Oil's Nationalization & Geo-Political Turbulence

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Matt H

In Venezuela, oil generates 80% of the country's total export revenues and contributes 50% of total government income. Oil accounts for 95% (!) of government revenues in Nigeria and 76% of government revenues, and the it accounts for 60% of export revenues in Russia. It's little wonder that these countries leaders want to control this key resource and source of government revenues. Imagine if this were the fiscal scenario in the U.S. and the U.S. Congress were looking for new sources of revenues to fund social programs like Social Security or Medicaid -- isn't it likely that Congress, always fearful of hiking taxes, would, look to a great money-generator such as oil for a few extra dollars? Especially if much of the oil output were not going towards U.S. consumption, but rather was being exported, say, to China.

Of course, as a democracy and a country where property rights are inherently supported, such nationalism is rare. However, recent rising oil and gas prices have only added to geo-political instability in the world's oil- and gas-producing regions. Energy nationalism in practice can mean everything from expropriation of assets (e.g., in Bolivia, where natural gas assets have been literally taken over by government) to heavy-handed negotiations of royalties with foreign investors. The former is viewed negatively, while the latter is somewhat par for the course in developing oil and gas assets. The average government take from local oil projects, in terms of royalties, tax revenues, etc., is 60% of total revenues generated, so governments are tending to get their share.

It all depends on Norway...

Top Gas Exporters don't fare much better

The crux of the problem is that, without making reference to causality, the top oil and gas producing countries are generally "riskier" than the average country for foreign investment. As oil and gas prices go up, one can expect this risk to increase. See, for example, the charts at left, compiled from EIA and Transparency International data, demonstrate the real risk that the world runs every day it keeps pumping oil and gas. The rank is awarded by Transparency International for the country's "perceived corruption", where a rank of "1" indicates the world's least corrupt country (Finland, by the way), and a rank of "163" indicates the world's most corrupt country (Haiti, which unfortunately has limited natural resources on top of it's corruption problem).