Leading a people to shambles: the oil curse?

Just days before the devastating 7.8-magnitude earthquake that killed more than 650 people in Ecuador, the IMF provided a figure that was surprising: it said Ecuador's economy would shrink by 5% this year. A few months before, the same institution predicted a 0.1% expansion for the country for this year. Ecuador thus joined Venezuela, which has so little electricity it is now running on a two-day public work week and is expected to contract 8% in 2016, and Brazil, which might be suffering through the worst recession in its history, as the poorest faring economies in the region.

The argument can be made that each country, though vastly different, is suffering a similar fate, which has to do with their geology. Ecuador and Venezuela are the only OPEC nations in the Americas – Venezuela is home to an oil resource so massive the country could produce at current rates for hundreds of years and never dry – while Brazil's pre-salt find deep beneath the Atlantic Ocean a decade ago was meant to lead to untold riches.

Sitting on copious oil deposits is akin to holding a winning lottery ticket. Petroleum is arguably the largest-revenue business in the world. The companies that trade in it are richer than most nation states. Ecuador's GDP was about US$100bn in 2014, according to the World Bank; oil company Royal Dutch Shell reported revenue of US$385bn for the same year. But like lottery winners, the end is often one of wasted opportunity.

In his book, The Oil Curse, Princeton professor Michael Ross says this phenomenon stems from the unusual properties of oil revenues: their scale, source, stability and secrecy.

The scale of oil income is monumental – far larger than, say, metals income. On average governments are 50% larger in oil countries vs. non-oil countries, Ross says. Moreover, a main source of money in oil countries is the resource itself, not merely taxes, meaning governments are not beholden to the needs of citizens, hence less democratic. Oil revenues are unstable, dependent on wildly oscillating commodity prices, making it difficult for governments to plan and manage budgets. Finally, the secrecy of oil income, especially when state oil companies are involved, means transactions are concealed, and revenues and expenditures are hard to track, leading to corrupt practices.

In the case of all three faltering countries, we can see evidence of the above: governments that grew bloated during the upswing in prices, windfall revenues, a crisis of democracy, a hard crash as prices plunged, and, above all, widespread corruption and a lack of transparency. 

Our appetite for oil remains voracious. Each year we demand more (the International Energy Agency predicts global oil demand will increase by over 1mn barrels per day this year and next) despite rapidly changing energy systems and a global consensus that climate change is caused by fossil fuels. The oil curse, then, is not a plague of the past, and will be repeated over and over, if lessons are not learned.

Ross argues in the final chapter of his book, somewhat less convincingly, that the way to tackle the above is to try to alter the size, source, stability, and secrecy of the oil business. This, in my mind, should include stricter environmental regulation to ensure the sustainable extraction of the resource, clarity with contracts, a dedication to transparency and democratic principles, the creation of oil stabilization funds to ensure long term stability, and a longer term plan to wean dependency off hydrocarbons. Some countries have begun adapting, such as Saudi Arabia. More should follow suit.