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Home Archive July 2010 Issue Issue Content Understanding Resource Nationalism in the 21st Century

Understanding Resource Nationalism in the 21st Century

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"So we have a choice to make.  We can remain one of the world's leading importers of foreign oil, or we can make the investments that would allow us to become the world's leading exporter of renewable energy …We can let the jobs of tomorrow be created abroad, or we can create those jobs right here in America and lay the foundation for lasting prosperity.”  
Statement on the official web site for the White House and President Barack Obama

Resource nationalism in oil-importing states appears on the rise.  Oil price volatility underpinned by demand growth has led China, India and others to increase state support for national-flag firms in order to increase the state’s energy self-sufficiency. Both Chinese and Indian National Oil Companies (NOCs) have made energy investments worldwide, including in Sudan and Iran.  Long-standing oil importers such as the United States and Japan have also[Kreyling, Sean J]  reenergized policies designed to increase domestic production of crude and crude substitutes, or have subsidized national-flag firms, in the name of energy independence.
 
A common explanation for this behavior proposes that policymakers view oil imports as a national security and foreign policy risk and decide energy independence is an appropriate response. But are there other ways we might account for these actions?  In this paper we suggest that the national security explanation by itself is inadequate, as it ignores the complexity of business-government relations, and the diversity in preferences held by political and corporate decisionmakers. Studies in the politics of trade demonstrate that government intervention is not only driven by public policy goals, but also the interests of domestic constituents.  That domestic political interests partially drive energy politics in the United States, may not surprise analysts of U.S. politics. Such considerations are less commonly used in analyses of other countries' energy policies, however, where explanations tend to focus on resource nationalism as an explanation, rather than the influence of firms, bureaucratic interests, legislators' responsibilities to their constituents, budgetary politics, the role of industry associations and civil society, or other factors, in explaining energy policy outcomes.
 
Specifically, states are commonly treated as if they were unitary actors.  (e.g., China makes energy investments in Africa, the United States decides to resume off-shore drilling, etc.) While this simplification has some utility, it neglects the fact that the state is not unitary, but is rather an aggregation of various actors, including industry, and non-governmental organizations, with the constellation of relevant actors varying depending on the issue. Given this, we argue that energy security analyses that focus on the national security and foreign policy objectives of a state’s international relations must be supplemented by a consideration of the intranational relationships and mechanisms from which a state’s policies emerge.   Alternative conceptual models are therefore required to understand the extent to which a state is actually pursuing policies consistent with resource nationalism.
 
In the next section we propose a framework for understanding resource nationalism in oil-importing states. We illustrate the plausibility of our argument using two case studies taken from the United States. We focus on the United States because information is comparatively transparent. The case studies are not definitive, but are intended to suggest business-government relations are plausibly a factor in the creation of energy policy. We nevertheless believe this framework is useful for explaining energy policies cross-nationally, despite variation across institutional and regulatory settings. We conclude by discussing the implications for our understanding of the relationship between oil and national security.

Framing the geopolitics of oil
Resource nationalism is not a new problem.  Guaranteeing supplies of oil and oil products was central to government policies in the early part of the twentieth century, both to ensure military operations were not compromised and that key industrial sectors of the civilian economies remained viable.  A variety of responses were implemented by oil-importing states, most notably fuel diversification and demand management.  One additional strategy sought to enhance self-sufficiency by supporting national-flag companies or investing in substitutes that could be produced domestically.

What drives governments to adopt similar policies today? A common argument assumes the state is insulated from the demands of firms or other socioeconomic groups, and that it seeks to maximize national security goals.  Policies such as subsidizing national flag firms, purchasing of exploration rights upstream, or using diplomatic instruments are then understood to be a function of states’ desires to insure against the risk of oil supply disruptions.

An alternative framework for analyzing resource nationalism

An alternative framework relaxes these assumptions by taking into account insights drawn from work on the political economy of trade.  Instead of assuming that policy outcomes are driven by policymakers, for example, the working assumption is that  policies are the result of bargaining between states and firms.  A second assumption is that firms drive policies through a process of regulatory capture.  Further, it is not assumed that policymakers always seek to maximize national security-related goals, but instead assume they seek to maximize budgetary or electoral goals (as alternative examples).  Doing so yields four potential explanations for understanding resource nationalism in oil importing states (Figure 1).

Figure 1.  Framing Resource Nationalism and its Alternatives in Oil Importing States

I.  Resource nationalism
National policy is determined by policymakers within the state, who are insulated from the influence of firms and seek to enhance national security by increasing the share of crude produced by national-flag companies.  Firms act as the agents of policymakers, and policymakers are able to control these firms, ensuring they act in the interests of the state.

II.  Resource politicization
National policy is determined by policymakers, who are insulated from the demands of firms.  Policymakers may be seeking to enhance national security; however they may also be seeking to maximize campaign contributions, budgetary allocations, or some other set of goals.  Promoting domestic oil drilling within the continental United States, for example, may serve a set of electoral goals in addition to, or instead of, enhancing national security.  Alternatively, emphasizing security threats to energy supplies may also help navies successfully negotiate inter-branch rivalries.  If budgets are limited and policymakers must choose between supporting different missions, for example, fears surrounding vulnerable energy supplies provide a useful justification for investment in naval platforms to secure oil transportation routes rather than in programs supported by other branches.

III.  Negotiated nationalism
The principal-agent problem informs the third and fourth alternative models.  In the third model, policymakers maximize national security goals, but are forced to negotiate with firms to achieve their preferred outcome.  Firms are imperfect agents of the state, pursuing a different set of interests.  States, on the other hand, are the principals, but can only monitor firm behavior imperfectly.  Decisions on whether to invest in a given field, for example, are highly technical – meaning policymakers may not possess the necessary information to ensure the firms’ actions are in line with state interests.

IV.  Politics and profits
Policymakers negotiate the implementation of policies with firms, and are not assumed to be necessarily seeking to enhance national security.  Instead, they pursue reelection, employment or economic growth-related goals.  Further, they negotiate with firms-as-agents when implementing policies.  Policies are therefore a bargained outcome between policymakers and firms, the former seeking some set of goals unrelated to national security, and the latter seeking profits.

Empirics
How might this framework be used to analyze policy outcomes? An exhaustive test of predictions drawn from these models is beyond the scope of this paper.  Instead, two case studies from the United States are provided: the 2005 CNOOC-Unocal case, and federal support for corn-based ethanol.  The goal is to establish that the models above offer plausible alternatives for understanding outcomes.

I.  China and the China National Offshore Oil Corp.’s bid for Unocal

On April 4, 2005 Chevron announced an agreement to acquire the Los Angeles-based firm, Union Oil of California (Unocal), for $16.5 billion.  On June 23, 2005, the China National Offshore Oil Corporation (CNOOC) made an unsolicited bid to acquire Unocal for $18.5 billion in cash.  CNOOC’s offer was opposed by some members of Congress.  Rep.  Joe Barton (R-Texas), then the Chair of the House Energy and Commerce Committee argued that it was against American “strategic interests to let a front company for the communist Chinese purchase a strategic asset, which in this case would be oil reserves and pipelines in the United States.”  Rep.  Richard Pombo (R-California) joined Rep.  Barton in opposing the CNOOC-Unocal merger, stating "[w]e cannot afford to have a major US energy supplier controlled by the Communist Chinese.  If we allow this sale to go forward we are taking a huge risk.”  US politicians were not alone in citing national security grounds in their opposition to the deal.  Peter J.  Robertson, Chevron's vice chairman at the time, noted that if the CNOOC-Unocal merger was approved, the new Chinese-backed firm might "strategically focus" Unocal's oil and natural gas assets toward China, potentially restricting supply to the rest of Asia.

Members of Congress responded to CNOOC’s bid for Unocal with legislative action.  On June 30, 2005 the House of Representatives passed House Amendment 431.  Proposed by Rep.  Carolyn Kilpatrick (D-Michigan), this amendment to the annual House appropriations bill prohibited the Treasury Department from using federal funds in recommending the sale of Unocal to CNOOC.  The amendment passed by a vote of 333-92.  On July 15, 2005 Senate Bill 1412 was introduced, which would have prohibited the acquisition of Unocal by CNOOC.  Rep.  Pombo sponsored a resolution to the bill, approved in the House by a vote of 398-15, which stated that Chinese ownership of Unocal could "threaten to impair the national security of the United States" and that if Unocal's board approved CNOOC’s bid, President Bush should conduct a "thorough review.”  Rep.  Pombo also sponsored the Energy Policy Act of 2005, of which Section 1837 required the Secretaries of Defense and Homeland Security to study the growing energy requirements of China and the implications of this growth for the political, strategic, economic, and national security interests of the United States.

While the US Congress does not have the authority to block foreign acquisitions of US firms on national security grounds, the executive branch does—an authority granted to it by the Exon-Florio provision of the Defense Production Act and carried out by the Committee on Foreign Investment in the United States (CFIUS).  On August 2, 2005, however, CNOOC announced that it was withdrawing its bid to acquire Unocal before any investigation by CFIUS was initiated.  In its press release, CNOOC credited increased political risk for its decision to withdraw. 

Motivations

An important rationale cited by opposition to the proposed acquisition of Unocal by CNOOC was national security.  The connection of Unocal to US security of oil supplies, however, is tenuous.  If the Unocal-CNOOC acquisition had proceeded, the new firm would have constituted one percent of US national gas consumption (2004 figures), while oil production would have been approximately 0.3 percent of domestic consumption.”

How then can this outcome be explained? One plausible explanation lies in the importance of economic growth and employment in the United States to policymakers.  A 2009 report found that the oil and gas sector accounts for approximately 65,000 oil and gas related jobs in California.  The report also attributed an additional 304,500 jobs indirectly by the consumption of goods and services from both oil and gas firms in the state, as well as by their employees.  This indirect employment adds a further $16.3 billion in workers’ earnings, and $46.3 billion in total economic output.  Chevron itself employed approximately 10,000 workers in California in 2007, contributing $4.5 billion to the state’s economy.  The report concluded that Chevron supported a total of 68,700 jobs, or about 1 in every 250 jobs in California in 2007, generating $3.9 billion in employee earnings and $9.2 billion in output. 
 
In addition to the political relevance of employment and growth, government intervention also shifted the competitive position of firms engaged in the battle over Unocal by raising the regulatory risk for CNOOC associated with pursuing the proposed acquisition of Unocal.  At least as early as 2004, Chevron identified that a merger with Unocal would increase Chevron’s presence in the Asia-Pacific, Gulf of Mexico, Central Asia and elsewhere.  It would also increase Chevron’s reserves by 1.75 billion barrels of oil equivalent, and daily production by 459 thousand barrels of oil equivalent per day. 

The high number of votes in favor of legislation impeding CNOOC’s ability to acquire Unocal, on the other hand, suggests that state-level employment goals or commercial interests are unlikely to be the only factors to shape congressional voting.  The CNOOC bid for Unocal occurred, for example, when Congress was increasingly concerned about the challenge Chinese firms presented US industry.  Members of Congress noted concerns with the proposed acquisition, concerns that were unrelated to energy security.  Sen.  Byron Dorgan’s (D-North Dakota) proposed resolution, for example, opposed the acquisition not only because of the strategic character of oil and gas, but also because of problems of competition such as the inability of investors based in the United States to acquire a controlling interest in CNOOC, and because CNOOC was substantially financed by capital from the Chinese state or state-owned banks.

The proposed resolution also referenced the effect that a CNOOC acquisition of Unocal might have on human rights and labor conditions in countries in which Unocal operated.  The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) has long standing concerns regarding the unfair trade practices in China that, according to the AFL-CIO, lead to job loss in the United States along with lower US wages and exploitation of US workers.  In 2004, the AFL-CIO filed the first “workers’ rights” case against the Chinese government itself.  It is reasonable to conclude that some members of Congress might have shared the concerns of the AFL-CIO regarding Chinese firms and voted against CNOOC’s attempted acquisition on these grounds.

No definitive conclusion can be reached in this short discussion about what motivated congressional action over the CNOOC bid for Unocal, however.  The evidence suggests a mix of motives among legislators existed, including regional economic concerns and employment figures.  However, the high level of legislator support for initiatives constraining CNOOC’s bid to acquire Unocal suggests other legislator motives, including concern over energy security, dissatisfaction with China’s own inward investment regime in the oil and gas sectors, and broader concerns about China’s growing economic importance.  Overall, it is reasonable to infer that legislator interests, unrelated to national security, may have influenced the nature of the policy decision that finally emerged; the strong opposition to the CNOOC bid, as evidenced by the overwhelming votes, suggests model two usefully describes outcomes, in which policymakers are more important in shaping outcomes, but seek to achieve goals other than simply enhance energy security.

II. Corn-Based Ethanol for Transportation Fuel Policies

Ethanol is the most widely used liquid biofuel globally.  Biofuels are also expected to play an increasingly important role in US fuel diversification, with ethanol being one of the few near-term substitutes for liquid transportation fuels.  The US ethanol industry produced 10.6 billion gallons in 2009, with 170 ethanol refineries in operation and another 24 under construction.  Total annual ethanol production capacity in the United States, including idled capacity, is estimated at 12.5 billion gallons.  US ethanol production reached 787,000 barrels per day (b/d) in December 2009, a 131,000 b/d increase year-on-year.  Ethanol is estimated to account for over 17 percent of US gasoline consumption by 2035.  

This growth in US ethanol capacity is underpinned by substantial government intervention.  Support for alcohol fuels in the United States originated in the Energy Tax Act of 1978 and has since grown to more than $11 billion.  The Volumetric Ethanol Excise Tax Credit  (VEETC) in 2007 provided over $3 billion in support to registered ethanol blenders.  Additional government support is evidenced by the introduction of the Renewable Fuel Standard (RFS) in the United States’ Energy Policy Act of 2005, which mandates renewable fuel use in gasoline.  Its passage resulted in gasoline producers making a significant shift from methyl tertiary butyl ether (MTBE), a popular fuel additive, to ethanol in May 2006.  The RFS was further expanded in The Energy Independence and Security Act of 2007, which set a mandate to raise renewable fuel use to 36 billion gallons by 2022.  More recently the Food, Conservation, and Energy Act of 2008 (i.e.  the 2008 Farm Act) reduced the tax credit for ethanol blending from 51 cents per gallon to 45 cents per gallon.  This reduction came into force in 2009.

Motivations

Federal support for corn-based ethanol is justified in terms of reducing the reliance on international markets for the supply of oil.  The United States began to subsidize the use of ethanol in 1978 in response to oil market volatility.  In 2007 Tom Daschle, a former Democratic Senator from South Dakota and former Senate Majority Leader in the US Congress, defended corn-based ethanol by arguing that “converting the starch from a portion of the US corn crop into biofuels is an efficient way to reduce the United States' dangerous dependence on imported oil.”

Critics of corn-based ethanol argue the conversion of corn into biofuel is an inefficient way of increasing US energy security.  C.  Ford Runge and Benjamin Senauer, for example, observe that even if every acre in the United States currently devoted to growing corn is used for the production of ethanol, this would meet only 12-15 percent of the United States’ transportation fuel needs.  They also question whether corn-based ethanol can be a platform for advanced biofuels (i.e., cellulosic and waste based fuels) given that crops like switchgrass are not currently economically competitive.

What alternatives exist to help explain this policy outcome, given these counterclaims? Should it be accepted that energy independence drives US government policy, or that policy emerges as a result of a more complicated set of domestic preferences?

Once again, one plausible alternative answer is that subsidies for ethanol-based biofuels are driven, at least in part, by political goals associated with regional economic growth and employment.  Ethanol production in the United States supports approximately 400,000 jobs in all sectors of the US economy and contributed $53.3 billion to the nation’s Gross Domestic Product (GDP).  These benefits are concentrated geographically, with the majority of US ethanol production capacity located in five states: Illinois, Iowa, Minnesota, Nebraska and South Dakota, which together produced approximately nine billion gallons last year.  In the case of Minnesota, the Minnesota Department of Agriculture estimates that the state's ethanol industry produced about one billion gallons of ethanol in 2007, had a total economic impact of nearly $12 billion dollars and provided more than 70,000 jobs.  According to the Minnesota Corn Growers Association, the state’s ethanol industry helps local communities thrive, by offering employment, an increased tax base and better prices for corn.  

The existence of these distributive benefits provides strong incentive to develop biofuels as a substitute for oil products—incentives that relate to regional employment and economic growth as much as to national security.  In addition, firms also benefit from state support for ethanol production, either in terms of bolstering domestic demand or in limiting foreign competition.  In the first instance, when coupled with the Renewable Fuel Standard, the VEETC creates what a leading industry association calls a “market-based, demand enhancement,” which provides assurances to investors that there will be continued demand for ethanol, which, in turn, should spur further capital investment in domestic firms.  In terms of limiting foreign competition, a secondary tariff is imposed on imported ethanol because foreign firms are indeed also eligible to receive the VEETC.  This secondary tariff is set at 54 cents per gallon (plus a 2.5 percent ad valorem tax), which incidentally, is higher than the current 45 cents per gallon tax credit in the VEETC.  Therefore, even if this tariff is intended to offset the VEETC, because of its design, it represents a substantial protective measure for domestic firms.

As with the case of Unocal-CNOOC, legislative support in favor of federal subsidies for corn-based ethanol suggests that legislator motivations expand beyond a mere concern for regional employment and economic growth.  Nevertheless, while justified for reasons of energy independence, there is plausible evidence to support the contention that regional employment and other economic opportunities for constituents may also be goals of policy.  This suggests that the politically oriented models two and four offer plausible alternative frameworks for understanding federal support for biofuels.

Conclusion and extensions
Energy policies in oil importing states are commonly framed in terms of securing energy supplies.  Yet the brief cases presented above suggest it is plausible that policymakers, firms, and others, are seeking to achieve goals other than enhancing energy independence, regardless of rhetoric.  Policymakers may have multiple reasons for supporting policies that can be characterized as resource nationalism, including regional economic growth or employment-related goals.  Commercial outcomes are also significantly affected by government intervention in oil markets, meaning that firms are likely to seek to shape policy outcomes.  Rather than accept the assumption that resource nationalism is driven by decision-makers within government who are primarily concerned about national security and who are insulated from firms and other interest groups, it is incumbent on analysts of energy policies to probe the empirical basis for the assumption.  This requires us to consider other possible motivations that drive decisionmaking, the instruments available to firms to influence policies and the mechanisms available to policymakers to align state and firm interests.

How might these frameworks relate to energy security policies in other countries? This paper has focused on case studies drawn from the United States, where policymaking in the energy sector is comparatively transparent.  The existence of substantial domestic resources, and a federal system of government with mutual vetoes between the executive and legislative branches of government substantially complicates the design and implementation of energy policy.  This makes interest group politics and domestic political incentives plausibly different from those in states that have few domestic resources available to exploit, or with more unified systems of decision-making.

Mixed incentives should nevertheless also hold across countries and political regimes—even when national oil companies dominate a state’s energy sector.  In the case of China, for example, analysis suggests that investment decisions by Chinese firms are made independently from the government and that the Chinese state itself is not a unified actor but is rather made up of a number of different bureaucratic agencies with different capacities and policy preferences.  The incentives faced by policymakers and the structure of bargaining between industry and political actors is likely to vary from country to country, therefore it should not be assumed that a unitary state model in which fears of energy security drive policy outcomes is the appropriate framework through which to understand resource nationalism in oil-importing states.

Instead, analysts should focus on identifying the incentives facing firms and policymakers, as well as the mechanisms of influence between the government and firms.  Data such as sources of firm financing, government representation in firm management and personnel practices, for example, are likely to be useful in identifying the instruments available to policymakers to change the incentives facing firms.  Examining the organizational incentives of policymakers with competency in the energy sector, as well as the domestic institutions that govern decision-making, are also likely to help establish the relative importance of firms and policymakers in determining outcomes, and what policymakers are seeking to maximize.


Llewelyn Hughes is an Assistant Professor of Political Science and International Affairs at George Washington University, Washington DC and can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it .  Seán J.  Kreyling is a Research Scientist, Pacific Northwest Center for Global Security, Pacific Northwest National Laboratory, US. 
 He can be contacted at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

 
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