U.S. and Global Demand for Oil
There are two ways to benefit from the discovery of oil: through use of the oil itself, and through profit from money generated by its sale.Crude oil is the most commonly traded commodity in the world, and oil and its byproducts are used for a range of services and products, from transportation, industry, heat and energy, to the production of plastics, chemicals and more. Though the United States is one of the largest oil producers in the world, oil consumption in the country is around 20 times that of the global average. Therefore, the United States is also one of the world's leading oil importers. According to the U.S. Energy Information Administration, the United States relies on foreign imports for an estimated 33 percent of the petroleum products consumed in the country. Worldwide, oil consumption is on the rise: In 2010, as Big Men was being filmed, global consumption of petroleum products and other liquid fuels was approximately 87 million barrels per day, and the Energy Information Administration estimates that by 2040 that number will increase by one-third, to approximately 115 million barrels per day.
The petroleum industry can be very lucrative (four of the Fortune 500 top ten are international oil companies), but it's also a risky and capital-intensive business. Exploration for oil resources is both technically complicated and costly. Today, discovery of new oil fields (through technologies that range from seismic scans to the actual drilling of test wells) is rare, and only the first step for countries hoping to benefit from the resource. Once a potential oil well is discovered, the resource must be extracted and the raw material (crude oil) must be refined, then transported to markets and, finally, to consumers. This process requires a broad range of employees, equipment, contracts and other supporting industries, such as shipping, banking and insurance. Nations need both capital and technical expertise to explore, extract, develop and sell their resource and often have to look to foreign experts and foreign investment. International oil companies put up huge investments and take major risks, especially in developing oil fields. Collectively, oil companies may spend billions of dollars exploring a promising oil field, only to find it dry or a poor source of supply, or to discover that they've run into non-geological issues (such as local conflicts) and their investments are lost.
Sources:
» Fortune. "Global 500 2014."
» InvestorGuide. "What are the Most Commonly Traded Commodities?"
» PetroChase. "Oil Drilling Investments--An Expensive and Risky Venture."
» Revenue Watch, Open Society Institute. "Covering Oil: A Reporter's Guide to Energy and Development."
» U.S. Energy Information Administration. "How Dependent Is the United States on Foreign Oil?"
» U.S. Energy Information Administration. "International Energy Outlook 2013."
» Window on State Government. "Crude Oil."
Global Models of Oil Ownership
The U.S. Model: Privately Owned Oil
In the United States, oil is privatized, meaning that individuals and companies can claim ownership of oil found in the country. Although laws and regulations surrounding oil and gas production differ state-to-state, in general, landowners in the United States own the minerals under their land and have the right to extract the oil, lease or sell the rights and profit from the sale or lease. The U.S. government also receives direct oil revenue through millions of acres of government-owned onshore and offshore oil reserves (as the land-owner in these cases, the government owns the rights to any oil found). Federal and state governments also own all offshore oil reserves and collect royalties from oil and natural gas production on federal lands and offshore. The U.S. government is not, however, the sole proprietor of the rights to the nation's oil, nor does it produce oil (production is left to private companies). Therefore, individuals and companies can also see major profits from oil production.
State-Run Model: Publicly Owned Oil
As seen in the film, throughout most of the rest of the world, national governments own all the rights to the mineral resources found within their borders and offshore. If a property owner discovers oil under his or her land, that oil belongs to the government, not to the individual. The idea behind state-owned oil is that revenues from oil--a national resource--will be redistributed for the benefit of the economy and the people as a whole.
In the state-run model, revenue is usually funneled through state-run oil companies, also called national oil companies, which act like private companies but are owned by the government. National oil companies own most of the world's known oil reserves (85 percent), as well as the majority of global oil production (58 percent). Many national oil companies open up opportunities for private international oil companies to explore, develop and sell the oil they control, and negotiate contracts to share the profits and investments.
One of the potential challenges of a state-run model is that the government has to act like a business, meaning that it must focus on profits, regulate itself and juggle complex negotiations with major oil companies.Moreover, the proceeds from state-run oil companies filter through the hands of many individuals before being distributed back out to local communities, and revenues may be mismanaged or embezzled, or misdirected to support political corruption or military activity. Strict laws and regulations are needed to keep corruption in check.
Oil is a high-risk, high-profit industry, but the accounts and funds of the major players can be difficult to track. Lack of transparency about contracts signed, the amounts governments receive, the amount of the resource produced and how funds are used provide many opportunities for corruption. A number of oil and gas companies do not disclose the identities of their equity holders and subsidiaries, and many refrain from publishing country-specific information, meaning that the royalties, taxes and fees paid to foreign governments are not disclosed. Though there are international agreements and legislation on corruption, national laws and regluations vary. Companies operating according to strict regulations and reporting requirements may be in negotiation or competition with others that are held to few or lax standards. Transparency International, Oxfam and the Extractive Industries Transparency Initiative, among others, have called on oil and gas companies to provide more detailed financial reports so that both private companies and national governments may be held accountable for taxes and funds.
Sources:
» Bureau of Ocean Energy Management. "Outer Continental Shelf."
» EnergyAnswered. "How Much Do U.S. Oil Companies Pay in Royalties to Government?"
» Geology.com: "Mineral Rights."
» Hackel, Joyce. "Is $20 Billion in Missing Oil Wealth the Explanation for Extremist Group Boko Haram?" PRI, March 13, 2014.
» HG.org Legal Resources. "Oil and Gas Law."
» Institute for Energy Research. "Federal Assets Above and Below Ground."
» National Democratic Institute for International Affairs. "Transparency and Accountability In Africa's Extractive Industries: The Role of the Legislature."
» "Oil, Politics and Corruption." The Economist, September 18, 2008.
» Revenue Watch, Open Society Institute. "Covering Oil: A Reporter's Guide to Energy and Development."
» Transparency International. "Oil and Gas."
» U.S. Energy Information Administration. "Overview of U.S. Legislation and Regulations Affecting Offshore Natural Gas and Oil Activity."
The Resource Curse
In the film, the Ghanaian government expresses concern about the potential for the discovery of commercial oil bringing on the "resource curse." The resource curse refers to a common problem in which a country in need of economic growth ends up with even more economic and social instability after the discovery of a major resource. According to a report from the Open Society Institute's Revenue Watch, "oil- and mineral-driven resource-rich countries are among the weakest growth performers, despite the fact that they have high investment and import capacity," and often have high rates of corruption, poverty, malnutrition and child mortality, as well as poor health care, education and life expectancy. The discovery of oil may bring hope for economic upturn to developing countries, but such countries may also lack the infrastructure, stability, experience and capital to use the resources to their citizens' advantage. The resource curse does not refer to issues inherent to a resource, but rather to the consequences of a nation's dependence on one resource as its main export and source of revenue, and the mismanagement of that resource.
The resource curse is attributed to many factors, including lack of economic diversification, inflation, dramatic fluctuations in oil prices and corruption. Oil markets are highly volatile, and their volatility may cause a country to experience sudden increases and drops in income, making it difficult to manage the nation's budget. Inflation can also cause a lack of economic diversification: as the exchange rate of the local currency increases, other less valuable resources become non-competitive, and the country's dependence on oil rises.
Unlike other industries, oil does not necessarily bring an increase in local employment. Oil is a technologically sophisticated industry that requires high-level skill-sets and a relatively small number of employees. Any required unskilled jobs are often short-term. Specialized workers are frequently brought in from abroad, and the short-term influx of foreign workers and foreign capital often causes inflation--which can greatly increase the cost of living for locals. Because foreigners are providing the necessary labor, there is little incentive to train or educate the local population. Over time, countries become reliant on their oil income, and local education and employment actually decrease.
Oil requires a lot of money, specialized expertise and, often, involvement from foreign companies--so the money from oil does not naturally go into the local economy. It often goes straight into the government through deals made with those foreign companies or markets, and it must then be filtered back into the communities.
According to the Open Society Institute's Revenue Watch, petroleum is also associated with civil war more than any other resource or commodity. This is not necessarily due to oil itself--there are many contributing factors to instability and violence--but oil may worsen or contribute such conditions because of the value and volatility of oil as a commodity, and as a result of companies, governments and individuals trying to draw the biggest gains from oil as possible, often with conflicting goals.
Sources:
» Revenue Watch, Open Society Institute. "Covering Oil: A Reporter's Guide to Energy and Development."
» The United Nations Interagency Framework Team for Preventive Action. "Toolkit and Guidance for Preventing and Managing Land and Natural Resources Conflict: Conflict Prevention in Resource-Rich Economies."