CHAPTER SIX
Developing Through Oil

Oil seduces those who would control it, feeding dreams of instant wealth and economic transformation. The Polish journalist Ryszard Kapuscinski once remarked how “oil creates the illusion of a completely changed life, life without work, life for free. Oil is a resource that anesthetizes thought, blurs vision, corrupts . . .” Developing through oil is an aspiration for many oil-producing countries but the reality of everyday life for many in Angola, Iraq, Iran, Libya, Kazakhstan, Nigeria, Congo, and Saudi Arabia falls far short of this goal. Turning oil wealth into broad and lasting social development is a massive challenge for producing countries. Oil-field development draws in very large capital investment but creates relatively few direct jobs; the revenues it generates can be vast but also highly volatile; and the wealth and opportunities it creates fall disproportionately to ruling elites and foreign corporations, despite oil being “public property.” These challenges require sound long-term policies, robust and accountable governance institutions, and a diversified economy able to withstand the effects of oil wealth. Yet oil wealth can work against these requirements. It fuels short-term populist policies or unrealistic long-term plans, weakens institutions through corruption, bloated bureaucracies, and lack of accountability, and concentrates (rather than diversifies) economic activity through overvalued currency and labor-market distortions. Furthermore, most of the new oil producers are poor countries where capacities for meeting these requirements and sustainably absorbing oil wealth are limited. When oil begins to flow, it quickly dominates and distorts the economy.

The expectations associated with oil and its potential for socioeconomic and material transformation are key to understanding the politics of oil and development. Cheap oil fuels hope and desire for greater mobility, material abundance, fast economic growth, and modernization. For those who control its flow, oil provides a concentrated revenue stream without equal and a source of enormous social power. Economic development in the twentieth century owes much to the cheap and flexible energy that an expanding flow of oil has provided. But this development has come at a high price, especially for the people and environments in and around sites of extraction and refining. In many oil-producing countries, oil’s promise of modernization is honored in the breach. In this chapter, we show how oil’s role in development is complex and multifaceted. We try to account for the role of oil in development, who wins and who loses, and why oil-based development often proves so difficult. We then consider the development consequences of the end of the “Age of Plenty.”

Accounting for oil in development

Oil’s high energy density, relative abundance, and easy portability have made it a powerful enabler of economic development. From the 1920s onward, oil became widely adopted across a range of uses and economic sectors, from heating and power to transportation and plastics. Oil transformed agricultural production in a way that coal never did: in the US, for example, gasoline tractors replaced horses and manual labor, growing from barely a thousand in 1910 to over a million in 1932. Oil and gas underpinned the rollout of high-yielding, input-intensive arable crops from the 1960s onward (the “Green Revolution”), via the use of pesticides, fertilizers, pumped irrigation, and climate-controlled storage and transportation. Freeing up people from backbreaking agricultural work, lowering food prices, and generating economic surpluses, the massive energy surpluses provided by oil have allowed both economic growth and diversification (see Box 6.1). More generally, cheap oil has enabled economies to outrun local resource depletion and achieve huge economies of scale in production and transportation (via, for example, the application of more powerful engines or coolchain technology).

Box 6.1 The oil we eat: petroleum in the geopolitics of food production

About two billion people spend only a few hours per week to get food. Only 2 percent of the active population in the US, the world’s largest net food exporter, is directly involved in food production, and US households spend around 10 percent of their income on food – among the lowest in the world. Oil and gas inputs make food production cheap, while trucks and cars make “food gathering” easy. Such rich diets would require three weeks of production by a subsistence manual farmer for a single day of consumption, and a single food calorie requires ten calories from oil and gas. Not everyone is benefiting, however. Billions of people still spend much of their time producing food but are often outcompeted by the rich world’s dumping of agro-products subsidized in part by lower fuel taxes.

Without oil and gas, the current industrial food system is unsustainable. Replacing oil by biofuels, such as corn ethanol, mostly compounds the problem by allocating farmland to fuel rather than food production, while most biofuels have a low energy return on energy invested (EROEI) and still require high natural gas inputs.¹

Easily transportable, petroleum products fuel generators in many poor or remote parts of the world, providing vital electricity for health care, basic infrastructures, and access to education and mass media. Oil’s rich chemistry has made it the basic material of the “Plastic Age.” The ease with which it can be transformed into myriad products – from lipstick and clothing to car parts and containers – has facilitated rapid increases in rates of material consumption in industrial economies since the 1950s. The global draw on oil is immense: it is equivalent to 150,000 cars filling their tanks every minute, a rate of flow two and a half times that of the River Thames. Propelling over a billion vehicles – from mopeds to jets and cargo ships – oil continues to be central to economic growth and the geographical mobility so characteristic of the modernization and globalization of economies in the twentieth century.

Low-income countries caught in colonial relationships were largely bypassed by the economic growth and broad social gains achieved in western economies through an increased dependence on oil. For many, the fruits of their independence turned bitter during the successive oil crises and recessions of the 1970s and early 1980s. Lower oil prices after 1985 were advantageous to oil-importing countries, although high levels of debt and dependency on primary commodity exports often overwhelmed potential gains for poor countries. In India and China, however, oil-fueled agricultural modernization and growing international trade have contributed to lifting hundreds of millions of people out of poverty. These periods of growth have been several times more oil intensive per unit of GDP than in already industrialized countries where economies have shifted toward services. After growing rapidly in the 1970s, the oil intensity of GDP in China has been steadily declining and is still about twice that of the US and the EU. India’s oil intensity peaked in the late 1990s but remains high. In absolute terms, however, oil consumption and its impacts have risen considerably as surging GDP outstripped this general decline in oil intensity.

Accounting for environmental and social costs

Oil may facilitate the lives of many (and provide extreme wealth for a few) but the production network for this versatile resource also distributes a series of social and environmental costs. Media coverage of dramatic events makes some of these costs highly visible, such as the 1969 Santa Barbara offshore rig oil spill off the California coast, the 1.6 million barrels spilled following the wreckage of the Amoco Cadiz in Brittany in 1978, the 1989 Exxon Valdez tanker spill in Alaska, or the Deepwater Horizon fire and Macondo blowout in the Gulf of Mexico in 2010. So does environmental campaigning against “dirty oil” from the Alberta tar sands or “marginal oil” from Arctic drilling. But beyond these iconic cases of the “deeper, dirtier, and riskier” pursuit of oil, many of oil’s social and environmental costs are hidden from view. Worker injuries, traffic accidents, respiratory infections, pesticide accumulation, plastic trash, and leaking pipelines are a chronic corollary of oil’s global production network. Often occurring on a small scale, these events when aggregated together build up into large-scale consequences affecting millions.

Environmental costs

At a global scale, oil is among the largest sources of pollution. From highways and plastic trash to oil spills and carbon dioxide, the life cycle of oil products – from exploration to extraction, transportation, refining, consumption, and disposal – endangers ecosystems all over the planet. More than 3,500 rotary oil rigs are drilling for oil, and 5 million oil wells tap 33 billion barrels of oil each year from 40,000 oil fields around the world. Crude oil is then sent through 540,000 kilometers of oil pipelines and 4,500 oil tankers to about 700 refineries. These provide fuel through 600,000 gas stations to a billion motor vehicles parked or circulating on a vast extent of man-made hard surfaces. A chief source of air pollutants (such as particulates, benzene, and nitrogen oxides), oil still accounts for about a third of fossil fuel-related GHG emissions, a drop from 50 percent in the late 1970s.2

The exploration and extraction phases of oil production can produce seismic disruptions and large amounts of solid and liquid waste, some of which have high concentrations of toxins. Worldwide, drilling wastes may amount to 300 million barrels, while oil extraction generates about 90 billion barrels of so-called produced water, the saline water in the mixture of oil and water lifted from reservoirs. Nearly all produced water is reinjected into oil reservoirs, but some ends up in waste pits. Leaks from pits into streams have been a core health complaint of oil-field communities in Ecuador. Vast amounts of water are injected into reservoirs to enhance oil recovery, between 1.4 and 4.6 barrels to every barrel of oil produced in Saudi Arabia, while the extraction and upgrading of bitumen from the tar sands requires about 4 barrels of water for every barrel of synthetic crude oil. Accidental spills during drilling or lifting oil to the surface can have massive consequences, especially at offshore sites where well plugging and relief well drilling are complicated. The explosion of Pemex’s exploratory well Ixtoc I in June 1979 spilled 3.3 million barrels into the Gulf of Mexico. Two decades later, the explosion on BP’s Deepwater Horizon platform, also in the Gulf of Mexico, resulted in the deaths of 11 workers and a spill estimated at 5 million barrels between April and July 2010. Intentional spills from Kuwaiti oil terminals and tankers by Iraqi forces during the 1991 Gulf War provoked the largest oil spill in history, with estimates ranging from 4 to 11 million barrels. Iraqi forces also set approximately 600 oil wells on fire as the Allied air offensive began, with the last oil-well fire capped on November 1991, nine months after being set on fire by Iraqi troops.3

Land-based pollution results from pipeline ruptures and spills. About 2.5 million barrels spilled from 5,000 pipeline incidents in the US between 1991 and 2010. Extensive networks of aging pipelines linking small and widely scattered fields to oil terminals are particularly prone to spills, and chronic occurrences can build into very significant volumes over the years. An average of 800 spills per year was reported in Nigeria between 2006 and 2009, and up to 13 million barrels of oil may have been spilled in the Niger Delta since oil exploitation started in 1958. There is much controversy over the relative importance of causes, including pipeline corrosion, poor maintenance, and operational mistakes versus oil theft and sabotage. The oil pollution of creeks and acid rain from gas flaring have had devastating impacts on the health and livelihoods of local communities.

Pipelines are often routed through low-income communities that have limited access to economic and political power, especially in urban settings such as Los Angeles. Construction itself is frequently marred by criticisms of inadequate compensation of land users, heavy-handed evictions, and, in some cases, human rights abuses. Construction of the Chad–Cameroon pipeline sought to set a new standard with the most sophisticated efforts to date to avoid such problems in low-income countries (see chapter 8), but dissatisfaction has remained among many affected communities while broader concern for human rights abuses in Chad persists.

The environmental risks associated with upstream activities are increasing. Environmental regulation and scientific knowledge and monitoring are greater than ever, but oil companies are increasingly seeking to develop reserves in locations that are technologically complex and environmentally challenging. Many of the remaining significant reserves of conventional oil lie in the ultra-deep water offshore and in the Arctic, while accessing the substantial known reserves of unconventional oil – such as in Canada or Venezuela – requires wholesale landscape transformation through open mining or vast amounts of energy to liquefy and extract bitumen or ultra-heavy crude in situ. Likewise, alternative liquid fuels – such as biodiesel and ethanol production – are associated with deforestation and the development of biomass plantations.⁴

The last two stages of the oil life cycle also distribute environmental and health impacts in ways that are highly uneven. Refineries mostly affect the health of local communities, again often low-income marginalized populations, with higher reported rates of leukemia and cancer, as well as psychosocial reactions to perceived or actual emissions. Oil consumption results in localized air and water pollution, as well as the emission and accumulation of greenhouse gases, while car travel demands massive infrastructure and can negatively affect the health of users and bystanders. In the US, 6.3 million kilometers of paved roads, which along with car parks for about 215 million cars cover around 16 million hectares, compete with other land uses including agriculture – itself increasingly directed at biofuel production. Cars themselves consume vast amounts of raw materials, the production and disposal of which have environmental impacts. Air and water pollution mostly concentrate in areas of use, with many urban areas – particularly in rapidly growing cities of the global South – turning into cesspools of toxic chemicals. GHG emissions have a global reach, although their effects on local and regional climates are highly differentiated. Whereas the benefits of oil consumption (car ownership, low-cost travel) accrue mainly to the richest fifth of the world’s population, it is the poorest who are expected to experience the most serious consequences of climate change, including urban poor and rural populations in drought-prone regions.

Social costs

The people most directly exposed to the oil production network are oil workers (see chapter 4) and the local communities that host oil infrastructure. The most exposed communities are those in poorly regulated production areas. Oil exploration often involves accessing ecosystems in remote locations, resulting in disproportionate impacts on indigenous communities, with at least seventy indigenous groups currently affected around the world. Environmental and social impacts resulting from oil sector activities include deforestation, road building, and the arrival of migrant oil workers. Impacts extend beyond the oil sector itself as, for example, road construction can facilitate land colonization by settlers. Although “opening” land for development can help reduce poverty and is often promoted by national authorities, colonization can have strong negative impacts on indigenous communities. Communities located near transportation and refining infrastructures are also disproportionally affected, many of these being low-income minority populations.5

Oil usage also creates risks within the more familiar, everyday environments of industrial economies. About 1.3 million people die in traffic accidents every year, while up to 50 million more are injured, mostly pedestrians and cyclists run over by cars in developing countries. The World Health Organization (WHO) reports that traffic accidents are now the world’s leading cause of death among youth between 5 and 29 years of age, while a 2005 WHO study suggested that more premature deaths could result from car exhaust than traffic accidents in Europe. Kerosene lamps provide another example of the large social costs of oil-fueled technologies. A source of light for more than a billion people, kerosene lamps are also polluting, dangerous, and inefficient, causing burn injuries and respiratory diseases affecting millions and demonstrating the importance of moving up the “energy ladder” toward safer (and more affordable) fuels. Indirectly, oil-fueled mechanized warfare since World War I has made armed conflicts more devastating, especially through civilian deaths by aerial bombing and the far-flung deployment of armed forces. Arguably, many lives are also saved thanks to rapid transportation to hospital and the medical progress and equipment that oil has made possible, not to mention increased food production. Yet deaths, injuries, and disease are part and parcel of the worlds made through oil and should not be ignored. They highlight the central role oil plays in the development of livelihoods and how, in ways not often imagined, oil now sets the conditions for the possibility of life. As such, they point the way to an alternative perspective on the “true costs” of oil and a politics of oil that addresses both the “goods” and “bads” that oil can create.6

Oil revenues: who gets what?

Every year, between three and five trillion US dollars change hands along the oil “value chain.” About two-thirds of this money ends up with governments in oil-exporting and -importing countries in the form of taxes, while much of the rest goes to some of the world’s biggest companies as profits. Oil is one of the largest revenue transfer schemes in the world: revenue is transferred from consumers’ pockets to governments and corporations, and from consuming countries to oil-exporting countries. The question “who gets what?” matters because oil’s production network generates striking inequalities, both between and within countries. On the consumption side, the US accounts for only 4.4 percent of the world’s population, but consumes about 20% of world oil supplies and 25% of road transportation fuel, and, while consumers complain of high prices at the pump, these prices do not (yet) reflect the full social and environmental costs of oil. On the production side, whereas oil enriches some of the world’s wealthiest people, it is often extracted from under the feet of the poorest. The wealth of Nigerian elites and the misery of Niger Delta populations exemplify this pattern, but it is repeated to various degrees across the world. In Angola, China, Ecuador, Iran, Iraq, and Saudi Arabia, oil is pumped in areas inhabited by often underprivileged minority populations. Very little of the oil industry’s profits have so far been spent mitigating the negative impacts of oil and helping to transition from an oil economy. Instead, they have been plowed backed into the industry or dispersed to shareholders.

Distribution of oil revenues

Every day, consumers worldwide spend about US$11 billion on oil products. Oil provides many different services, but for many consumers the gas station is where the politics of revenue distribution comes alive. Because gas stations are on the frontline of oil price awareness, a few display information showing that they make only a few cents of profit on every dollar in sales. Such seemingly petty earnings contrast with news headlines of massive profits among oil companies, with ExxonMobil earning US$45.2 billion in 2008 – the biggest annual corporate profit in US history at the time. Such profits, in turn, pale in comparison with the earnings of governments in the main producing countries, such as the US$262 billion collected that year by the Saudi central government on oil exports. Oil-producer governments capture on average 70% of the net revenues from oil production, varying from 40% in the US to 95% in Iran. Many governments in importing countries, and especially in Europe, also heavily tax oil products. Governments in the European Union get about 5% of their national tax revenues from fuel taxes, or about US$275 billion in 2014. French drivers often compare their car to a cash cow: taxes can account for as much as 80% of the retail price of petrol when oil crude prices are low.7

To answer “who gets what” from oil revenues, we break down the oil value chain into its different components (see Table 6.1). Oil production and refining costs are relatively fixed, amounting to about a dollar per gallon of gasoline. The remainder consists of government taxes and corporate profits, which vary considerably. Using a crude oil price of US$100 per barrel and average world price of gasoline of US$5.02 per gallon, costs amount to 20% of the final value, producer governments earn 33%, consumer governments 40%, and companies 7%. This distribution of revenues from endproduct sales reflects the relative power of governments, oil companies, and consumers. Producer governments justify their claim through resource ownership of a depleting nonrenewable asset, as well as compensation for damages in the case of local landowners and communities. Consumer governments point to the costs of road infrastructure, traffic accidents, and pollution. Oil companies see themselves as the rightful producers of the resource. Finally, consumers supposedly decide if oil is to be extracted, but most are price takers, in the sense that they have a limited capacity for influencing the price of oil, hooked on lifestyles and locked into infrastructures that demand a strong will and some sacrifices to opt out of.

Table 6.1 Distribution of cash flow from oil sector

*Sources:* EIA and IEA, based on US$100 per barrel and global average gasoline price; field development capital expenditures included in finding costs.

This assessment provides only a general snapshot, and there is considerable variation among producing and consuming countries, different oil companies, and types of oil. The oil industry also benefits from large subsidies and tax exemptions, amounting to about US$4 billion in the US. Overall, consumer governments control the largest share of oil revenues, but in effect they simply channel consumer spending through public budgets, rather than create new wealth. It is producer governments that gain the most from the oil sector, a “petrodollar” wealth from which development is supposed to flow (see Box 6.2).⁸

Wealthy producers?

Volume and price are not the only determinants of “who gets what” among oil producers. Contractual arrangements, as discussed in chapter 2, matter a great deal to determine the share of operational revenues obtained by producer governments. This percentage of tax revenue relative to total revenue – the rent or “government take” – reflects in part the geological potential, costs of production, and risks taken by oil companies. As a consequence, “government take” is not easily comparable between countries or even between contracts. Yet some governments (and their populations) do better than others, with Norway, for example, capturing 75 percent of total revenue compared to 30 percent for the UK (see Table 6.2). Sharing the same North Sea Basin, the two countries have produced about the same amount of oil and gas. The UK did not seek direct equity participation in oil ventures, but Norway did and also imposed higher taxation. After 45 years of production, the UK had generated US$470 billion in revenues, about US$11 per barrel, while Norway received US$1,197 billion, or US$30 per barrel. The difference, amounting to US$727 billion, would allow the UK to repay a third of its national debt. Moreover, Norway did not spend all its oil earnings, but reinvested most of them into a savings fund (the Norwegian Pension Fund) worth US$876 billion in 2015.¹¹

Box 6.2 Petrodollars

Producer governments have long received oil revenues, but until the late 1960s this income was relatively small, due to the dominance of western companies in revenue distribution. Petrodollars were ironically born out of the context of US dollar devaluations in 1971 and 1973 that led OPEC to attempt a shift to a basket of currencies; but the 1973 oil embargo unintentionally reinforced dollar-denominated oil trading. Reacting to the huge new flow of dollars collected by oil-producing governments, US Secretary of State Kissinger vowed “to return extorted funds to our economy.” To do so, the US government and lending agencies pushed petro-states to buy US-dollar denominated assets and invest in US services and infrastructures. This set a development model geared toward modernization dependent on US technologies and financial products, and ultimately on the value of the dollar itself.

Petrodollars were also recycled through US banks to low-income countries in the form of loans, tied in part as well to the provision of (overinflated and often inadequate) US goods and services – with loan pushers, or “economic hit men” as popularized in John Perkins’s non-fiction book, being active in both oil-exporting and low-income countries.⁹ This model of development resulted in some social benefits, but it frequently yielded massive debt overhangs and a growing gap between an oil-related elite and the rest of society.

The current oil boom is also seeing much financial recycling, although the US now channels only about a quarter of that wealth compared to three-quarters in the 1970s. Iran has demanded to be paid in euros and not US dollars following the lifting of sanctions, and Saudi Arabia is the only OPEC member staunchly defending the status quo of dollar-based oil trading over a basket of currencies, even if most countries also hold much of their reserves in dollars. Standing as an exception, Iraq was forced into a major petrodollar recycling scheme under US occupation through largely wasteful “reconstruction” schemes.¹⁰

Table 6.2 Government “take“ from oil revenues

*Sources:* US Government Accountability Office, “Oil and Gas Royalties,” May 2007; Daniel Johnston “Higher Prices, Lower Government Take?” *Petroleum Accounting and Financial Management Journal* (2004).

Politics, ideology, and negotiation skills also affect revenue distribution between companies and governments. Foreign governments and oil companies have toppled regimes undermining their oil interests, as in Iran, while producing governments have nationalized foreign oil ventures. Some governments are able to grow their participation and capture of revenues from the sector for long-term benefits, while others negotiate bad deals, occasionally for corrupt purposes. Short-term horizons, such as the reimbursement of massive debts or the payment of civil servants’ salary arrears, can motivate large up-front “signature bonuses” to be paid at the time a contract is awarded at the expense of future revenue flows. Government take tends to be higher in producing countries with a strong national oil industry, such as Iran and Venezuela. Yet such high shares can be deceptive, hiding inefficiencies and declining production, as well as cross-subsidies such as domestic oil consumption.

Government revenues should not be confused with the flow of benefits to citizens. As wryly noted by Human Rights Watch’s Arvind Ganesan, “the government’s ‘take’ is not necessarily the public’s ‘take’. It may just be the government’s take.” Oil revenues can reach people through public goods and tax rebates, but also through direct cash payments and pension funds. Very few governments directly distribute oil revenues to their citizens, a pioneer being Alaska which has handed annual payments averaging about US$1,600 to every resident since 1982. If implemented across all mineralproducing countries, cash transfers could halve the number of people living on incomes of less than US$1 per day. Yet most countries prefer to use other means of distributing oil revenues. Many authorities, such as Alberta’s provincial government, prefer to slash taxes, a popular policy that kept the same party in power for 44 years, even if low taxes and lack of oil savings has put the government in debt during oil downturns. Aware that oil is running out and seeking intergenerational equity, Norway maintains heavy taxes and generous public services, while directing about 95 percent of its oil revenues to the Norwegian Pension Fund. Norway now stands as a model for escaping the “oil curse,” though it benefited from favorable initial institutional and economic conditions compared to most other oil-producing countries.

The “oil curse”

One of the tragic paradoxes of oil wealth is recurring misery. Many oil-rich countries face large economic shocks and distortions, remain under authoritarian governance, and suffer from armed conflicts. As a result, social indicators and economic performances in oil-producing countries are often below those expected from their level of income and resource endowment (see Figure 6.1). Many oil-producing countries rank well below their GDP per capita ranking in terms of the Human Development Index (HDI), the worst case being Equatorial Guinea with a rank of 41st for GDP per capita compared to 138th for HDI in 2014. Equatorial Guinea only became an oil producer in the mid-1990s which helps explain such a discrepancy, but many other factors are at work in what political scientist Terry Karl calls the “paradox of plenty.”¹²

Debt overhang and Dutch disease

Two of the most important economic problems facing oil-producing countries are oil-revenue volatility and impediments to economic diversification. Price volatility and fluctuations in production result in massive budgetary problems for governments and shocks to the economy. The risk is high of overspending during boom times, with governments turning to loans during bust times in the hope of better days. Most oil-producing governments ended up heavily indebted after the fall of oil prices in the mid-1980s. Some producing countries were rightly more cautious during the last boom, despite widespread belief at the time that prices would stay high, if volatile, for the next couple of decades.

Oil revenues also tend to result in massive economic distortions that can increase oil dependence over time. Whereas oil windfalls provide capital to help accelerate industrialization, modernize agriculture, and diversify the economy, large oil revenues tend to undermine other productive economic sectors through local currency appreciation and cheap imports. This “Dutch disease” was named after the negative impact of North Sea natural gas development on the Netherlands’ industrial and agricultural sectors in the 1970s. The impact on the structure of the economy is compounded by lower opportunities for participation of women in the labor market. Oil windfalls should also help relieve poverty, but in the worst cases both poverty and inequalities rise over the long term. For example, although oil revenues increased from the 1980s to the 1990s, the percentage of Nigerians living on less than a dollar a day increased from less than a third to 70 percent over the same time period. Poverty results, in part, from the “crowding-out effect,” as the oil sector encroaches on other sectors that would employ many more people than oil, and encourages economically inefficient investments (such as uncompetitive industries, prestige spending, and “white elephants”). Greater poverty and inequalities also result from the concentration of oil-revenue flows into a few hands, essentially politicians’ pockets and corporate coffers. That these revenues are generated from a handful of state or foreign companies, rather than via taxation of the general population and a diversity of business sectors, facilitates secrecy and discretionary spending while reducing government accountability.

Governance, grievances, and corruption

Oil wealth can have a number of negative impacts on the quality of governance in oil-producing countries. The first is its potential for enabling authoritarian forms of governance and foreign interference. Simply put, oil wealth provides rulers greater autonomy from civil society and exacerbates foreign commercial and strategic interests. A population may be better off materially under authoritarian rule and with foreign oil companies, compared to a dysfunctional democracy or mismanaged national oil company. Yet, without transparency and accountability around oil revenues and budgetary expenditures, the risk is high that authoritarian rulers and foreign companies will abuse their position. Popular revolutions or oil industry nationalizations are rarely effective solutions: popular uprisings have often given way to renewed authoritarianism (Iran), sometimes aggravated by recurring coups d’état as armed forces take on a greater governing role (Nigeria). Nationalizations have also been followed by punishing treatment from foreign oil companies and their powerful home governments, including the use of oil export embargoes (Mexico), or military interference (Iran). Some national oil companies have also lacked technical expertise to run efficiently, or become so close to a corrupt government as to become slush fund providers.

Price volatility also exacerbates governance problems. Domestically, low prices increase general grievances among the population, while during periods of high prices populations may voice demands for the state to take a greater control and/or share of oil revenues. Regionally, low prices may entice producer-country governments to divert public attention from falling revenues through war or seek resources through military conquest, while high prices may result in a combination of increased military capacity and a greater appetite for military interventionism. Internationally, low prices create few incentives among importing countries to maintain stability in oil-producing countries for the sake of affordable oil, while high prices may result in oil consumers opposing political and military support for wealthy regimes. In turn, political instability and hostilities taking place in oil-producing countries, especially major exporters, influence price movements.

The oil boom of the 1970s brought massive increases in fiscal earnings for producing countries through nationalizations, contract renegotiations, and rising oil prices. Greater financial strength and autonomy, however, created many challenges as fast-growing, overstretched, and sometimes fledgling bureaucracies faced new or increased expectations from the population and ruling elites. With the collapse of oil prices in the 1980s, states became doubly weakened. Financially, petro-states faced massive indebtedness – a “debt overhang” that resulted in part from the overoptimism and fast growth of the boom period. Bureaucratically, petro-states faced new challenges of underfunding and accompanying structural adjustments.

The mismanagement of the boom and bust cycle of the 1970s–1990s had major geopolitical dimensions and consequences. It contributed to the collapse of the Soviet Union as a drastic fall in oil revenues after the mid-1980s precipitated the need for reforms and undermined their implementation. It drove Iraq to first invade Iran in 1980 when wealthy, and then Kuwait in 1990 when broke. And it contributed to a growth collapse and deepening cycle of corruption, resistance, and repression in countries such as Algeria and Nigeria. As the oil price went down to an all-time low of US$9 per barrel in December 1998, anxiety built up that cash-starved oil exporters facing restive populations would descend into civil war if the glut in the oil markets continued. Eurasian and some of the Persian Gulf countries were the most at risk.13

Saudi Arabia raised the most concern, as unemployment grew and dissent became more vocal, notably among the Shi’ite minority residing in the Eastern Province, the richest oil area of the country. By 2000, even Saudi Arabia had accumulated a national debt of US$36 billion, while its GDP per capita plummeted from US$35,000 in 1980 to stagnate at around US$20,000 since the mid-1980s. In common with other oil-dependent countries, low oil revenues exacerbated domestic grievances and tensions, particularly against national authorities perceived to be unable to harness oil wealth for the benefit of people. When Saudi dissidents struck at the World Trade Center in September 2001, much of Saudi Arabia’s population had been experiencing economic decline. As in other countries, oil revenues incited radical opposition and divisive identity politics even among the elite. Chief among these was Osama bin Laden, who in 1995 publicly blamed Saudi King Fahd and his “elite circle” for the poor state of the economy and their “wastefulness” in building palaces. Bin Laden also denounced King Fahd’s financial backing of former ally Saddam Hussein, the lowering of oil prices “to harm Iran during the war with Saddam” and to serve western interests, useless and corrupt spending on inadequate military equipment and the payment of the coalition’s bill for the Gulf War, and the “lack of serious action to find other sources for income.” He denounced the US–Saudi agreement on low oil prices during the 1990s as “the greatest theft in history”, estimating an annual loss of US$1,200 for every Muslim in oil-exporting Islamic countries. The Saudi regime faced serious grievances during the 2011 Arab Spring, yet it proved resilient in part by announcing the redistribution of US$130 billion from oil revenues amassed during the recent boom, through salary increases, low-cost housing, and social benefits. The Kingdom has also launched a “National Transformation Program” to reduce oil dependence, boost the private sector, and create a massive sovereign wealth fund through selling part of the national oil company Aramco. Such reforms are necessary, although they are made more challenging in a context of lower oil prices, dwindling cash reserves, and reduced public spending. They also face resistance both from some elites and the general population.

Corruption is a major problem in many oil-producing countries, generally resulting from the volume and concentration of revenues, the discretionary power of authoritarian elites, the relative absence of businesses and civil society organizations financially independent from oil rents, and the collusion of some international banks. Corruption and misguided policies in Nigeria mean that more than half the population lives on less than US$1.25 per day, despite oil government revenues of about US$550 billion since the end of the Biafran War in 1970. The late Nigerian President Abacha and his family and collaborators embezzled between US$2.3 and US$5 billion over a four-year rule, with the assistance of at least 23 banks, many from Switzerland and the UK; about US$1.2 billion was later recovered by the Nigerian government. Equatorial Guinea’s president Obiang and his family have come under repeated anticorruption and moneylaundering probes, with French courts seizing some of the assets of the president’s oldest son.

Corruption and its redistribution through political patronage is sometimes perceived to “keep the peace” through handouts to vocal opposition groups. There is often a tension, however, between local political and corporate elites capturing the share of oil revenues and local communities who see few benefits, especially in production areas where the gap between commitments by authorities to reward and compensate local populations and what they actually receive is wide – as documented for the Niger Delta, the Angolan enclave of Cabinda, or Western Siberia. More broadly, tensions frequently run high between the central government and communities in oil-producing regions who perceive themselves as the rightful owners of the oil, leading in turn to the rest of the population resenting unequal treatment.

The risk is that volatile prices will exacerbate tensions, both within countries over the redistribution of oil revenues and internationally between importing and exporting countries. Higher prices could in principle benefit poor countries that experience protracted periods of conflict, such as Angola and Sudan, through both economic recovery and greater political stability. Much will depend, however, on the quality of domestic governance and the legitimacy that governments gain through wealth redistribution. Efforts to improve governance and thus reduce the risk of corruption have so far focused on revenue transparency and accountability, including the Extractive Industries Transparency Initiative (see Box 6.3), and the more rigorous application of legislation such as the US Foreign Corrupt Practices Act (see chapter 8).

Although many oil-producing countries suffer from poor governance, including corruption, it is important to note that many governments (and individual officials) are attentive to reducing extreme poverty in order to avoid grievances and conflicts. They are less attentive to the inequalities which can be rife but frequently “invisible” because of an absence of official statistics (as for many Persian Gulf countries), or hard to detect by usual survey methods due to the extreme concentration of wealth. Governments may seek to prevent local grievances and preempt a secessionist struggle by granting local populations some autonomy and revenue compensation. Nonetheless, many countries have experienced secessionist struggles in oil-rich regions (see Table 6.3), while high debts, declining oil prices, and demands for democratization have set the context for civil wars, as in the case of the Republic of Congo in the mid-1990s.¹⁴

Box 6.3 Oil revenue transparency

Calls for greater transparency in oil revenues emerged in the late 1990s as part of an anticorruption advocacy campaign by British NGO Global Witness and international financier George Soros, demanding that oil companies “publish what they pay” to governments. Motivated notably by BP’s stakes in Angola and the Caspian, British Prime Minister Tony Blair launched in 2002 the Extractive Industries Transparency Initiative (EITI), a voluntary process whereby governments agree to minimal criteria of revenue transparency in order to participate and gain compliance status. The criteria require extractive companies (including state companies) to publish their payments to governments, governments to publish what they receive in revenue from companies, and an independent audit reconciling the payments and revenues to note any discrepancies. In addition, the initiative requires the active participation of civil society in the design, monitoring, and evaluation of the audits. By June 2016, the EITI had validated 31 countries, and 20 other countries were working toward compliance validation. Several countries long targeted by the initiative, including Angola (which motivated Global Witness to launch transparency initiatives in the first place), are still not participating in the initiative, but new mandatory legislations are also pushing the transparency agenda, such as the US Dodd–Frank Wall Street Reform and Consumer Protection Act which mandates the US Securities and Exchange Commission to require disclosure of payments to governments by publicly listed oil companies. More broadly, there is also growing momentum to require contract transparency and disclosure of beneficial ownership, which will assist civil society and parliamentarians to assess whether a country is getting a “fair deal” and who ultimately benefits from extractive activities, and to check if payments match agreed terms.

Table 6.3 Secessionist conflicts in oil-producing countries

Country	Region and duration
Angola	Cabinda (1975–2002)
China	Xinjiang (1991–ongoing)
Indonesia	Aceh (1975–2005)
Iran	Kurdistan (1966–ongoing), Arabistan (1979–80)
Iraq	Kurdistan (1961–2003)
Nigeria	Biafra/Niger Delta (1967–1970, 2004–ongoing)
Sudan	South Sudan (1983–2005)
Yemen	South Yemen (1994)

Notes

4. See D. O’Rourke and S. Connolly, “Just Oil? The Distribution of Environmental and Social Impacts of Oil Production and Consumption,” Annual Review of Environment and Resources 28 (2003): 587–617; CO₂ emissions based on IPCC and IEA data. M. Wu et al., “Water Consumption in the Production of Ethanol and Petroleum Gasoline,” Environmental Management 44(5) (2009): 981–97; A. Price, “The 1991 Gulf War: Environmental Assessments of IUCN and Collaborators” (IUCN, 1994); M. Sadiq and J. C. McCain, The Gulf War Aftermath: An Environmental Tragedy (Springer, 1993); “Oil well fires” section of the US Department of Defense Environmental Exposure Report (www.gulflink.osd.mil/owf_ii/). On marine oil pollution, see http://oils.gpa.unep.org/. US Statistics from the Pipeline and Hazardous Materials Safety Administration (http://phmsa.dot.gov/). A. Nossiter, “Far from Gulf, a spill scourge 5 decades old,” New York Times, June 16, 2010; D. Olin, “Exxon’s endless lawsuit,” Portfolio.com, March 23, 2009. Aging pipelines would come under greater corrosive stress from bitumen-based crude, a risk that Alberta’s Energy Resource Conservation Board rejects: ERCB, “ERCB Addresses Statements in Natural Resources Defense Council Pipeline Safety Report” (2011); NRDC, “Tar Sands Pipeline Safety Risks” (2011).

6. See W. W. Huebner et al., “Mortality Patterns and Trends among 127,266 US-Based Men in a Petroleum Company: Update 1979–2000,” Journal of Occupational and Environmental Medicine 51(11) (2009): 1333–48; T. Sorahan, “Mortality of UK Oil Refinery and Petroleum Distribution Workers, 1951–2003,” Occupational Medicine 57(3) (2007): 177–85. See S. Gower et al., “Development of a Health Effects-Based Priority Ranking System for Air Emissions Reductions from Oil Refineries in Canada,” Journal of Toxicology and Environmental Health, Part A 71(1) (2008): 81–5. Health impacts of car use include road traffic injuries, cardiovascular diseases, diabetes, breast, lung and colon cancers, and depression: J. Woodcock et al., “Public Health Benefits of Strategies to Reduce Greenhouse Gas Emissions: Urban Land Transport,” The Lancet 374(9705) (2009): 1930–43. On the costs of oil, see J. Hill et al., “Climate Change and Health Costs of Air Emissions from Biofuels and Gasoline,” Proc. Natl. Acad. Sci. 106(6) (2009): 2077–2082; J. M. Ogden et al., “Societal Lifecycle Costs of Cars with Alternative Fuels/Engines,” Energy Policy 32(1) (2004): 7–27; I. W. H. Parry et al., “Automobile Externalities and Policies,” Journal of Economic Literature 45(2) (2007): 373–99. See M. Kaldor et al., Oil Wars (Pluto, 2007).