now experiencing. Independent refineries such as Valero invested heavily in the equipment necessary to turn this low grade oil into gasoline.

So with fuel prices rocketing into the stratosphere, aren’t the oil patch countries making obscene profits?

Regrettably, the answer is not really.
 

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Two-thirds of the oil patch nations are socialist economies in which the state owns all the natural resources as well as the companies that extract and refine it. And with some exceedingly rare exceptions, governments who operate what is supposed to be a very profitable enterprise in a monopolistic environment almost always run them into the ground as spectacular failures due to poor management and incessant corruption.

Disappointedly, oil is one of those failures.

For example, Pemex, the state owned petroleum company of Mexico was nothing more than an ATM to its government. Instead of plowing a substantial portion of its profits back into Pemex, Mexico used its revenues to fund two-fifths of its national budget. In addition, unions and well connected bureaucrats plundered the remaining money from it. So instead of investing in exploration and in the technology to improve its refining capacity, Pemex is a bankrupt organization that is completely unable to operate efficiently and profitably.

Sadly, many countries in the oil patch have suffered the same fate such as Russia, Iran, Venezuela, etc.

Although Iran is sitting on the world’s third largest oil reserve, it actually has to import gasoline from abroad because its aging refineries are decrepit and in woeful need of repair and modernization. And even without the harsh sanctions levied from the international community and from the United Nations, the bloated bureaucracy of its regime prevents foreign firms from taking a chance on investing billions of dollars in its extraction and refining facilities. There is nothing that can stop investment faster than red tape and the insane regulations that have no basis in reality.

And even successful oil producing nations like Kuwait are still mired in a procurement system that isn’t any better off than what Mexico has. The result is an inefficient oil production that is substandard and inept. Kuwait’s saving grace is its tiny population that prevents the funding of colossal government programs. In addition, its autocratic regime didn’t want all of its wealth completely squandered on useless pursuits.

However, there are some exceptions.

Brazil has begun to move towards a free market economy and the results have been breathtaking. With numerous free trade agreements, privatization of state owned industries, and the influx of enormous capital from foreign investors, it now has a growing middle class that is well diversified and a prosperous economy.

But perhaps the biggest improvement has been with oil. What was once a monopoly belonging solely to its state owned oil company Petrobras, Brazil now has more than 50 oil companies operating on its soil who represent the cutting edge of technology when it comes to exploration and extraction. Brazil is running circles around the socialist nations of the oil patch because their free market orientation gives them the incentive for profit.

And that is the biggest contrast of the countries with state owned oil enterprises.

The pilfering of profits perpetually keeps these state owned organizations broke and incapable of modernizing in a constantly changing world. What these governments don’t understand is that profit can be used to reward investors who risked their own money for such ventures as well as using it to upgrade their operations with the best equipment, the latest technology, and the smartest personnel. Instead, the profits are diverted to unrelated government programs, wasteful pet projects, and the lining of the pockets of corrupt bureaucrats.

However, what is so tragic is that the corruption and inefficiencies of state-owned oil enterprises are actually exacerbating the dilemma of astronomically high oil prices. The economic laws of supply and demand kick in when there is tremendous demand and a short supply. Woeful production and limited inventories have driven the price of oil even higher because these operations are not efficient enough and their equipment and technology is outdated. As a result, these countries are not cashing in on the high oil prices.

But still worse, the United States which has a free market economy is the only country in the world that poses restrictions on its own natural resources. 85 percent of the oil reserves in America and within its territorial waters cannot be extracted because of bureaucratic legislation. Also, it has been more than twenty years since a new refinery has been built. The “Not in my Backyard” mentality has tremendously limited refining capacity.

It is unfortunate that oil prices have soared out of control. However, nearly all of these problems are self-inflicted. If people around the world want to see lower fuel prices, then they need to allow the free market revolutionize the exploration, extraction, and production of oil. If not, then these artificial restraints that warp supply and demand will continue to keep the world’s population in misery.

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