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The Pernicious Effects of Oil

Author: Esther Pan
October 10, 2005
This publication is now archived.

Introduction

Given the tight supply and surging demand of the world oil market, small countries that produce oil can have a major impact on global markets. This is in contrast to many previous oil shocks, when international cartels like the Organization of Petroleum Exporting Countries (OPEC) effectively controlled world oil supply. As a result, the impact of corruption and mismanagement in countries like Angola, Chad, and Nigeria-which can lead to unrest and force halts to production-are magnified on a global scale. For example, ethnic strife in the southern Nigerian town of Warri in March 2003 shut down 40 percent of Nigeria's oil production for several weeks. "When the market's as tight as it is now, every barrel of export counts," says Richard Karp of the American Petroleum Institute, a trade organization. "Community strife or local unrest" in small countries can raise oil prices around the world, he says.

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The Cost of Corruption

Exacerbating the problem in many of these countries is entrenched graft. Corruption "makes it very difficult to create governments that are accountable to people in their own countries, and hurts efforts in those countries to build sustainable development," says Edward Morse, former deputy assistant secretary of state for international energy policy. Throughout the 1990s, he says, there were a number of international initiatives to increase transparency in oil-producing countries, made possible because oil prices were low. Since oil-rich countries couldn't earn enough on oil revenues alone to run their states, they had to think about cooperating with international efforts toward diversification and more responsible governance. "That was working very well, until prices went up," Morse says. With prices currently over $60 a barrel, "it's far more difficult to ensure transparency," he says.

At the same time, "Western governments were giving hundreds of millions of dollars" to many of these same countries to help build hospitals, feed the hungry, and otherwise improve society, says Clarence Daryl Edwards of the Britain-based nonprofit advocacy group Global Witness. These funds were stolen or wasted, as oil revenues were diverted to the top 1 percent of these countries' populations, leaving the vast majority of their citizens still poor. Unequal oil revenue distribution also exacerbates tribal and ethnic conflicts, such as those between Muslims and Christians in Nigeria, or Nuer [cattle herders] and Muslims in Sudan. As revenues grow, experts say, the number of stakeholders in the oil industry also grows; tribal leaders, local government, national government, armed militias, and the military all want a share of the pie.

Many oil-producing nations, particularly in Africa, are widely viewed as corrupt, with elites who embezzle oil funds and governments that can barely provide security for oil production, much less housing, education, or services for their citizens. Since these countries are so-called rentier states-that is, they derive all or most of their income from renting or selling natural resources to outsiders, instead of collecting taxes from their citizens-they have no accountability to their people and little incentive to democratize. Instead, the government focuses on "keeping its people in line so they do not overthrow it and start collecting the oil rents themselves," Noah Feldman writes in his book After Jihad.

The international community also has limited power over rentier states. "The leverage the international community had was over debt payments [from developing countries], and when the oil price is high, oil-producing countries can service their debts with the money they're making, and the leverage is lost," Morse says. "Venezuela, for example, made enormous strides toward greater transparency-until the election of Hugo Chavez. Now we don't know if Venezuela even knows how much oil it's producing."

Corruption also limits the ability of developing countries to provide security, either for their citizens or for the multinational companies extracting their resources. Attacks by armed gangs on oil operations are often answered by harsh military repression into local villages; one such operation in the Nigerian town of Odi in the Bayelsa province left hundreds of civilians dead in November 1999, according to Human Rights Watch. Oil workers are often kidnapped or killed; such was the case when five Chevron employees were killed in Nigeria in April 2004. In response, many oil companies are hiring private security firms or threatening to concentrate their operations on offshore oil rigs, hundreds of miles away from local unrest. Ian Gary, strategic-issues adviser for extractive industries with Catholic Relief Services, says governments around the world must help civil-society groups monitor (PDF) countries' oil revenues, and push oil-producing states to invest in poverty reduction and development, human rights, and the rule of law.

The "Oil Curse"

There are all too many countries that are resource-rich and still desperately poor: Nigeria is the prime example. Although Nigeria has taken in more than $350 billion in oil revenues over the last forty years, 70 percent of Nigeria's population still lives on less than a dollar per day. One of Africa's largest oil producers, the West African nation turns out about 2.5 million barrels per day. Experts say offshore oil production could add another 1.5 million barrels per day by 2010. However, the oil-rich Niger delta region, which produces nearly all of Nigeria's oil revenue, is abjectly poor and plagued by chronic unrest. The Nigerian military is unable to control the armed groups, which routinely steal oil from pipelines. More than half the country's thirty-six states have seen violence from armed militias since 1999; over one million illicit weapons and small arms are circulating in the country.

Experts say the Nigerian dictator Sani Abacha stole an estimated $2.2 billion between 1993 and 1998. Much of this money was stashed in Swiss bank accounts. Some $358 million has been returned by Swiss authorities, who asked the World Bank to monitor the funds to make sure they are not stolen again. The country routinely ranks near the bottom of countries' perceived honesty released by Transparency International, a Berlin-based non-governmental organization (NGO) that monitors corruption.

Current president Olusegun Obasanjo is taking some important steps to improve Nigeria's transparency and reduce corruption, experts say, including adequately funding the police in some areas, developing roads and schools in some parts of the Niger Delta, and allowing government officials-including two ministers, a police chief, and the president of the Senate-to be prosecuted for embezzlement. Petroleum and Energy Minister Edmund Doukuru recently said the country will make more oil-related information-such as fees collected from oil companies-available to the public. Nigeria has even hired a Western firm to audit its oil revenues.

Signs of Progress

Nigeria is also one of four African nations to sign onto the 2003 British-led Extractive Industries Transparency Initiative, aimed at pressuring oil-producing nations to be more transparent about their oil revenues and commit more of their resources to development and poverty reduction. "EITI is a great example of a voluntary initiative where companies, NGOs, and governments work together," Karp says, citing Nigeria and Azerbaijan as two examples of nations that have seen real improvements under the initiative. In November 2004, the government of Azerbaijan signed a Memorandum of Understanding with a coalition of civil society groups and local and foreign companies. The memo sets out rules for the disclosure of payments made by oil and gas companies to the government and those received by the government from all extractive industries. It also calls for an international auditing firm to review and verify the disclosures.

Morse says Algeria, another country showing improvement, is carrying out "the bravest set of experiments" toward liberalization being done by a government today. Economic and structural reforms-including cutting tariffs and signing several important trade agreements with the EU-are earning praise from international watchdogs. Morse credits the progress in Algeria to a combination of "luck and wise leadership," but experts say any oil-rich country can make real strides toward fighting corruption and managing its natural resources wisely. It's just a question of making them want to. "Western governments need to keep in mind that governance issues, the transparency of operations, and political stability matter in every oil-producing country, not just Saudi Arabia and Kuwait," Karp says. "It's a concern everywhere. [Reforms] don't just produce benefits for the citizens, but they create a more stable investment climate."

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