The Politics of Oil: Controlling Resources, Governing Markets and Creating Political Conflicts.

AuthorConsidine, Jennifer

The Politics of Oil: Controlling Resources, Governing Markets and Creating Political Conflicts, by Dag Harald Claes (Edward Elgar, 2018), 409 pages, ISBN: 978 1 785536 018 3.

An accomplished writer and leading expert in international relations, Dag Harald Claes brings his expertise to bear and provides readers with a captivating and accessible account of the history of global oil markets. This book tackles two of the most complex subjects in modern history--politics and oil--illustrating the vast array of political aspects that relate to international oil markets. To underscore the necessity for a rigorous, interdisciplinary approach to these tantalizing issues, the Preface begins with a direct quote from Albert Einstein. "When asked how it could be that the mind of man had discovered the structure of the atom, but was unable to devise political means to control it. [Einstein] replied: "It is because politics is more difficult than physics." In the words of the author himself, the book is a "humble attempt to cover everything you should know about oil and politics." In this regard it has succeeded, providing several critical insights to the current status of world oil markets.

Section one, Resource Governance, covers the role of governments and their sovereignty over oil resources. From the regulatory oversight of the supply chain to intricate geopolitical concerns such as the Resource Curse, the section begins with a simple question, "who can rightfully claim the benefits of natural resources like oil. In other words, who owns nature?" In answer the author provides an historical overview of resource rent from Riccardo to Hotelling and traces the evolution of the theory of property rights from the 'Worldly Philosopher' John Locke to the present day. Multifaceted issues such as sub-sea resources are addressed and simplified. (Heilbroner, 2020) To cite only one example: The generally recognized principle in international law is that natural resources "in the ground or under the seabed from the outset belongs to the state under whose territory or continental shelf the resources are found." Yet many of the world's offshore oil fields fall outside a State's territorial waters and into waters otherwise covered by international law. (Trevisanut, 2020)

Claes shows us that the distribution of resource rights is as varied as the distribution of resource wealth itself. Three countries hold 46 percent of the world's proven reserves and more than 80 percent of these are held by only 8 countries. There are only two countries in the world--the U.S. and Canada--where the property rights of private landowners include the right to explore and produce oil resources in the ground. Resources in the rest of the world, including over 80% of Canada's oil resources, are governed by a 'public governance system of oil resources.' As a result, the governance of each oil producing country has its own unique system. Across this diverse array, there are some common features:

(i) a comprehensive system for regulating the relationship between the state (owner and regulator) and the oil companies which explore for and produce oil;

(ii) contract regimes, including concession agreements, production sharing agreements, and service agreements, and

(iii) fiscal regimes dictating the means by which governments can capture economic rent from oil companies. These include signature bonuses, royalties, profit taxes and production sharing, and direct government participation.

This section would benefit from a discussion of intellectual property considerations and following Smith et al. (1993) technology transfer agreements could be added to this list.

Chapter 2, Governing Oil Production, begins with an overview of the economics of oil extraction. Claes begins the chapter with Harold Hotelling's theory of exhaustible resources. The goal is to maximize the total profit of the oil asset. To achieve this goal, in a simplified world, the price of oil must rise at the interest rate so that the profits from leaving the oil in the ground match the profits from extracting and selling the oil today and leaving the money in the bank. As summarized by Dahl (2015, p. 340), with a finite or fixed amount of oil to be sold and no operating costs, if "producers dynamically optimize in this simple model, market forces should cause prices to go up at the interest rate."

Hotelling's rule is predicated on several assumptions including the idea that the entire stock of oil must be non-renewable, exhaustible and known to the producers. This is a proposition that many economists suggest invalidates the applicability of Hotelling's rule to international oil markets. In Adelman's view, "The total minerals in the earth is an irrelevant non-binding constraint. If expected finding and development costs exceed the expected net revenues, investment dries up, and the industry disappears." (Adelman, 1993a, p. 220) In Adelman's alternative formulation the oil price is not a reliable indicator of scarcity of supply. Instead "the early warning signal of scarcity is a persistent rise in development costs and the in-ground value of oil reserves". (Adelman, 1993a, p. 226) "'Limited resources' raise prices by forcing a persistent increase in marginal cost: the amount that must be newly invested to develop an additional barrel of reserves and capacity. We have seen that investment needed for an additional daily barrel of capacity fell, even with...

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