Oil and Gas - A Resource Curse - Essay Example

Abstract: The following discussion will seek to provide the reader with a more in depth understanding of the way in which oil and natural gas wealth impacts upon the economy; both with respect to the domestic economy for the oil/gas producer as well as the global economy that is impacted upon by the prices and production levels that these producers effect. Further, a discussion and analysis will be provided that helps to focus a level of discussion on the manner through which current behaviour by OPEC nations might impact upon the future economic power that they could hope to establish. Introduction: Although many less-developed nations might wish themselves to be so resource rich as some of the nations within the Middle East, the reality of the matter is that nations that typically experience a high level of valuable natural resources, such as oil, ultimately suffer as a result of their existence. This irony has long been the topic of a series of governmental, sociological, economic, and policy related research projects that have sought to understand and define this unique dynamic as it exists within some of the most resource rich, but developmentally depressed nations in the world. The reality that many nations face with regards to being nearly entirely dependent upon their natural resources as the basic foundation of their economies is referred to as both “renterism” and the “Dutch disease”. The first term, renterism has to do with the fact that these nations ultimately rent out the access to their resources in exchange for direct payments for such an agreement. Similarly, the term Dutch disease is with regards to the Dutch nation’s dependence upon the revenues from the natural gas fields in the 1960’s and 1970’s. For purposes of this brief analysis, the issue of the resource curse will be viewed within the prism of seeking to understand it as it is exhibited within the nations of Saudi Arabia and Iran. These two nations have been selected due to the fact that they are both regional powers that have defined their economies around the oil wealth that they possess; albeit through slightly different means. Moreover, even though a similar economic stance has been taken with regards to a centrally planned economy in both nations, the overall levels of extreme wealth and pervasive poverty, social divisions, non-democratic forms of governance, problems with radical forms of Islam, and a host of other byproducts of the uneven economic development that oil wealth dependence portends crates a great deal of similarity between these two nations. Furthermore, two specific cases will be analyzed and referenced with regard to providing inference with respect to the way in which oil and natural gas wealth impacts upon the economic development and diversity within the economy as a whole. History and Background: Prior to the discovery of oil, the global economy was predicated uon entirely different metrics. Many regions sought to integrate with the global economy by seeking to industrialize and differentiate their economies at rapid rate. Whereas broad inference can continue to be drawn with respect to oil producing nations and a global precedent, for the ease of comparison and discussion this analysis will utilize both Iran and Saudi Arabia as case examples for the way in which natural resource wealth, namely oil and gas wealth, adversely impacts upon domestic economic development. Although it is not fair to say that all currently oil/gas rich nations were particularly backwards as compared to their neighbors, they exhibited a relatively low level of growth and change as compared to Western Europe and parts of Asia at that time. It can be noted that within both Iran and Saudi Arabia, there existed a much more decentralized understanding of governance and power. Although it is not the purpose of this analysis to go into a great deal of defining the means by which resource wealth encourages further levels of despotism, it should be understood that once a high level of valuable resources are located within a given region, it necessarily encourages individuals within government to more fully and completely exert their control over these resources as a means of promoting sovereignty, stability, and deriving profitability; both for themselves and for the nation in general. A byproduct of this increased level of centralization and control is necessarily the loss of specific civil liberties and freedoms. Aside from the collapse of the Ottoman Empire and redefining the post-colonial borders, the discovery of oil and natural gas resources has had the most profound impact upon the course of development, politics, war, and even radical forms of Islam. With respect to the actual discovery of oil within the Middle East, Iran was the first in 1908 (Neilberg, 2012) followed by Saudi Arabia in 1923 (Jones, 2012). Oil came to be an even more coveted resource to which all developed nations sought to procure. Accordingly, it was not abnormal to merely take over another country as a means of extracting its mineral wealth and diverting it back to the homeland. Such a model was utilized for nearly 25 years as the British extracted oil wealth from Saudi Arabia and Iran (Mainuddin, 2007). The ways in which key actors within both Iran and Saudi Arabia sought to protect their national interest and these resources differed (Chaudhry, 1997). A series of uprisings against existing forms of governance and failed regimes resulted in Iran whereas Saudi Arabia initially set out to tax petroleum companies extracting oil from their land at 50% of revenue (Vidyasagar, 2005). It was soon determined by the reader that a more equitable and reasonable approach by the Saudis was the total and complete nationalization of the oil and petroleum industries within Saudi Arabia. Moving further down the road towards integration incorporation with the new dynamics of the world economy, Saudi Arabia and Iran were both primary signatories of the 1960s OPEC agreement (Bresser-Pereira, 2012). Originally, OPEC was signed in Baghdad, Iraq by the nations of Iran, Iraq, Kuwait, Venezuela, and Saudi Arabia (Boschini et al, 2013). Its ultimate goal was of course the regulation and price-fixing that these countries would agree to within such a cartel. Oil and Natural Gas – Blessing versus Curse Prior to delving into a running list of the ways in which oil wealth can be detrimental to a given economic system or nation, it should be understood that nearly every negative externality that arises from dependence upon oil exploitation is the ultimate result of the mismanagement of the wealth that is derived from it. Accordingly, one of the first realities of it equitable and imbalanced spending of money derived from oil resources is with regards to the stereotypes that exists about much of the carefree lifestyle that a small percentage of the population of these nations enjoys while the remainder live in near abject poverty (Saad-Filho, 2013). This is somewhat surprising due to the level of public works, infrastructure improvement, and development monies that it been poured into both of these nations. However, when one stops to consider the reality of how oil and natural gas resources develop a nation’s economy, this comes as little or no surprise. For instance, if one considers the situation of Saudi Arabia, rather than training their own people as oil workers and hiring them out to the nationalized oil firms that they themselves are ultimately in control of, the Saudi Arabia and government chooses instead to import workers from around the globe and pay these workers salaries that are many times greater than the average salary that a Saudi national would enjoy (Herb, 2005). As such, this is a primary exemplification of how the so-called “Dutch disease”, referenced within the introduction constricts the nation’s ability to produce its own goods and makes it ultimately reliant upon the exportation and sale of its natural resources as a means of deriving economic sustenance. Similarly, one cannot analyze and discuss the issue of resource dependence and its impacts upon an economy or nation without discussing the way in which resource dependence ultimately leads to an undiversified economy. Even though the efforts taken by nations such as Saudi Arabia and Iran have helped to build the infrastructure that is required to develop different types of industries and services within these nations, the necessity to do this is nonexistent (Beblawi, 1987). Due to the fact that the government is able to generate massive amounts of revenue on an existing cash cow, little emphasis is placed upon encouraging the development of different types of industries within these nations. Instead, what is been seen as a situation in which the governments are oftentimes focused and intent upon laying the groundwork (building the roads, acquiring the communications network, improving the health care system, and revolutionizing the educational system); as such, they are somehow hesitant to directly invest and encourage the businesses and services which could ultimately provide a degree of sustainment for the economy in the eventuality that the natural resources are finally depleted (Sayigh, 1975). Moreover, another clear issue that arises with regards to the curse of natural resources is the overall level of misdirection, misappropriation, and corruption that takes place within nations that experience at high level of natural resource dependence. With regards to the Corruption Perception Index, Saudi Arabia scores a 66 with Iran scoring a 133 (Nesbitt, 2013). To put these numbers into perspective, Saudi Arabia’s score is comparative to nations such as Niger, Kenya, and Mali whereas Iran’s score is reflective of nations such as North Korea, the Russian Federation, Turkmenistan, and Burma. Naturally, Iran’s score is much worse than Saudi Arabia’s; however, neither nation should be understood to fall within moderately uncorrupt standards (Schwartz, 2008). Combined with this level of corruption and poverty that have previously been defined and described, the reader can and should integrate with an understanding of the means by which such a situation can often foster societal discontent; oftentimes by violent Islamic extremism (McFerson, 2009). This is of course not to say that oil wealth leads to Islamic extremism; rather, the dependence upon natural resources such as oil and gas leads to a situation in which a very large number of people are disenfranchised from the runaway success that others are experiencing (Rahnema, 2008). This in turn encourages them to turn to many movements that they otherwise might not consider as a means of providing some definition and meaning to an otherwise extraordinarily difficult existence. Naturally, in addition to just poverty, literacy rates, and the overall human development index for both Iran and Saudi Arabia are extremely low and can most directly be compared to some of the least developed nations of the world (Akarue.net, 2013) Another adverse effect that oil wealth has contributed to the nations in question is with regards to the decline in regional cooperation and pan-Arabism that has resulted. Whereas such a level dependence and relationships have been born from the postcolonial era, the nations that experienced a high degree of natural resource wealth soon began to drift apart due to the fact that they felt they no longer needed such a cooperation in order to achieve strategic or regional interest. Similarly, the demographics of the nations began to shift as a result of the increasing level of wealth and development of the government reflect population growth as a function of the optimistic bubble that such wealth generated within the national consciousness. As a function of this, many of the nations with the Middle East have demographic bubbles and societies that are unevenly distributed between old and young. For instance, within the nations of Saudi Arabia and Iran, it is estimated that nearly 35 what percent of the entire population is aging between 14 to 25 years old (Nazih, 1996). Whereas it is typical for society to be comprised of approximately 15 to 20% of individuals within this age group, such an uneven representation shows that the over optimistic outlook served to create an unrealistic expectation for the means by which such societies could continue to provide for their people. This oftentimes gives way to rapid population growth, immature and unstructured political systems, and an unpredictable demographic that my demand revolution (Hilson & Maconachie, 2009). Global Economic Impacts: Many researchers that have noted the global econimc effects that oil and natural gas rich nations have been responsible for point to the fact that the glut of money that has been rapidly created as a result of the ongoing and seemingly ever increasing demand for these resources has been partly responsible for the credit boom and bust that led to the 2007/2008 financial collapse. Although this connection might seem tenuous at first glance, the reality of the fact is best described by the following quote: “ Capital outflows from oil exporters therefore played an important role in the global liquidity glut during the build-up to the US subprime crisis. Analysis of direct capital flows is hampered by the lack of reporting transparency and the use of foreign financial intermediaries. Indirect recycling also took place, i.e. direct oil-revenue investment in a given financial market led to corresponding knock-on flows towards the ultimate net borrower. Nonetheless, analysis from the US Federal Reserve suggests that “…most petrodollar investments [found] their way to the United States, indirectly if not directly” (Federal Reserve Bank of New York 2006). In short, the US was the ultimate net borrower, in order to finance its growing current account deficit” (Fitzgald, 2014). As can be noted, the bubble that was created was fuelled partially by the false belief that the petro dollar was on track to continue to grow and expand with no clear end in sight. Ultimately, as this untenable path came to an end, the collective economies of the developed world felt the combined impacts of the retraction of cheap and readily available credit. Realizing that unbridled demand for such a natural resource was not an asset that could be relied upon indefinitely, many of these oil/gas rich nations came to see the need to diversify their collective economies in an even more important light. The connection to the economy of the United States and other developed western economies has to do with the fact that the oil profits were quite often invested in what was understood to be “safe investments”; namely treasury bonds. This of course placed downward pressure on the interest rates within the United States and elsewhere; leading to credit markets that were virtually un-restricted. Whereas many economists and politicians have pointed to the impact of government de-regulation and the availability of credit to those that did not deserve it, these are merely secondary impacts. The primary impact has to do with the glut of money that was invested in US Treasury Bonds and other financial tools that allowed for the Federal Reserve and other central banks throughout the world to under-estimate the safe interest rates that could have served as a bulwark against such a problem ever being exhibited in the first place. The Economic Impact of Cartel Behaviour: The Effect on the Labour Market Whereas supply and demand help to dictate the way in which consumers and producers interact with one another, there are alterations to the basic understanding of supply and demand that help to create unique situations within the field of economics. Some of these include the way in which monopolies and oligarchies react within a particular market. As the OPEC countries act in a form of collusion and as a type of cartel, the ability and role that these members have in price setting is profound. This has allowed these nations to determine the overall availability and quantity of the resources that they collectively produce. However, the cartel behaviour has also contributed greatly to the economic hardships that have taken place over the past several years and, as this paper will argue, has reduced the overall productivity and profits that could have been achieved had such cartel behaviour not been exhibited at all. For instance, the behaviour of OPEC countries prior to the collapse of 2007/2008 was the same as it was during and after the collapse; namely to seek to derive maximal profits by restricting production (Vactor, 2010). However, such a tactic only works the best in times of overall economic success and profitability within the global market. As the labour markets cooled from Asia to the United States, the overall ability of individuals to continue to purchase fuel at the same prices (and above) as they had previously was severely restricted. From the standpoint of a cartel that would seek to maximize profitability, this did not directly impact upon the approach to the markets that were taken. Instead, a “business as usual” approach was targeted to take place; even as the hardest months and quarters of 2007-2008 continued. As jobs were lost, prices rose, and unemployment figures skyrocketed; nonetheless, the price of fuel was never constant nor decreasing. Resentment and the Power of Technology: As a result of the hardships that the oil and gas cartel has placed upon many nations around the globe, the direct level of resentment has been maximized; to a level that does not exist within other sectors and/or against the producers of other natural resources. Whereas this resentment has not threatened to grow into an international incident or war as yet, it has encouraged many nations, and private individuals to focus their creative and technological resources towards developing energy futures that are not contingent upon the older model of gas/oil dependence. Whereas this may seem as something of a psychological analysis of the impacts of oil dependence and/or resentment, it has and will likely have a profound impact upon the survival of this industry and the overall economic wealth of oil and gas producing nations in the future. If and when renewable energy is able to develop to a more full and complete degree, the desire to be free from the cartels and from the polluting nature of hydrocarbons will likely tip the balance in favor of whatever replacement might offer the best benefits at such a time. Beyond this, the duel benefit of being domestically resilient and secure in terms of energy will likely be a selling point that will encourage many nations to focus on their own form of energy independence. The impacts of this will be profound for oil and gas producing nations. Even though a great deal of effort has been placed upon diversifying their economies and re-investing oil and gas wealth back into the economies of these nations, the overall success that such projects have had are quite limited. Taking the example of the Russian Federation as a case in point, the nation continues to draw fully 80% of its GDP from sectors relating to natural gas and/or oil extraction (Vactor, 2010). As such, the preponderance of focus that has been placed upon keeping this dynamic well into the future has restricted the overall of diversification that could have otherwise taken place. Moreover, many economists point to the case of the Russian Federation, Venezuela, Saudi Arabia, Kuwait, Dubai, or Iran (as well as many others) as proof that oil revenue is seldom invested effectively back into a functional private market. Instead, what is actually more often effected is a situation in which the oil/gas rich nation sponsors and funds a handful of government dependent sectors that cannot function or compete in the global market if the sustaining arm of subsidies were ever retracted. Sadly, instead of making the collective economies more secure and robust, this only serves to weaken the structure of these economies and shorten the overall depth and breadth to which the economy would otherwise develop. As can reasonably be seen, oil and gas wealth is oftentimes understood by economists as more of a curse than a natural resource blessing. Although it is true that certain nations might be envious of the natural resource wealth that others have, the total economic level of dependence to these resources serves as a type of economic addiction which only detracts from the potential that might otherwise be developed if such a resource “blessing” never existed in the first place. As time has proven, those economies that are most effective and able to weather the changes in the global markets are those that are diversified; something that few if any OPEC nations are. Ultimately, if these economies seek a way forward from the situation that has thus far been described, it will be necessary for them to focus upon building a natural and resilient private sector first. The desire to strengthen other aspects of the economic base that nations such as Iran and Saudi Arabia have engaged is laudable; however, unless a true private sector exists in the first place, such attempts will ultimately fail as there is little to no incentive to compete within the global market instead of continuing to be reliant upon government subsidy as a means of existing and profiting from a lack of development or engagement. Whereas this does not stipulate that these nations which seek to diversify their economies cannot rely upon any level of government engagement, continuing to propagate one state industry after another with petro dollars will only create a level of sustainability that will result in decreased efficiency and overall profitability. Whereas resource wealth ahs been understood more as a curse than as a blessing within the discussion that has been put forward, it should not be seen that the analysis has come to the conlusion that the oil/gas producing nation is without any recourse to change the situation they find themselves locked within. Conclusion: As a result of the preceding factors which have been analyzed, the reader can note that that curse of oil resources far outweigh the blessings. Rather than utilizing the oil and natural gas to provide a rapid and effective improvement of the economic diversity and industrial strength that a given nation can provide, the resources are almost always employed with regards to ineffective and oftentimes wasteful projects that do little to improve the abysmally low Human Development Index (HDI) and poverty that is so pervasive within such systems (Busse & Gröning, 2013). Although there are several benefits that can be derived from the great wealth that oil brings, on the whole, society is at a net disadvantage because of its existence in ample reserves). As a function of the greed, corruption, lack of development with regards to the human considerations of the populations within Saudi Arabia and Iran, the reader can come to the realization that the existence of oil and natural resource wealth within these nations creates a situation in which the government and economy becomes dependent upon the quick generation and easy access to capital. As in the classic case of the child raised in the lap of luxury, these governments display a fundamental lack of concern for the development issues plaguing their own people and are of the misinformed belief that the revenues from oil and gas generation will continue to exist indefinitely; regardless of the fact that many analysts point the fact that these resources will one day be exhausted. Accordingly, rather than viewing the wealth of natural resources as a net benefit and aid to the nations in question, it should be noted that they act instead as a net detractor to both the economic and developmental integrity of the systems that have been discussed. Bibliography Akerue.net 2013 ‘Has oil wealth been a blessing or a curse for the Middle East?’ | Ben West. [online] Available at: http://akerue.net/blog/academic/2010/10/has-oil-wealth-been-a-blessing-or-a-curse-for-the-middle-east/ [Accessed: 1 May 2013]. Boschini, A, Pettersson, J, & Roine, J 2013, 'The Resource Curse and its Potential Reversal', World Development, 43, pp. 19-41, Academic Search Complete, EBSCOhost, viewed 2 May 2013. BRESSER-PEREIRA, L 2012, 'A graphic explanation on how a Dutch disease without costs exporters', Political Economy, 32, 4, pp. 700-702, Academic Search Complete, EBSCOhost, viewed 2 May 2013. Busse, M, & Gröning, S 2013, 'The resource curse revisited: governance and natural resources', Public Choice, 154, 1/2, pp. 1-20, Business Source Premier, EBSCOhost, viewed 2 May 2013. Fitzgerland, G., 2014. Oil's Role in the Global Economic Crisis. [online] Oilprice.com. Available at: [Accessed 21 Apr. 2014]. Hazem Beblawi, 1987. The Rentier State (Nation, State and Integration in the Arab World, Vol 2). First Edition Edition. Routledge Kegan & Paul. Herb, Michael. “No Representation without Taxation? Rents, Development and Democracy,” Comparative Politics 37, no. 3 (2005). Hilson, G, & Maconachie, R 2009, '“GOOD GOVERNANCE” AND THE EXTRACTIVE INDUSTRIES IN SAUDI ARABIA, Mineral Processing & Extractive Metallurgy Review, 30, 1, pp. 52-100, Academic Search Complete, EBSCOhost, viewed 2 May 2013. Jones, T 2012, 'America, Oil, and War in the Middle East', Journal Of American History, 99, 1, pp. 208-218, Academic Search Complete, EBSCOhost, viewed 2 May 2013. Kiren Aziz Chaudhry, 1997. The Price of Wealth: Economies and Institutions in the Middle East (Cornell Studies in Political Economy). Edition. Cornell University Press. Mainuddin, RG 2007, 'POLITICAL ISLAM: UNTANGLING THE CONCEPTUAL MUDDLE', Journal Of Third World Studies, 24, 2, pp. 109-128, Academic Search Complete, EBSCOhost, viewed 2 May 2013. McFerson, HM 2009, 'Governance and Hyper-corruption in Resource-rich Countries', Third World Quarterly, 30, 8, pp. 1529-1547, Business Source Premier, EBSCOhost, viewed 2 May 2013. Nazih N. Ayubi, 1996. Over-Stating the Arab State: Politics and Society in the Middle East. Edition. I. B. Tauris. Neiberg, MS 2012, 'EUROPE'S POWDER KEG', Military History, pp. 46-52, Academic Search Complete, EBSCOhost, viewed 2 May 2013. Nesbitt, T. '2013, ‘Job opportunities key to sustained economic development', Middle East, 442, pp. 50-54, Academic Search Complete, EBSCOhost, viewed 2 May 2013. Rahnema, S 2008, 'Radical Islamism and Failed Developmentalism', Third World Quarterly, 29, 3, pp. 483-496, Academic Search Complete, EBSCOhost, viewed 2 May 2013. Saad-Filho, A, & Weeks, J 2013, 'Curses, Diseases and Other Resource Confusions', Third World Quarterly, 34, 1, pp. 1-21, Academic Search Complete, EBSCOhost, viewed 2 May 2013. Sayigh, Yusif A., 1975. Oil in Arab Developmental and Political Strategy: an Arab View. In J.D. Anthony, ed. 1975. The Middle East: Oil, Politics and Development. Washington: American Enterprise Institute for Policy Research, Ch. 2. Schwarz, Rolf (2008) “The political economy of state-formation in the Arab Middle East: Rentier states, economic reform, and democratization', Review of International Political Economy, 15: 4, 599 -621 Vidyasagar, D 2005, 'Global Minutes: Oil Purse Or Oil Curse?', Journal Of Perinatology, 25, 11, pp. 743-744, Academic Search Complete, EBSCOhost, viewed 2 May 2013. Van Vactor, S., 2010. Introduction to the global oil & gas business. 1st ed. Tulsa, Okla.: PennWell Corp. Read More