The paradox of oil

As Saddam Hussein’s bronze statue crashed to the ground in Baghdad in late April, crowds of excited Iraqis and millions of television viewers around the world believed it could be a second chance for the country’s impoverished people. After all, Iraq has oil — oil with a capital ‘O’ in fact: 110 billion barrels, the world’s second largest reserves after Saudi Arabia.

UN sanctions that had stifled the country’s economy for 13 years were lifted in May, when the United States and Britain won broad powers to run Iraq and sell its oil until a new government is established. US ambassador to the United Nations John Negroponte declared, “It is time for the Iraqi people to benefit from their natural resources.” In reality, the outlook for Iraq is far from certain. A look at some of the world’s key oil-exporting regions shows that, like the golden touch of the ancient Greek King Midas, the oil gift often comes with costs that can outweigh the benefits. The international image of oil nations is one of stark contrasts. On the one hand, suffering and woes: strikes in Venezuela, starvation in Angola, and violent ethnic clashes in Nigeria. On the other, sumptuous royal palaces in Saudi Arabia. Juan Pablo Perez Alfonso, a former Venezuelan oil minister, was all too aware of the mixed blessing of oil riches, calling oil the “devil’s excrement” in one famous book. “Ten years, 20 years from now you will see,” Perez Alfonso said in the 1970s; “Oil will bring us ruin.”

Right on schedule, Venezuela’s myth of oil prosperity finally burst in the last decade of the 20th century. In Nigeria, per capita income of $270 a year is lower than when oil was found in the 1950s. Since 1999, Nigeria has been trying to recover up to $3 billion that disappeared during the four-and-a-half year rule of former president Sani Abacha. Bloody clashes erupt frequently near the oilfields in the Niger delta as tribes fight over scarce revenue and jobs. As demand for oil grows in the West and reserves dwindle in Europe and the United States, energy companies have gone further afield, looking for oil in developing countries and increasingly under thousands of metres of ocean. They are often welcomed warmly as poor countries lack the capital and technology to develop their own resources. “These countries usually lack the technology, the capital and expertise needed to develop these fields, especially the deepwater projects which are very technologically challenging. Apart from the big international oil companies, there is really no one else who can do it,” said Andy Latham, energy analyst at consultancy Wood Mackenzie in Edinburgh. Iraq’s oil helped Saddam stay in power for more than two decades and many critics of the war think that controlling Iraq’s reserves was a motive for the US-led attack. The top job in Baghdad has the added bonus of control over an estimated $25 billion in annual oil revenues alone, at pre-war production rates. “All the oil companies are dying to get into Iraq,” says Terry Lynn Karl, professor of politics at Stanford University in California. “And every single opposition group in Iraq is dying to get into power so they can get their hands on those resources and decide how to allocate them.” The question now is whether post-Saddam Iraq can escape what Harvard economists Jeffrey Sachs and Andrew Warner call the “curse of easy riches.”

Stanford’s Karl, author of Paradox of Plenty: Oil Booms and Petro-States, is not encouraged. “The warning for the Iraqi people and the United States is this: It is a very dangerous myth that oil will make you rich,” she says. “Oil-exporting nations are some of the most conflict-ridden, economically troubled and authoritarian countries in the world, and this is directly related to their central export. “Because petroleum is so highly capital intensive and so extraordinarily profitable, no other resource tends to concentrate power and money into the hands of the few like oil does.” Countries that have benefitted most from oil have been those with established democracies before the windfall arrived. Norway, which ranks as the third largest oil exporter behind Saudi Arabia and Russia, is probably the best example. The United Nations Development Programme ranks the quality of life there as the best in the world in its annual index. It is also a shining example of probity in government, with more than $100 billion saved in a petroleum fund that could be used in future to fill a fiscal deficit when prices drop or output slides. But in the case of Iraq, experts say the oil money could actually be an obstacle to developing a democratic system. “Oil is a big source of wealth and temptation for the ruling class. It gives them the ability to ignore people’s opinion,” says Raghuram Rajan, professor of finance at the University of Chicago. “Oil doesn’t help if you are trying to get democracy working in a country.”

Oil helped finance Saddam’s gold taps, racehorses and yachts, while most Iraqis lived in squalor. Such dramatic contrasts can be seen in many other oil-rich areas too. The majority of Venezuelans live below the poverty line despite decades of oil wealth. In Kazakhstan, in central Asia, a glittering new capital, Astana, is rising on the desolate steppes thousands of kilometres from anywhere. Astana has the trappings of a cosmopolitan city, from apartments to hotels, which have appeared where nothing existed ten years ago. But critics say it is turning into a white elephant, deserted on weekends as civil servants flee to the bustle of the former capital Almaty. Almost every major oil company is active in Kazakhstan, and together they are believed to have invested more than $15 billion into its oil and gas sector in the past decade. Kazakhstan hopes to become the world’s fifth largest oil exporter by 2025. Now, however, most Kazakhs subsist on about $100 a month and the country’s infrastructure is threadbare at best. “Oil-exporting governments keep themselves in power by doing, essentially, two things. One, they disproportionately funnel benefits to the section of the population that supports them, and two, they build a security and military apparatus to quash dissent from the people who are not seeing any of these benefits,” says Stanford’s Karl.

In Chad, for instance, the government received $25 million for oil drilling rights, and some of this could have made its way into arms purchases to fight rebels. In Sudan, foreign oil investments have been blamed for fuelling the civil war. But Chad could also become an example of how oil companies should do business with Third World governments. ExxonMobil said it would not proceed with investment in the impoverished African country unless the World Bank got involved. In that instance, the American oil giant was considering a $3.5 billion pipeline to ship oil from the landlocked state via Cameroon to the Atlantic. ExxonMobil called in the World Bank to monitor an offshore bank account to ensure the $2.5 billion to be paid to Chad during the lifetime of the project was used for social and environmental programmes in the country. The company also publishes quarterly updates on the project, a rare disclosure for the oil industry. “People have started looking for solutions. The Chad-Cameroon pipeline may prove to be an interesting example. It’s the first time a powerful entity like the World Bank has insisted on measures for more responsible revenue management. But the jury is still out on how effective they will be,” Karl says. The development of oil in countries such as Venezuela and Saudi Arabia propelled them into the modern age and created high aspirations for the peoples there. Both countries were able to set up generous social welfare and benefit systems which rivalled those in developed Western societies.