It used to be that the ‘seven sisters’ – the large private oil companies that today have been consolidated into BP, Chevron, ExxonMobil, and Shell – had monopolies on global oil production. Ahead of the 1973 oil crisis they controlled 85% of global oil reserves.
But nationalization of oil production since then has meant that their market share has declined dramatically. In fact, a large majority of global oil production is now controlled by state-owned Enterprises, or SOEs.
Although the big companies part of OPEC+ such as Saudi Aramco and Rosneft are familiar to most casual observers of energy politics, Norwegian, Chinese, Mexican, Venezuelan, Indian and Brazilian production, and many others, are also led by SOEs. North America has become unique in that its oil production is still led by the private sector.
In an investment environment guided by ESG (environmental, social and governance) principles, this has become a handicap. Responding to activist investor demands, including from large pension funds, endowments and foundations, many large publicly traded oil companies have slowed production, cut costs and made plans to switch to renewable energy in the past few years.
This is a rational response to the investment market: according to DivestInvest, an NGO encouraging and tracking such investments, about 1,500 investment institutions overseeing a combined $39.2 trillion of assets are now committed to divesting from fossil fuels, according to a report released last Fall. But it is a consideration that SOEs do not face.
“Europe is in the middle of the worst energy crisis experienced in a generation. And with the closure of nuclear plants in Germany and Belgium, this crisis will continue…” https://t.co/1Y3qMa6qyG
— Canada Action (@CanadaAction) March 2, 2022
This is on top of other headwinds facing North American oil production. Companies have embraced capital discipline, responding to the collapse of demand in the early days of the pandemic, the inability to get major new projects approved, and the hangover from overspending in the late 2010s. The focus is now on dividends and buybacks rather than expansion. And the result is predictable: global oil inventories are concerningly low and prices are becoming untenably high. There is a structural gap between supply and demand.
Suppose there was enthusiasm from a climate policy perspective for starving North American and Western European oil companies of investment. In that case, the recent events in Eastern Europe must give us pause and look at this trend from a security perspective. We are actively giving up market share for an essential good – energy – to SOEs, the majority of which are controlled by autocratic states.
The West and its allies must have access to reliable and affordable sources of fossil fuels up until the last day we use them, and the consensus is that it will be for decades to come. Putting in policies that deliberately discourage investment and domestic oil and gas production means that we and our allies will become more dependent on oil from autocratic states. We are seeing the implications in real time – it gives governments with values very different from ours significant leverage over our economies.
Canada is the world’s fourth-largest exporter of oil and has the third-largest known reserves, and is alone as a democracy in the top rankings (The United States is an enormous producer of oil but consumes roughly the same amount domestically). Assessing the state of our international politics, it would be unwise, irresponsible even, to give up market share to OPEC+. The stability of the global system requires access to reliable energy supplies.
If and when global demand for fossil fuels declines, Canada’s market-based system will respond accordingly. But forcing a supply-side strategy, based on starving our domestic oil and gas sector of investment and making it impossible to build any new pipelines or projects, will make western countries like Canada vulnerable in the future. This was obvious before. It’s a grim reality today.
“We don’t have large scale export capacity pointed in the right direction”
— Canada Action (@CanadaAction) March 1, 2022
Let’s think strategically about our resources so we can have the biggest positive impact on Canadian families, the global climate, and our partners around the world. #CdnEnergy pic.twitter.com/joxFRLfPJy