Fueling State Capitalism

Abstract

Abstract Short version (150): Foreign investments by state-owned enterprises (SOEs) in the oil and gas sector began a dramatic climb in the late 1990s amid rising oil prices. These investments are widely perceived to be politically driven, raising concerns about resource mercantilism and asymmetric interdependence. The book begins with the premise that the investments are commercial ventures by ambitious SOEs seeking to become global players. Applying the principal agent model, the book argues that the realization of their global ambitions depends on two domestic structural factors. First, democracies can limit investments with questionable viability, as it can be politically costly for elected leaders to endorse SOE decisions that prove unprofitable for the state. Second, bureaucratic structures overseeing the SOEs can help prevent counterproductive behavior, conditional upon a clear line of authority among bureaucratic principals on matters pertaining to SOE operations. The argument differs from previous approaches by exploring a range of institutional alternatives to privatization for solutions to problems of oil sector governance. Long version (240): In a resurgence of state capitalism, foreign investments by state-owned enterprises (SOEs) in the oil and gas sector called national oil companies (NOCs) began a dramatic climb in the late 1990s amid rising oil prices. These investments are widely perceived to be politically driven, raising concerns about resource mercantilism and asymmetric interdependence. The book begins with the premise that the investments are also commercial ventures by ambitious NOCs seeking to become global players. Applying the principal agent model, the book argues that the realization of NOCs’ global ambitions depends on two domestic structural factors. First, democracies can limit investments with questionable viability, as it can be politically costly for elected leaders to endorse NOC decisions that prove unprofitable for the state. Second, bureaucratic structures overseeing the NOCs can help prevent counterproductive behavior, conditional upon a clear line of authority among bureaucratic principals on matters pertaining to NOC operations. By considering a wider set of institutional alternatives to privatization in managing NOCs, this book contributes to the resource curse literature. It demonstrates its argument through a statistical analysis of NOC outward investments over the years 2000–2013 and case studies of China, India, Brazil, Norway, and Russia. Based on the experience of NOC global expansion, the book concludes that to achieve decarbonization that not only helps governments meet their political objectives, but also helps NOCs ensure their longer-term commercial viability via a managed transition to renewables, the role of bureaucratic institutions will be even more crucial.