Oil: a curse or a blessing?
There is an adage about wealth and democracy that says, “the more well-to-do a nation, the greater the chances it will sustain democracy.” This literally means that oil rich nations with large oil deposits (a clear absolute advantage) should shine far beyond all others as beacons of democracy and freedom.
Unfortunately, according to a paper titled, “Are oil rich nations really doomed to autocracy and inequality?” by Samuel R. Schubert, nothing seems further from the truth.
“Among the world’s top ten oil exporters, only Norway and Indonesia can be realistically described as democracies. While others like Nigeria, Russia and Venezuela demonstrate a mere semblance of freedom,” Mr. Schubert states.
The idea that oil resources might be more an economic curse than a blessing began to emerge in the 1980s. From 1965-1998, in the OPEC countries, gross national product per capita growth decreased on average by 1.3%, while in the rest of the developing world, per capita growth was on average 2.2%. Today, oil constitutes 30% of total export revenues in some 34 less developed countries and none can be classified as democratic.
This trend should obviously defeat all logic, but only if consideration is not given to the genesis and cycle of internal conflict within oil producing countries. In this model, the oil resource is the spark and fuel for long running conflict. On the one hand, for any opposition force to destabilize a nation it attacks the main source of income i.e. the oil producing region. Secondly once in control of these regions, either fully or marginally, the resources are then utilized to finance the rebellion, hence creating a perpetual cycle of conflict. The wars in Angola, Liberia, the Democratic Republic of Congo, Nigeria and Sierra Leone are perfect examples of this phenomenon.
Angola for example, is Sub-Saharan Africa’s second largest oil producer after Nigeria. Recent discoveries suggesting it could soon become the largest. But the 1999 UN Human Development Index placed Angola at 160 out of 174 countries, according to social indicators. Angola, by all standards, should have a thriving economy. Instead it suffers from incessant internal conflict, with massive proportions of national wealth unaccounted for, and the well being of the population seemingly not a priority to the government.
Why? Studies have shown that oil dependence leads to skewing of political forces. It concentrates production to geographic enclaves and concentrates power into the hands of the few elites.
Sudan’s seemingly endless civil wars, perhaps the longest running conflicts in Africa, also explain this phenomenon. Since oil began flowing from the government controlled Heglig and Unity oilfields, which lie uncomfortably close to the battlefields in the war-torn south, there has been an escalation of the conflict in the Sudan. It also explains why the South has failed to become a fully independent entity and hopefully peaceful state. South Sudan's nascent oil industry and reserves are estimated at as high as three billion barrels.
Countries that depend on oil for revenue bask in wealth, but overwhelmingly suffer what The Economist has termed a “poverty of policy”. The Ghanaian Chronicle of 28 Feb 2008 explores this phenomenon in an article titled, Nigeria’s resource curse. Below is an excerpt;
Nigeria is a heart rending paradox. A rich country with desperately poor people. Despite its massive earning from oil, 70% of its estimated 140 million people live below the poverty line.
More than 80 million Nigerians live on less than 1 USD a day, in a country that has earned 340 billion dollars since the 70s. Nigeria is ranked 144 out of 146 by Transparency International Corruption Perception Index (CPI) 2004. It is therefore right to state that Nigeria’s oil wealth has failed to generate development and rather only produced deep-rooted corruption as the bedrock of internal policies.
To further understand this trend, one needs to understand the economic concept known as the Dutch Disease. This refers to the potentially adverse effects of a booming export sector on the performance of other exports and the industries competing against imports. Essentially strengthening – appreciation - of the exporting country's exchange rate. In the 1960s, the Netherlands experienced a vast increase in its wealth after discovering large deposits of natural gas in the North Sea. Unexpectedly, this seemingly positive development had serious repercussions on important segments of the country's economy. The Dutch guilder became stronger - 30% appreciation - making Dutch non-oil exports less competitive.
Iraq's economy has long been dominated by the oil sector, which has since the 1950s provided the country with about 95 percent of its foreign exchange earnings. The country's petroleum resource base is truly impressive. Proven oil reserves of 112.5 billion barrels and potential reserves of 200 billion barrels. Of these reserves, 75 billion have not yet been developed as a result of the political and military turmoil of the past 20 years.
The current Bush-Iraq war was never about weapons of mass destruction, as alleged by the American Intelligence reports. To date, not even one weapon of mass destruction has been found. With world fuel prices on the rise, the primary reason for the US undertakings in Iraq was oil. In May 2003, the top American Iraq administrator, L. Paul Bremer III, stated that Iraq was “open for business.” As the conflict goes on, America has shamelessly completed building a stretch of oil pipelines. The US, the world’s largest consumer, has spent a great deal of its own resources over the last decades literally in blood money to keep oil flowing smoothly to itself and its allies.
So where does Uganda stand in all this? Very poorly, unless the country guards vigorously against the problems faced by the majority of oil producing countries. There are signs that oil curse prophesy may be proven true. Although a new entrant among Africa’s oil producing countries, Uganda has seen tensions rising over the Island of Rukwanzi. The tiny Lake Albert Island has already become an area of contention between Uganda and the Democratic Republic of Congo (DRC).
The island lies in the Albertine Gorge which is the foremost area of recent oil discoveries. It also lies along the disputed 160 km long border of Western Uganda and the DRC. Although the island is barely three kilometers wide it is strategically located as a base for oil exploration, which has been ongoing for several years. Hostilities broke out when a Canadian Heritage Oil worker was shot and killed on 4 August 2007 by the Congo soldiers.
Furthermore, though there is a belief that projected revenues to be accrued from oil shall rescue Uganda from external budgetary support, in the near future, this may well come to naught. The key to economic independence, regardless of increased resources, will be a commitment to fighting corruption. President Museveni’s 2006 inauguration statements on zero tolerance of corruption need to be backed by tough and concrete action. Otherwise, the increased wealth in the Albertaine region will do little to benefit this nation. To further complicate Uganda’s situation, uranium deposits have been discovered in the country. Though not yet confirmed as commercially viable, this is one mineral resource the West would dearly like to keep tightly controlled.
No study of world energy would be complete without including Russia. According to an article written by one Marshall I. Goldman; “Through its egregious mismanagement of these resources, Russia has become one of the world's most inefficient and wasteful producers and consumers of energy. This is due in part to the presumption that there will always be more oil or gas to be discovered, and, as a result, there is no particular need for Russia to use what it has efficiently”.
Actions taken by former President Putin, using oil resource to develop Russia, may well prove Mr. Goldman wrong but we wait to see.
Juan Pablo Parez Alfonso, a founder of OPEC complained in 1975: "I call petroleum the devil's excrement. It brings trouble. Look at all the waste, corruption, consumption, and public services falling apart. And debt, debt we shall have for years" Economist May 22, 2003.
The problems faced by oil exporters has spawned a lot of literature, laden with colorful terms such as "The Dutch Disease," "The Paradox of Plenty," "Flawed Prosperity," and even "The Banyan Tree Problem” (Tsalik, 2003).
But the core issue seems to have been forgotten. Oil is neither a blessing nor curse, it's simply a resource. Nations without oil but with commercial endowment of gold and or diamonds face the same problems. The problem of persistent poverty is mainly attributed to lack of visionary leadership coupled with inept management of state resources especially in Africa. Sub-Saharan Africa must solve its leadership problems and improve the management capabilities of its administrators; only then could we effectively reduce poverty.
Uganda is advantaged in that oil discoveries have come later rather than earlier. We need to learn from the mistakes made by other countries and make the most of this opportunity. Otherwise, in the words of James Russell Lowell 1819-1891, mishaps (oil) are like knives that either serve us or cut us, as we grasp them by the blade or the handle.