More Oil, More Problems

shutterstock_87551914What if your city, county, state or country suddenly struck oil, welcoming it into a billion-dollar industry?

Oil is a global commodity with unique characteristics. While being a driving force in global industrialization and world commerce, oil is a finite natural resource with extreme price volatility and notorious boom and bust cycles.  It has the exceptional ability to generate profits for state and private actors. The combination of these factors produces what some have called ‘‘the paradox of plenty’’ or the ‘‘resource curse.’’

The “resource curse” refers to the inverse causation between natural resource abundance and economic growth, especially oil. Simply put: more oil, more problems. The symptoms of the “resource curse” include less economic growth, a negative correlation between a country’s dependence on oil and their GDP, poor development outcomes, high rates of poverty, malnutrition, child illiteracy, corruption, authoritarianism and civil war.

For example, following the early ‘60s discovery of natural gas deposits in Norwegian North Sea territory, an export boom reduced the profitability of Norway’s manufacturing and service exports. (For similar reasons, total exports from the Netherlands decreased markedly relative to GDP during that time.) Nonetheless, Norway was able to overcome this economic calamity and progressed to secure the number one spot in the United Nations’ Human Development Index (HDI). HDI is a composite statistic of life expectancy, education, and income indices that ranks countries into four tiers of human development, serving as a frame of reference for both social and economic improvement.

But in developing countries with weaker institutions and governance structures, the economic impact of oil exploitation on the populace is likely to be devastating and can trigger much deeper social problems. Oil exploration in the Niger Delta wetlands has made poverty and hunger commonplace. Angola, where 90% of the government’s revenue comes from oil, remains one of the poorest countries in the world. Saudi Arabia’s riches and royalty conceal its growing poverty problem, with an estimated quarter of the population living below the poverty line. Recent developments in Iraq may attest that this valued resource may be a curse rather than a blessing.

In 1991, after the devastating Iran-Iraq war, Iraq ranked 50th out of 130 countries in the HDI. By 2000 it had fallen to 126th out of 174. Iraq currently ranks 132 out of 178 in the HDI. Over 20% of the population does not have access to safe drinking water, over 50 percent of its people are illiterate and there are high rates of malnutrition.

Iraqi Kurds, who have sought an independent state since 1920, have begun post-Saddam to assert their right to sign deals with foreign oil companies and drill on lands they historically claimed. In 2004 the Kurdistan Regional Government opened up to drilling, allowing foreign oil companies to keep 30 times the profits than the Iraqi government was offering. In response, Baghdad threatened to cancel all the KRG’s drilling contracts elsewhere in the country, but to no avail. Over 50 multinational companies, including Exxon Mobil Corp. and Chevron, proceeded to sign contracts with the Kurds to tap into the estimated 66 billion barrels of oil. This does not only have the potential to shift the global market for crude; it could tear apart the country. Recent bombings that have killed more than 90 people and wounded more than 500 illustrate the mounting tensions that could lead to a “resource war” over the right to drill for crude.

Could the country’s treasured resource, its means of corruption, wealth and poverty soon become “blood oil” — the cause of war between the Iraqi and Kurdish populations?

*In cases where oil has been the cause of wars, or has funded the prolonging of wars, it can justifiably be regarded as ‘blood oil’.

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As “Fueling Poverty: oil war and corruption” states, oil, “when mixed with prevailing conditions in poor countries – weak institutions, governance and democracy – the result is a lethal cocktail that poisons oil-producing developing countries and hits poor communities hardest.”

Oil’s effect on poverty in source countries has not been a deterrent to the market. So, various proposals have been made to lessen this ‘‘paradox of plenty,’’ including demands for revenue transparency by oil companies and exporting governments, revenue management schemes, stabilization funds, etc. One proposal to mitigate the resource curse stands out. Todd Moss, a senior fellow and vice president for programs at the Washington-based Center for Global Development looks optimistically at the Alaska Permanent Fund. State law requires that a quarter of the state’s revenue from oil be put into the fund. Every year, the money is invested and every Alaskan resident gets a share of the dividends. These payments stimulate the economy, reduce income disparities and have contributed to a large reduction in poverty among Alaskan Natives, the state’s poorest group. This approach, however, has not been successful in other places it has been implemented, including Venezuela where Hugo Chavez has raided the oil fund. The lack of personal taxes and respect for dividends which carry no public responsibility often resulting from these “oil-to-cash” programs can undermine the sense of community and alienate citizens from government.

Oil-to-cash would be a challenge for countries that have witnessed the power of their natural resources and have entrenched interests guarding business-as-usual. Many oil-producing countries don’t have an incentive to change their governments to serve and protect their constituents, but only to secure revenues gleaned from the export of petroleum on which they rely. Without a significant effort to reduce dependence on foreign oil, the consequences will continue to affect producers and consumers worldwide.