The Oil Curse

I asked the following question on one of my economics exams:

You are the leader of a country that is trying to economically develop. Your head geologist bursts into your office with the news that he has just found a huge pool of oil. He hasn’t told anyone. What do you do?

The answer: Shoot him. Why? Because relying on the export of oil or mineral wealth has been more of a curse than a benefit. Recent history shows relying on raw material exports retards, not promotes, economic development, political change towards democracy, and social change toward tolerance and equality.

The cautionary tale from history is Spain. In 1492 Spain was finally (after over a 400 year crusade) united under a Catholic government. Much of Spain's educated elite, minority groups of Muslims and Jews, were persecuted by the Inquisition and forced to leave Spain and later Portugal (enriching Holland). But a lucky bet on Columbus led to immense mineral wealth, mostly silver, from Spanish America. This wealth was used for about 150 years to pay for Europe’s largest military and very conspicuous consumption by the royal family and the nobility.

Much of this wealth actually benefited the rest of Europe as Spain exported silver to buy mercenaries and luxury products, armor from Germany, and ships from Genoa. The Spanish government’s income never covered its expenditures to support its imperial ambitions, so that some of its mineral wealth went to enrich foreign lenders.

Underneath it, however, Spain remained a feudal, backward, poor country. As the silver mined in Peru decreased, so did Spanish power and wealth. By the late 1600s, Spain was no longer the major power in Europe and would never again even be an important political or military factor in European power politics. It also collapsed economically, to becoming an impoverished country until late in the 20th century.

Let’s look at the modern equivalents. Many African countries have immense mineral or oil wealth - diamonds, oil, copper, uranium and other minerals. The result? Corruption, civil wars (to fight over which group gets rich from exports), internal terror and violence, and widespread poverty. The Congo is one of the richest countries in mineral wealth in the world but also one of the poorest, most corrupt and most violent. The per capita income in sub-Saharan Africa is probably lower than it was 40 years ago when African countries became independent.

What about the major oil exporters? Certainly it has greatly helped a number of less developed countries to get rich, especially countries with small populations like Saudi Arabia and the United Arab Emirates. But even here the picture is mixed. Much of the Saudi wealth has gone into military spending, luxury products, supporting extremist groups, buying foreign real estate, and importing foreign labor. The extended royal family and a few politically-connected families like the bin Ladens has become extreme wealthy. Most Saudis work for the government or government-related companies. The political system is still autocratic, there is a religious police, and the social system is still intolerant and discriminatory towards women, religious minority groups (Shiites) and infidels. Sound familiar?

In most countries, little of the oil wealth has filtered down to the people. Much of it has been expropriated by the political elite in countries like Nigeria and Indonesia. Many oil exporters (Algeria, Iran, Angola) have experienced civil wars. A great deal of the oil wealth has gone into military spending (Iraq, Saudi Arabia), including developing atomic weapons (Iran). Some has gone to support terrorist groups, particularly in Libya. Iraq used its oil wealth and a subsidy from Saudi Arabia to fight a long and costly war with Iran. Kuwait was invaded for its oil and trashed by Iraq before the United States military pushed the Iraqis out. The people in Latin American countries like Venezuela, Mexico and Ecuador have not benefited very much from oil wealth. Venezuela has descended into poverty and chaos. Saudi Arabia has a government and government policies that are similar to Spain's in the 1500s  And, in a crazy irony, Iran (the third largest exporter of crude oil) is a major importer of refined oil products like gasoline. Some of its oil export earnings are used to subsidize imported gasoline.

Saudi Arabia, with about one-fourth of the world’s proven oil reserves, has a lower per capita income than Israel, which has no oil and virtually no other natural resources. Japan became the world’s second largest economy after World War II despite having almost no natural resources and importing all its oil. China is a huge importer of natural resources, especially oil. An important point: The global economy is a substitute for controlling natural resources through imperial conquest. It is no longer necessary to own or control natural resources if they can be purchased through the markets of the global economy.

But there are political consequences. Europe and Ukraine are dependent on Russian natural gas, which gives Russia political leverage. Oil revenue funds the current or former anti-American governments of Libya, Iran, Iraq, Sudan, Russia and Venezuela. Oil money has been used to finance terrorist groups. This is not smart foreign policy.

It is too bad that the oil exporting countries have not learned the lesson of Spain. The economies of almost all oil and natural gas exporters (and other natural resources) are still, after 40 years, heavily dependent on exporting unrefined products. Most of these countries had not been successful in using their exporting earnings to industrialize away from dependence on raw material exports. As in Spain, they also have not modernized their internal social, political or economic structures. The root cause is that the resources are owned by the government so that the money earned from exports goes to support the political agenda of the government or is diverted to the private wealth of political elites.

When the resources run out, or prices fall, or the industrialized countries find substitutes (electric vehicles, solar), or step up recycling and conservation, the economies of the oil and natural resource exporters will no longer be based on the export earnings of raw materials. Maybe, like Mexico, they will search for and find better strategies to sustain economic growth and development. For the sake of the people in these countries and the peace of the world, let’s hope so.