Nationalization is bad for the market and profitability of IOCs.

Nationalization of oil has a negative impact on the market and on the profitability of IOCs by limiting their access to reserves.9 Most of the reserves controlled by NOCs are located in places where oil is more easily—and thus more cheaply—extracted, leaving more challenging and less profitable reserves for the IOCs. These companies generally run much more efficiently than NOCs and would possibly increase the global crude supply or develop spare production capacity if they could access reserves held by NOCs.10 Spare production capacity is vital to reduce the shock of supply disruptions.

Currently, the major oil development opportunities are in the Middle East, Russia, Venezuela, the Canadian oil sands, and offshore Brazil. Of these, only Canada is not a nationalized country and offers access to reserves in a low-risk political environment. The stable political situation in Canada has helped spur investment in oil sands development.11 There has been some speculation that the Arctic might also provide opportunities for IOCs in the near term. However, it seems likely that developments in this region will proceed slowly.12 Thus, IOCs are struggling to compete in a market saturated by NOCs.

The impact on the global oil supply of dwindling investment opportunities for IOCs is compounded by the trend toward mergers and acquisitions of publicly traded oil and gas companies in recent years. Consequently, the reserves held by IOCs have come under increasingly centralized control. In 1990, the five largest IOCs controlled 60% of total IOC reserves. By 2005 they controlled 84%. These companies have been slow to invest in new production in light of generally high oil prices. Consequently, it may be the case that IOC production will decline somewhat in the near- to mid-term due to decreased competition, possibly leading to a situation where NOCs produce an even larger proportion of the global supply.13

Oil market distortions can result from deficiencies in operations by nationalized companies. This is because the diversion of revenue from the oil and gas companies to government coffers reduces infrastructure reinvestment, leading to production declines that reduce global supply.14 For example, Mexico's crude output has steadily declined from its peak of 3.824 million barrels per day in 2004 to 3.157 million barrels per day in 2008.15 Some analysts predict that Mexico will become a net importer of oil within a decade. The Mexican Government taxes Pemex, the national oil company, at slightly more than 60% of its gross revenue. Consequently, in the absence of foreign investment, currently forbidden by the Mexican constitution, Pemex must rely on government borrowing to develop infrastructure and maintain operations. This has led to a deterioration of infrastructure that has significantly reduced productivity. Granted, Mexican reserves are believed to be declining as well, although a major reason for the output decline is inadequate investment in infrastructure.16

The economies of nationalized states often lack diversification and consequently are extremely sensitive to swings in oil prices. These states often succumb to the so-called "resource curse," characterized by susceptibility to boom and bust cycles; inflation of the value of the state currency, which increases the challenge of developing non-resource related industries because imports become comparatively cheaper;17 and the generation of resource revenue streams that can feed a culture of greed and corruption facilitated by the lack of transparency. Under these conditions, many citizens lack economic opportunities and become dissatisfied with their government, potentially to the extent that political unrest, sometimes violent, results.18 The seemingly intractable violence in the Niger Delta serves as a stark example of the resource curse.19