What will happen to Big Oil stocks as the world's oil supply moves toward greater instability? At the beginning of May, Big Oil lost its control of the Orinoco Belt to Venezuela. But now, some Latin American countries led by Venezuela's Huga Chavez, are vowing to withdraw from the International Centre for Settlement of Investment Disputes (ICSID). This is a center aimed at serving as arbiter between companies (including Big Oil companies) and the countries in which they have investment projects. As one might gather, the results often go in favor of the companies, allowing them to recover some of the cost of their investments. So what does it mean for Big Oil that some developing Latin American countries are pulling out? MarketWatch offers a look:
The ICSID helps strengthen the companies' hand in the face of aggressive governments, said Houston attorney Michael Goldberg. When countries operate within the World Bank framework, they provide companies with "a measure of security for fair treatment," said Goldberg, head of the international arbitration practice at Baker Botts LLP. "Withdrawal from such arrangements would clearly be another risk factor for any potential investor."
Big Oil companies are raking up risk in terms of investment options. However, this is not adversely affecting the stock of Big Oil companies. Even though the investment risk by these companies may be greater, the large profits reaped by companies like Exxon (XOM) and Chevron (CVX) can handle the risk. In the short term, too, one must consider that U.S. summer driving season is under way, and while other stocks may be affected by rising gas prices, Big Oil stocks are not likely to be negatively impacted by rising gas prices.
No, in the short term Big Oil looks fine. However, the issues come in the long term. Stability of the world's oil supply is already at risk due to events in the Middle East and in African nations like Nigeria. In the long term, as nations and investors start to turn to alternative energy in order to shore up the world energy supply and attempt to achieve energy independence from unstable regions of the world, Big Oil companies who have not invested in alternative energy may find themselves in trouble.
For now, however, the instability that Latin America is tossing in the mix is likely to serve only as another catalyst for rising gas prices — and for rising Big Oil profits.
Disclosure: I am in the process of acquiring BP (BP) stock. Other than that, I do not own any Big Oil stocks in my portfolio, including the mutual funds that make up my Roth IRA.