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Two Fiery Explosions Later, Should We Privatize Government Oil Companies?

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Harry Wilmerding
July 10, 2021 12:52 PM ET
  • Politicians and environmental activists quickly blamed capitalism and corporate greed for two offshore fires near oil rigs, but the oil rigs ended up being state-run enterprises. 
  • Nationalized oil companies have had a history of unsafe and inefficient production, according to an oil industry experts.
  • “Safety is an endemic problem for many of the nationalized oil companies relative to private oil companies,” Johns Hopkins University economic professor Steve Hanke told the Daily Caller News Foundation.

Politicians and environmental activists quickly attributed capitalism and corporate greed for two fires near oil rigs this week, but the drilling projects ended up being state-run enterprises, multiple sources reported.

The causes of the two fires on opposite sides of the world are still being investigated but may be due to natural phenomena, according to preliminary reports from the oil companies. Nationalized oil companies have had a history of unsafe and inefficient production, according to an oil industry experts.

“Safety is an endemic problem for many of the nationalized oil companies relative to private oil companies,” Johns Hopkins University economic professor Steve Hanke told the Daily Caller News Foundation.

“The general sense with all things the government gets involved in and nationalizes is that it gets politicized. Decisions become political, about preserving power and wealth rather than business,” Dan Kish, a senior fellow at the Institute for Energy Research, told the DCNF.

A fire in the Gulf of Mexico occurred on July 2 near a Petróleos Mexicanos oil platform, according to Bloomberg.

Another fire broke out in the Caspian Sea on Sunday, near the Azerbaijan national oil company’s offshore gas field, according to Reuters.

New York City’s Democratic Mayor Bill Di Blasio tweeted that the PEMEX fire resulted from corporate greed.

Democratic New York Rep. Alexandria Ocasio-Cortez blamed legislators unwilling to pursue the Green New Deal in a Tweet.

Democrat California Gov. Gavin Newsom and Independent Vermont Sen. Bernie Sanders slammed the U.S. dependence on oil and lack of spending on climate change on Twitter.

Climate activists Greta Thunberg and Rosanna Arquette wasted no time slamming the oil industry’s environmental impact, while British politician Laura Pidcock linked the fire to privately-run companies.

The activist’s and politician’s complaints came before the companies released a statement explaining the incidents, and it’s unclear how capitalism or corporate greed could be the cause since both offshore drilling projects were state-run.

Petróleos Mexicanos, the Mexican state-run oil company also called Pemex, said on Monday saying an electric storm triggered the fire that sparked a gas leak from a subsurface pipeline, Reuters reported.

The exact cause of the fire is still unknown and Pemex said they are assembling a team to investigate the origin of the blast, according to Reuters.

“There was no oil spill, and the immediate action taken to control the surface fire avoided environmental damage,” Pemex said in a statement, reported by Reuters.

The Caspian Sea fire was caused by a mud volcano eruption near Azerbaijan’s state-run oil company SOCAR’s offshore gas field, according to the BBC.

“No incidents have happened at the offshore field and industrial structures controlled by SOCAR, work continues normally,” SOCAR spokesman Ibrahim Akhmedov said, according to CNN.

The fire did not damage SOCAR’s oil and gas infrastructure or cause any injuries, according to Akhmedov, The Washington Post reported.

The area around SOCAR’s oil and gas fields is rich in mud volcanoes, according to the Post.

Azerbaijan’s Oil Workers’ Rights Protection Committee said the fire occurred on a company site in the Umid gas field, but SOCAR denies the claim, according to Reuters.

The fires and the reaction it generated highlight inefficiencies of nationalized oil companies compared to privatized entities.

Pemex is an example of an inefficient state-run entity as they have abundant supplies and reserves but still need to import foreign oil.  according to Kish.

This is partly due to the companies inability to produce enough oil to meet demand, but the bigger problem is “the inefficiency of the government-owned company,” Kish said.

The countries that have nationalized their oil industry lack competition within the market, Kish explained.

Competition incentivizes companies to produce safely and efficiently, Kish said.

“If the private sector can do something, it typically competes against other companies. If they don’t do well with all aspects of business, including safety, human health, and environmental safety, their mistakes can be very costly,” Kish said.

The private sector also sees acts of nepotism and favor sharing, Kish noted, but the lines of authority within a private company make decisions that reflect performance and meritocracy rather than political and personal interest, he said.

Private companies can’t run as a political entity where profits go directly to the people in charge. Therefore, they have the funds to invest in high-end employees’ higher quality material, which helps drive innovation, efficiency, and safety, Kish said.

Kish points to Venezuela, which has the largest oil reserves globally, as an example of an inefficient and poorly run state-run oil company.

“They can’t grow their oil fields because the politicians milk the company for all the money rather than investing in equipment and personnel,” Kish said.

State-run oil companies also experience high price pressure, as they are constantly cutting costs due to inefficient operations. To cut costs, the nationalized companies hire cheaper labor, buy inexpensive and inferior quality materials and often defer maintenance which is dangerous to both the environment and the employees.

“If a state-owned company needs to invest $100 million in an oil rig to stay productive, the politicians in charge would rather use the money to help them maintain power and wealth. When you politicize anything, it becomes subject to being corrupt,”  Kish said.

If the U.S. were to nationalize its oil companies, “It would become a warzone,” Hanke said.

The U.S. would see politicians, not industry experts conduct business, Kish explained. Political gain, wealth preservation, and nepotism would control the industry, according to Kish.

“If it ever came to a point where the government nationalized oil companies, it would only be part of the problem. If they can nationalize the oil industry, they can nationalize anything.” Kish said.

“If you love the DMV, then you will love a national oil company. We would have no option but to go to them for gas,” Kish said.

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