Privatization of Oil Companies and saving mother nature?

I recently argued on the Huffington Post that the reason there has been a upward trend on oil prices since 2000 is to be found on the supply-side. More precisely, on the supply side of nationalized oil companies. As I pointed out, even if somewhere around 90% of oil reserves are owned by state-owned entreprises, some 75% of production comes from them indicating already a higher productivity pattern amongst private producers. In fact, when one compares nationalized oil companies and their staff relative to their production, they need a substantially greater number of employees per barrel produced than do the private producers. As a result, I argued that liberalization and privatization of oil markets in many countries like China, Brazil, Mexico, Venezuela, Iran and Saudi Arabia would lead to overall price drops.

However, when I debatted this issue with accountant Leo-Paul Lauzon, he told me that pump prices – even when accounting for purchasing power parities – in those countries are lower than in Canada, the US or Great Britain. While this is true, it comes at a great cost. The map below illustrates which countries subsidize their gasoline prices by selling it below cost of production and to what extent they do so (it comes from the International Energy Agency)

As one can see from this map, a vast part of the population of the planet has its gasoline subsidized to a high extent. While it may make some individuals happier for their wallets in the short run, it does not help them in the long run. First of all, prices are not about being low or high, they’re about being right. When prices reflect market conditions and not government enforced regulations, they reflect scarcity and inform actors on how to behave to consume intelligently or produce more efficiently. Businesses don’t compete to become more efficient, the subsidy either comes directly from taxpayers or indirectly because more taxes have to be collected elsewhere and consumers don’t consume efficiently. The last point is where privatization of those oil companies could actually benefit the environment. In the short term, a gradual dismantlment of oil corporations owned by governments and a sale of their assets to private investors would lead to gradual price increases in those countries. In the long run, pump prices will fall adjusting for inflation once new investments are made to increase supply, productivity and efficiency. They will also fall because consumers will invest in energy-saving technologies. How much energy (and pollution) would be saved with such a dismantlment? Well, we are talking about preventing the emission of 2,4 gigatons of greenhouse gas emissions between now and 2020. This represents 7% of the total projected GEG emissions from energy production if the susbidies remained in place.

Compare this to the 450 scenario. This scenario is a very agressive environmental plan to reduce GEG emissions and global warming  which would limit the long-term concentration of greenhouse gases in the Earth’s atmosphere to 450 parts per million of carbon-dioxide equivalent. In short, we would have to reduce emissions by 3.5 gigatons by 2020. Another estimate, more conservative this time, of the benefits of eleminating fossil fuel subsidies (via privatization, deregulation and liberalization) is that emissions would drop by 1.5 gigatons by 2020. In short, some 43% of the effort to reduce greenhouse gas emissions would come from a set of policy aimed at removing government intervention and leaving more scope for private markets.

So, yes privatizationcanbe environmentaly friendly…


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