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Oil’s Slippery Slope, Part 1

April 4, 2012

A joint post by Laura Esposito and Michael French

Oil is arguably the most important natural resource in the global arena. It brings wealth and poverty, endorses governments and private companies, causes wars and land disputes. Until clean energy takes the stage entirely, oil may as well run the world. And run it does. With oil-centric political decisions made by Uganda, Brazil, and Nigeria, among several others, the race is on for developing countries to capitalize on this black treasure before it becomes obsolete.

What of oil’s role in the development process? With the world’s huge reliance on and consumption of oil, it makes intuitive sense to think that a discovery of oil would be extremely beneficial to a country. For example, the United Arab Emirates and Norway have benefited from oil. After all, oil pays the bills in the short term and also allows countries to invest in long-term projects and more easily transition to other sources of energy. Additionally, oil attracts foreign direct investment because countries without oil need to get it from somewhere. In certain circumstances, especially when solid economic infrastructure already exists, this holds true. But oil often harms less established, developing countries.

Source: APE CON MYTH

Though a power that could be used for good, control of oil sources is usually used for bad. Bribery and economic inequality are the main accomplices to oil’s rise—ensuring positions of power for those already in power, and neglecting to share potential wealth with the poor or actually assisting in the development process. For a cash cow, there could be a lot more people eating beef.

Known as the oil curse phenomenon, many countries with a large dependence on oil exports tend to have corrupt authoritarian rulers and a great disparity of wealth between a small group of the rich and a much larger group of the poor. Since oil infrastructure is usually sponsored by the government, which can nationalize control over the industry, oil becomes part of a centralized system where the money pours into the central leadership. As a result of the government having large inflows of money coming in, they do not have to tax their citizens heavily, if at all. While this may seem beneficial, it actually creates an unaccountable environment, as people tend to monitor a government’s activities more closely when it is using their taxpayer money. Without monitoring, these governments often become corrupt and use the petrodollars in ways not conducive to most of the population. This oil curse (sometimes referred to as Dutch Disease or the resource curse) also leads to a large dependence on a singular product, and causes other sectors of an economy to become stagnant and underdeveloped.

In Uganda, for example, oil could bring up to $2 billion a year in revenue. Instead of jumping for joy, the Ugandan government is the center of attention because of the potential oil wealth and what they are planning to do with it. Despite concerns about pollution and corruption, Uganda’s government is signing oil contracts with Tullow Oil, and by extension, CNOOC Ltd., and Total SA. These three companies (of the UK, China, and France respectively) are slated to invest in Uganda’s infrastructure, through the construction of an oil refinery and pipeline. This will bring in foreign direct investment to Uganda, which will also bypass, to some extent, government oversight in the process and the possibility of corruption along the way. However, these negotiations have “lacked transparency,” which does not encourage much confidence that the benefits from oil will trickle down. While some people take advantage of the influx by developing local businesses and services, others face displacement and loss of their livelihoods.

HRT Oil & Gas begins work in the Amazon | Source: HRT and The Washington Post

Brazil, known for some of its offshore deposits, could face environmental issues from potential spills. This would offset the thousands of jobs created by the oil industry, and would also add to increasing debt from the financial capital needed to begin production. In addition to Brazil’s offshore sites, others are looking to the Amazon for oil sources, such as Brazilian geologist Marcio Mello. HRT Oil & Gas, started by Mello, and focused on the Amazon, hopes to have a lower carbon footprint as compared to other oil companies. If successful, this could help set a precedent by offsetting some of oil’s less desirable effects. Despite significant oil deposits throughout the country, Brazil’s income distribution makes it one of the most unequal countries in the world.

Plans for oil production involve huge investments in infrastructure and thus require significant backing. In the case of Nigeria, President Goodluck Jonathan wants to borrow $7.9 billion for pipeline construction. This will open Nigeria to more sources of foreign investment, and will be used for either natural gas or oil.

Nigeria | Source: Tom O’Neill and National Geographic

However, while being one of the largest oil producers in Africa, Nigeria continues to be plagued by poverty. As Statistician-General Yemi Kale recently lamented, “It remains a paradox… that despite the fact that the Nigerian economy is growing, the proportion of Nigerians living in poverty is increasing every year.” Furthermore, according to economist Joseph Stiglitz, Nigeria “has earned almost a quarter of a trillion dollars in oil revenues over the last three decades,” but “In spite of all the oil, per capita income declined by over 15 percent from 1975 to 2000, while the number of people living on less than $1 a day quadrupled from 19 million to 84 million.”

The problem remains that oil revenues present precarious budgeting issues for emerging and developing economies. While Brazil has a diverse economy, national oil company Petrobras has incurred significant debt for new oil ventures. Uganda and Nigeria continue to sign oil contracts, with the belief that foreign investment will trickle down through infrastructure and jobs, helping to boost their economies.

So, what’s an oil rich country to do with its oil? There just might be some new cures for the resource curse, aimed at creating government transparency and accountability, and encouraging citizens to play a larger role in the distribution of petrodollars.

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