The nationalization of oil supplies refers to the process of confiscation of oil production operations and their property, generally for the purpose of obtaining more revenue from oil for the governments of oil-producing countries. This process, which should not be confused with restrictions on crude oil exports, represents a significant turning point in the development of oil policy. Nationalization eliminates private business operations—in which private international companies control oil resources within oil-producing countries—and transfers them to the ownership of the governments of those countries. Once these countries become the sole owners of these resources, they have to decide how to maximize the net present value of their known stock of oil in the ground. Several key implications can be observed as a result of oil nationalization. "On the home front, national oil companies are often torn between national expectations that they should 'carry the flag' and their own ambitions for commercial success, which might mean a degree of emancipation from the confines of a national agenda."
According to consulting firm PFC Energy, only 7% of the world's estimated oil and gas reserves are in countries that allow private international companies free rein. Fully 65% are in the hands of state-owned companies such as Saudi Aramco, with the rest in countries such as Russia and Venezuela, where access by Western companies is difficult. The PFC study implies political groups unfavorable to capitalism in some countries tend to limit oil production increases in Mexico, Venezuela, Iran, Iraq, Kuwait and Russia. Saudi Arabia is also limiting capacity expansion, but because of a self-imposed cap, unlike the other countries.
History
This nationalization (expropriation) of previously privately owned oil supplies where it has occurred, has been a gradual process. Before the discovery of oil, some Middle Eastern countries such as Iraq, Saudi Arabia, and Kuwait were all poor and underdeveloped. They were desert kingdoms that had few natural resources and were without adequate financial resources to maintain the state. Poor peasants made up a majority of the population.
When oil was discovered in these developing nations during the early twentieth century, the countries did not have enough knowledge of the oil industry to make use of the newly discovered natural resources. The countries were therefore not able to mine or market their petroleum.
Major oil companies had the technology and expertise and they negotiated concession agreements with the developing countries; the companies were given exclusive rights to explore and develop the production of oil within the country in exchange for making risky investments, discovering the oil deposits, producing the oil, and paying local taxes. The concession agreements made between the oil-producing country and the oil company specified a limited area the company could utilize, lasted a limited amount of time, and required the company to take all the financial and commercial risks as well as pay the host governments surface taxes, royalties, and production taxes. As long as companies met those requirements, governments promised the companies would be able to claim any of the oil they mined. As a result, the world's oil was largely in the hands of seven corporations based in the United States and Europe, often called the Seven Sisters. Five of the companies were American (Chevron, Exxon, Gulf, Mobil, and Texaco), one was British (British Petroleum), and one was Anglo-Dutch (Royal Dutch/Shell). These companies have since merged into four: Shell, ExxonMobil, Chevron, and BP. The nations with oil reserves were unhappy with the percentage of the profits they had negotiated. But, due to the inclusion of choice-of-law clauses, the sovereign host countries could not simply change the contracts arbitrarily. In other words, disputes over contract details would be settled by a third party instead of the host country. The only way for host countries to alter their contracts was through nationalization (expropriation).
Although undeveloped nations originally welcomed concession agreements, some nationalists began to argue that the oil companies were exploiting them. Led by Venezuela, oil-producing countries realized that they could control the price of oil by limiting the supply. The countries joined together as OPEC and gradually governments took control of oil supplies.
Before the 1970s there were only two major incidents of successful oil nationalization—the first following the Bolshevik Revolution of 1917 in Russia and the second in 1938 in Mexico.