The three superpowers of oil production take instructively contrasting approaches to a fundamental question: Why produce oil?
It's a question worth asking occasionally. Producing oil is expensive, risky, and difficult. It disturbs the landscape. It creates messes when things go wrong. It requires mechanical intervention of complex natural systems typically very hot, highly pressured, and full of foul if not toxic substances.
Despite these inconveniences, companies and governments in more than 60 countries find production worthwhile. They produce oil to burn and to sell because they need energy and money. That's simple enough. What gets complicated is the interplay of those motives in the politics of individual producing countries, especially the superpowers.
Oil superpowers
In order, the heavy hitters and their July production of crude oil are Saudi Arabia, 7.6 million b/d; Russia, 7.4 million b/d; and the US, 5.8 million b/d. They account for 30% of worldwide production and have no volumetric rivals. Iran, which jockeys with China for the position, held the No. 4 ranking in July with 3.6 million b/d.
So is it mostly for energy or mostly for money that the superpowers produce oil?
Saudi Arabia produces oil mostly to sell. Its oil consumption, although rising, is minor by world standards, representing less than 20% of crude production. The monarchy built and sustains a national infrastructure with money from oil, over which it exerts sovereign control. Inseparability of oil production from the national treasury deprives the kingdom's notoriously low producing costs of practical meaning. To both lift oil and run the nation, the government can't afford to sell crude at much less than $20/bbl. And, despite Saudi belt-tightening of recent years, the threshold is rising.
Russia, by contrast, has privatized swiftly and has a strong recovery in oil production to show for its effort. The giant country has rising needs to burn and sell oil, which it consumes about one third as fast as it produces crude. Growth of the Russian economy, although more diversified than that of Saudi Arabia, depends heavily on oil ex- ports. And continuation of the resurgence in oil exports depends on huge exploration and development projects in arctic and far eastern frontiers.
While Russia has attracted domestic and foreign investment to rich opportunities in existing fields, its record with larger and riskier frontier projects is spotty. The big international companies able to handle work of that size and complexity want the stability that comes with production-sharing agreements anchored in law. The Russian government has been slow to respond, partly because newly privatized and politically influential Russian companies have other ideas about how foreign capital should enter the country. The dispute is far from over.
What's certain is that Russia has enormous undeveloped production potential. Its projects give companies the chance to install modern technology and produce oil at costs and on scales that rival those of Saudi Arabia. Needing money as well as energy, Moscow is much more hospitable than Riyadh to foreign capital, balky though it has been about production sharing.
The US just wants energy, cheap energy. It is, of course, the world's leading consumer of energy and oil, using the latter more than three times faster than it produces crude. To the extent its political system pays any attention at all to production, the context is nearly always consumption. At the national level, production's money-making dimension receives scant notice.
Lately on a budget-straining spending spree, the US government nevertheless refuses to lease most of the federal landholding. It eagerly denies itself the potential royalty and tax revenue from virtually all acreage off two of its three major coasts and part of the third and from the country's most promising onshore prospect—the Arctic National Wildlife Refuge coastal plain. In Moscow and Riyadh, heads must shake in wonder.
Political mosaic
So the No. 1 oil-production superpower hunkers behind nationalization. The No. 2 superpower privatizes its resource but holds major sources of capital at a distance. And the No. 3 superpower dedicates the most promising untested parts of its federally owned resource to a growing warehouse of land excluded from economic use.
What's most interesting about this political mosaic is that change to any of its pieces holds potential to fundamentally alter the world of oil.
