Two Sumos -- government and big oil companies -- are wrestling for control of the oil industry. And according to the Wall Street Journal [subscription required], a big shift in bargaining power is putting government on top. This could be a crushing blow for oil companies and the people who invest in them.

In the past, oil companies enjoyed the upper hand because they had the capital and the expertise to take on the risk of exploring for new sources of oil. As a result, big oil traded that ability to take risk for equity ownership of oil fields. But since there are fewer new places to explore, governments increasingly find themselves in control of their own energy destinies.

With demand strong and supply dwindling, prices are high and governments have the capital and expertise they need to develop their own energy resources -- leaving leaving big oil companies with a smaller piece of the pie. In some places, the producer nations are simply taking majority stakes in existing projects away from Western oil companies. Even when the Western company is paid for its property, future profits are erased. In December, Royal Dutch Shell PLC (NYSE: RDS.A) was forced to turn over a majority stake in Russia's giant Sakhalin 2 project to Gazprom

When I think of the jowly former Exxon Mobil Corp. (NYSE: XOM) CEO Lee Raymond and his $400 million retirement package, I feel little sympathy for big oil. But if big oil wants to strengthen its long-term profits it will need to find a way to increase its bargaining power. And this could come from developing sustainable energy sources --such as solar and others -- and pushing for greater energy efficiency in automobiles.

The resulting lower prices could strengthen big oil's bargaining power with governments and position it to extract a bigger share of end game profit. Meanwhile it would be positioned to profit from the next big energy wave.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Exxon or Royal Dutch Shell.

Is big oil past its profit peak? originally appeared on BloggingStocks on Tue, 10 Apr 2007 12:00:00 EST. Please see our terms for use of feeds.