The Oil World's New Bullies

Don't cry for Big Oil yet, but Russia, Iran, Venezuela and even Chad are calling the shots.
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Move over, Exxon Mobil (XOM) - Get Report. Step aside, BP (BP) - Get Report. Run away home, Chevron (CVX) - Get Report. There's a new set of oil bullies on the block. And they're named Russia, Iran, Venezuela and Chad.

No need to feel sorry for the Exxon Mobils of the world while you're filling up your tank with $3-a-gallon gas. Who can feel sorry for a company that earned $36 billion in 2005, more than any U.S. company

ever

?

But as you seethe about $3 gas now and worry about $4 gas next year, remember that Big Oil isn't calling the shots anymore. Venezuela has forced Exxon Mobil to slink out of the country and has made Chevron and

ConocoPhillips

(COP) - Get Report

pay a 75% hike in royalties and a 50% increase in taxes and say, "Thank you, sir, may I please have another?"

Russia is blackmailing all of Europe by saying "Sell us your natural-gas delivery companies or no natural gas for you." Iran has thumbed its nose at the U.S. and the U.N., figuring that the world needs its oil too much to actually do anything about its nuclear weapons program. And Chad got the World Bank, the U.S. government and Exxon Mobil to cough up disputed royalties by threatening to shut its oil pipeline.

Boy, you know you're in trouble when Chad, a country of 8.1 million people living on 1.3 million square miles of desert, can push you around.

When Exxon Mobil Is Small Fry

How did Russia, Iran and Venezuela get to be the new bullies of oil?

It's not simply because they export lots and lots of oil -- although that certainly doesn't hurt. In 2004, according to the U.S. Energy Information Administration, Russia was the world's second-largest oil exporter after Saudi Arabia. Iran was the second-largest oil exporter in OPEC (the Organization of Petroleum Exporting Countries) after, again, Saudi Arabia, and the fourth-largest oil exporter in the world. Venezuela came in at No. 5. (For the record, Norway rounded off the list of the top five exporters at No. 3. It's

only

the seventh-largest oil producer in the world, but because of its small population, the country exports almost all of what it pumps.)

The clout of these new bullies really results from their stranglehold on the world's big pools of discovered and discoverable oil.

Let's take the discovered, or proven, reserves first. Of the global oil giants, Exxon Mobil has the biggest proven reserves -- 11.2 billion barrels, according to Energy Intelligence Research.

But that makes the company only No. 12 in the world. And every company ahead of it in the rankings is an oil company controlled by a national government. That includes Russia's

Gazprom

and

Lukoil

at No. 9 and No. 10, with 19 billion and 16 billion barrels, respectively, Venezuela's

PDVSA

at No. 5 with 77 billion barrels, and Iran's

NOIC

at No. 2 with 133 billion barrels. (Saudi Arabia's

Aramco

is No. 1 with 263 billion barrels of proven reserves.)

Moving on to undiscovered reserves, it is impossible, of course, to predict where the world's undiscovered reserves are -- that's why they're called "undiscovered," after all. But the oil industry's odds-makers point to the border between Saudi Arabia and Kuwait, areas around the Caspian Sea belonging to Iran, Venezuela's Orinoco River Basin and Russia's Siberian north.

Oil-supply optimists, such as Daniel Yergin's Cambridge Energy Research Associates, calculate that the world will be able to raise oil production by as much as 15 million barrels a day by 2010. That would be an increase of 18% from 2005 production of 82 million barrels a day. If the International Energy Agency's projection that global oil demand will grow by 1.6% a year during this period is accurate, then that increase in supply would be more than enough to meet global oil demand.

Throwing Their Weight Around

But look where that increased production will have to come from -- from the big proven and unproven reserves on the territories of the bullies or lands effectively controlled by them. Iran, for example, hopes to increase production from roughly 4 million barrels a day in 2005 to 5.6 million barrels a day in 2010. Venezuela's Orinoco River Basin contains an estimated 235 billion barrels of heavy oil -- unproven reserves equal to 90% of Saudi Arabia's proven reserves.

And Russia effectively controls access to increased production from the nations of Central Asia. So, for example, the same day that brought news from Lukoil that it would increase production from Kazakhstan by 40% by 2010 brought news from Chevron that it had accepted Russian demands and appointed the Kremlin's choice to head the consortium controlling the pipeline that ships oil from Kazakhstan across Russia for export.

The bullies' leverage on the world's energy supply is even greater if you consider that some of the world's biggest oil fields outside the control of the bullies or of OPEC are mature and look like they're headed into decline. While predicting a field's peak is always tricky, as since new technologies have been remarkably effective at prolonging the life of "mature" fields, most experts are predicting that production from the big oil fields of the North Sea and Alaska will peak by 2010 or 2015. So the bullies' share of global oil production will climb even higher, thanks to lower production from those fields.

The new oil bullies are showing no reluctance to throwing their weight around. Russia has threatened to cut off energy supplies or to jack up prices to force some of its neighbors to give Gazprom control of pipelines that move natural gas from Russia to European markets. Gazprom's deputy chief executive Alexander Medvedev told European Union officials the outfit would retain its export pipeline monopoly for decades.

Iran is clearly counting on the oil deals it has signed with China to ensure Chinese support in its battle with the U.N. and the U.S. over its nuclear weapons program. So far that's working just fine. China and -- no surprise -- Russia have resisted calls for a U.N. Security Council resolution condemning Iran. Venezuela has seized oil fields from

Total

(TOT) - Get Report

and

ENI

(E) - Get Report

, and President Hugo Chavez has sent cheap oil to Cuba, Nicaragua and other Latin American countries in an effort to limit U.S. clout in the region.

Giving In -- or Not

So how do you deal with an oil bully?

Exxon Mobil has decided to take its ball home and wait for the bullies to self-destruct. In Venezuela, the company refused to renegotiate deals and simply walked away from projects. There's some evidence that in the long run Exxon Mobil's strategy will work. Production from the national oil company PDVSA is down about 60% under Chavez because of poor management in the oil fields.

Most oil companies aren't sitting on reserves the size of Exxon Mobil's, and they don't have the $29 billion cash balance that Exxon Mobil had at the end of 2005. Chevron, for example, which has been struggling to show production growth despite a raft of new discoveries, has concluded that it needs to get along with the bullies somehow. Besides agreeing to put the Kremlin's man in charge of a key pipeline, the company has entered into talks in Venezuela that will increase taxes and royalties and cut production but still keep the company in the game.

A Declaration of Dependence

The countries of the European Union have decided to strike the best deal that they can with the Russians now, while they tax and invest in solar, wind and nuclear projects to reduce their future dependence on Russia for natural gas. So, for example, Portugal, hardly one of the richest countries in Europe, requires utilities to pay 0.31 euros -- about 37 cents -- a kilowatt hour for electricity produced from solar projects. (Electricity costs in the U.S. run about 10 cents to 14 cents per kilowatt hour.) Germany, Italy and Spain have similar programs. The immediate pain is worth it, European countries like these have concluded, to get rid of these bullies.

And the U.S.? Government policy is a dreadful combination of the laughably irrelevant with the downright dangerous. On Earth Day, President Bush touted hydrogen-powered cars as a future solution to our oil addiction -- and his administration has requested $5 billion over the next five years for hydrogen research that may result in a marketable hydrogen vehicle someday. Meanwhile, the administration has proposed a fiscal 2007 budget that would slash funding for research to improve energy efficiency -- today -- by 20% from 2006 levels.

And to get angry drivers off their backs, Republicans in Congress have proposed sending out $100 checks so drivers can keep buying gas to fill their cars at the pump.

That will sure fix these bullies. Raise gas prices to $3 a gallon, huh? Well, we'll pay that. And we just dare you to raise it some more.

It's a message oil bullies -- old and new -- will certainly understand. It's just not the one that we ought to be sending.

At the time of publication, Jubak did not own or control any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.

Jim Jubak is senior markets editor for MSN Money. He is a former senior financial editor at Worth magazine and editor of Venture magazine. Jubak was a Bagehot Business Journalism Fellow at Columbia University and has written two books: "The Worth Guide to Electronic Investing" and "In the Image of the Brain: Breaking the Barrier Between the Human Mind and Intelligent Machines." As an investor, he says he believes the conventional wisdom is always wrong -- but that he will nonetheless go with the herd if he believes there's a profit to be made. He lives in New York. While Jubak cannot provide personalized investment advice or recommendations, he appreciates your feedback;

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to send him an email.