The Oil Curse Explained

This is the final instalment of the “Eid Holiday Reading Special” to mark the last day of the Islamic holiday of Eid Al-Adha, and before we are back to work tomorrow.

Why does oil wealth so often become a curse for developing states?  In the developing world, oil-producing states are fifty percent more likely to be ruled by autocrats, and more than twice as likely to have civil wars, as non-oil states. They are also more secretive, more financially volatile, and provide women with fewer economic and political opportunities.  For the last thirty years, good geology has led to bad politics.

That’s the opener to a succinct and useful read by Michael L. Ross (author of The Oil Curse: How Petroleum Wealth Shapes the Development of Nations)  on the politics of oil.  His piece, if applied to the Middle East, explains a lot about the energy problems oil economies face.   Also try replacing some of the examples quoted with Egypt’s state oil company, the Egyptian General Petroleum Corporation (EGPC), and see where you get.

The crux of the article and Ross’s book is based on the four “S’s” of oil: scale, stability, source and secrecy.  He also explains the pros and cons of the wave of nationalizations that swept oil companies throughout the developing world during the 1970s:

In some ways, nationalization was a giant step forward for oil-producing countries: they gained greater control over their national assets; they began to capture a much larger share of the industry’s profits; and in the 1970s they were able to raise world prices to record levels, causing an unprecedented transfer of wealth from oil-importing states to oil-exporting ones.

The revolution in energy markets gave the oil-rich governments greater influence than they could have imagined. 

But for their citizens, the results were often disastrous: the powers once held by foreign corporations passed into the hands of their governments, making it easier for rulers to silence dissent and hold off democratic pressures

He ends on a positive note: “much can be done to alleviate the oil curse”.  Take this, for example:

Countries can better manage the size and source of their revenues by, for example, extracting their mineral wealth more slowly, giving citizens a regular cash “dividend” from their oil revenues (like Alaska), using barter contracts, or partially privatizing their national oil companies (like Brazil).  To improve the stability of their revenues, they can use traditional stabilization funds, or—better still—oil-denominated loans.

But what’s the best and most immediate solution?

“The one remedy that can help everywhere is greater transparency in how governments collect, manage, and spend their oil revenues,” Ross writes.

On that note, for those that consider EGPC’s debts as totally separate to the country’s budget and the country’s external debt pile, think again.

Egypt’s oil company is nothing but an opaque, heavily indebted mess, that is misspending billions of dollars to fund both an inefficient energy subsidy network that is struggling to meet domestic demand, and pay off debts to oil companies and banks.

Egypt’s external debt does not just stand at about $33 billion, you can count at least another $20 billion owed to international and domestic banks and oil companies for years of mismanaging energy subsidies.

One Comment

  • Posted October 28, 2012 at 5:58 pm | Permalink

    I haven’t read Ross’s book, but this seems pretty problematic:

    “But for their citizens, the results [of nationalisation] were often disastrous: the powers once held by foreign corporations passed into the hands of their governments, making it easier for rulers to silence dissent and hold off democratic pressures…”

    So MNOCs constituted or constitute a real force for democracy in producer nations? Really? They weren’t or aren’t prepared to

    And this ignores and inverts the experience of, for example, Iran, in which oil companies supported the crushing an elected democracy.

    Perhaps oil is bad for democracy partly because it does not rely on the mass labour of the domestic population. This means both that they can’t exercise strike power, and there is no in-built mechanism for revenues to “trickle down” in the form of wages.

    Ross continues, “ethnic minorities in oil-producing regions took up arms to fight for a larger share of the government’s revenues…”

    But it seems hard to attribute that to nationalisation. e.g. see behaviour of MEND in the Nigeria directed against foreign oil companies.

    Surely it’s more plausible to link any increase in ethno-regional competition after the 1970s to the higher prices after ’73, pushing new exploration and (perhaps/perceived) greater potential revenue to be redistributed.

    “…and in many states, the tidal wave of revenues produced new jobs for men but not women.”

    Does Ross want us to believe that had there been no wave of nationalisation the number of local women employed in oil would have been significantly greater?

Post a Comment

Your email is kept private. Required fields are marked *