What If?

What if the oil well currently leaking in the Gulf of Mexico were owned by Rosneft, the Russian state-owned oil company, and not BP?  This is an apt question to ask upon reading Ian Bremmer’s new book, “The End of the Free Market,” and it points to the challenges introduced by the rise of state-owned enterprises (SOEs) across the world.

Bremmer notes that of the top 15 energy companies, two are privately owned.  The rest, controlling 3/4 of the world’s oil reserves, include such SOEs as Gazprom, Petrobras, Saudi Aramco, Petronas, Petróleos de Venezuela, China National Petroleum Corporation and the National Iranian Oil Company.  “In each case, the state is using markets to create wealth that can be directed as political officials see fit. And in each case, the ultimate motive is not economic (maximizing growth) but political (maximizing the state’s power and the leadership’s chances of survival).”

SOEs redraw the lines between the state and the market, acting as vehicles for increased political control and geopolitical influence so the political leadership can address issues of political risk.  These firms have fewer encumbrances than private firms do.  They can pay more for particular assets and, most significantly, often have little accountability.  The government acts as both shareholder and regulator, and most oversight does not reflect how SOE’s function.

Let’s get back to the “what if?” scenario.  In this case, an oil spill in the Gulf becomes something far more than an economic and environmental disaster with a corporation like BP as the key actor.  Now it’s a diplomatic incident and, between the state and its corporation, it’s incredibly unclear who to go to in order to resolve the crisis.   How would the Russian government respond, who would claim oversight, would Rosneft incur damages, and to whom does the aggrieved party turn — all of these questions are suddenly thrust to the fore, ultimately without clear answers.

The problem here is one of governance.   The state may not yet have the ability to drill 5,000 feet below the ocean surface for oil, but when it does the issue of governance will be far from esoteric.  In fact, it will determine the future make-up of the world economy and perhaps radically change the nature of future crises.