Socialism and energy have a peculiar relationship to each other. In most countries, no matter who owns the surface land, the subsurface rights to the oil, gas, or (sometimes) minerals, belongs to the national government, and, in theory, the people of the country.
The idea did not start with the 20th century: kings and rulers had often held that right eons before Karl Marx, but its peculiar current manifestation has ruled the energy field since 1938, when Mexico’s President Cardenas, despairing of American oil companies’ exploitation of Mexico’s oil fields (and workers), decided to nationalize the industry. The income would belong to the people of Mexico. A trend was permanently established.
It would seem like a winning idea for developing countries — take the benefits of a hugely lucrative natural resource out of the hands of the few to fund the economic development for all. The practical reality is that in most countries the wealth still mostly flows to the few at the top — of the government, as opposed to shareholders. Development has not happened consistently on the ground.
What’s tricky about socialized energy is that it often lacks initiative. Sure, Saudi Arabia, has the prodigious state-owned Aramco, but most countries with a long history of socialized energy do not know how to manage upkeep, upgrades and investment in it wisely. Too often, leaders consider it a cash cow. Politically, it’s easier to have an anachronistic policy than re-think the whole thing. They expect energy companies to invest billions of dollars in developing fields, not for companies’ enrichment (which offers incentive) for the country’s benefit (which does not). In many countries, the mentality has been either, have those evil greedy capitalists sink the money into our country, or let them do all the investing — we’ve got other things to worry about!
In the past weeks, these foolish philosophies have come home to roost, in (of all places) Mexico, as well as Venezuela, Iraq, and Russia.
A quick overview: in Mexico in October, President Felipe Calderon finally closed Luz y Fuerza del Centro, a state-owned, bloated and antiquated electricity distributor, to much hue and cry. The Economist reported
The government was pumping $3 billion a year into Luz y Fuerza. Most of this went on fat salaries and even fatter pensions for its 44,000 employees and 22,000 pensioners. The company managed to lose 30% of its electricity through illicit connections and technical failures.
Iraq has been gearing up for its second round of oil lease auctions this week. The first round in June went poorly, with only one field (the giant Rumaila) going to a BP/China consortium. This would seem strange for a country with such huge oil reserves, but not when you consider the terrible terms they offered the oil companies: a fee of $2 for every barrel the oil companies drilled and then pumped out of the ground. The companies saw a profit at $4. The government decided to squeeze a little too much for its indispensable hydrocarbons only to find buyers losing interest and shopping elsewhere. I will write more on the Iraqi oil auctions later in the week.
Venezuela, which apparently relies on hydroelectric dams for a surprising amount of its electricity, has been facing power shortages due to lack of investment in alternatives and infrastructure development. There has been a drought as well. How to deal with this?
Mr Chávez has called on Venezuelans to take quicker showers. “Some people sing in the bath for half an hour,” he told a recent cabinet meeting, broadcast live. “What kind of communism is that? Three minutes is more than enough!” (The Economist)
(I am trying to imagine any other leader in the world doing this.)
Finally, Russia was told by an independent arbitration panel to pay shareholders of the formerly privately-held oil company, Yukos, $100 billion. Russia has a long history of nationalizing oil resources even when they have been contracted to a foreign oil company. The New York Times wrote,
From 2004 until the onset of the global financial crisis last year, the Russian government engineered a series of forced sales and bankruptcies in the oil and natural gas industry.
Yukos, you will remember, was expropriated in 2004, supposedly for back taxes but really in a political struggle between Vladimir Putin and oligarch, Mikhail B. Khodorkovsky. Russia will appeal and probably not pay in the end, although technically claimants could go after Russia’s assets outside the country.
The financial crisis and subsequent dive in oil and gas demand has changed Russia’s behavior: they are much friendlier for the time being to foreign investment rather than find money to do so on its own. In this terrible economic climate they are even being asked to consider the unthinkable: bailing out the home-grown oligarchs.
The moral to the story: if you own it — house, car, giant oil field — you are responsible for maintenance, repair, upgrades, and replacement. It’s painful for resource countries to find the money, but that’s what it means to actually own something. Resources may be the free lunch, but they’re only just so free.
