Petroleum, Poverty and Security: Not by Oil Alone

Oil wealth has always been regarded as a prime asset in development. But there is evidence that, unless used in particular ways, its contribution to national wealth may be seriously overstated.

The World Today
4 minute READ

Petroleum has always been a blessing and a curse. For oil-rich countries with few people, like the Gulf states, the benefits are enormous. For nations with less oil, but a huge population like Nigeria, it is a very different story. This is because petroleum creates few jobs directly and generates a volatile, ultimately unsustainable, revenue stream. Producer nations underestimate this at their peril.

How much oil a country has is critical. Above fifty barrels per head per year of production, countries almost always benefit. Below that level, producers outside the Organisation for Economic Co-operation and Development often have lower development indicators than their non oil-producing neighbours.

For the exceptions, such as Malaysia, Iran and Thailand, the key to success has been to diversify the economy and reduce oil dependence.

There is increasing global focus on poverty reduction as the world fails to meet the UN’s Millennium Development Goals by 2015 and growing concern over energy security prompted by surging prices. To address this, China and India are both acquiring reserves overseas, while the United States is anxious over potential supply disruptions in west Africa and the Middle East.

Exporters become importers

China’s growth has meant a transition from being a net oil exporter to importing over two million barrels of oil per day. It still only consumes two barrels of oil per person per year compared to an average of sixteen for the G8 nations excluding Russia. Nigeria consumes less than a barrel. Put bluntly, if its people were to consume oil at the rate of more wealthy countries, would there be less to go round? Are we facing a situation where countries like Nigeria need to remain poor to maintain petroleum exports?

That petroleum can have serious negative impacts on producing countries with low-income is well known and increasingly well documented. These negative effects include low, and sometimes negative, economic growth, poor provision of basic public services, weak governance, widespread poverty and insecurity.

The five countries with the greatest per person petroleum wealth – Qatar, United Arab Emirates, Norway, Brunei, and Kuwait – each produced an average of 300 barrels of oil equivalent or more per head per year in 2002/3. In contrast Nigeria pumped 2.23 million barrels a day of oil and gas. With a population of 124 million, this is equivalent to only seven barrels of petroleum per person per year, worth only a net $140 for each Nigerian at $30 per barrel, compared to a gross domestic product of $800 per capita. Nigeria cannot be transformed by just petroleum.

Unrealistic

There is a particularly strong correlation between lower middle petroleum producers – like Nigeria – and economic underperformance. Eight out of ten of these countries have gross domestic products significantly lower than the regional average. The worst performers include Uzbekistan, Yemen, Iraq, Nigeria, Congo, Ecuador and Azerbaijan, all of which have suffered from recent conflict and instability. Argentina is the only relative success in this category.

Why is this? If you translate barrels into value, five to 25 barrels is the equivalent of between $150 and $750 worth of oil at $30 a barrel. Assuming the state receives sixty percent of this in tax and other income, allowing for capital expenditure abroad and oil company profits, this is cut to between $90 and $450 income per head per annum. Not enough to eradicate poverty but enough to keep bad governments in power. Where people have unrealised expectations of the benefits of being in an oil-rich, or even a moderately oil-rich, country conflict follows. This problem is magnified in Africa, because it is more fragile, more diverse, and more prone to political instability and civil strife than most other regions.

Witness recent coup attempts in Equatorial Guinea, Mauritania and Chad, the civil war in Sudan and continuing unrest in the delta region of Nigeria. The oil industry is remarkably impervious to conflict, especially when reserves are offshore. A vicious circle can develop whereby oil revenues provide bad governments with the means to maintain power and sustain conflict, thereby preventing the investment required in the non-oil sector.

Contrast Malaysia with a gross domestic product per head of $9,000 and Angola with $1,700. They have similar oil endowments but petroleum is only ten percent of exports in Malaysia compared with 92 percent in Angola. Malaysia’s consumer electronics industry developed from scratch in the early 1970s and now dominates exports, employing almost four hundred thousand. A high oil endowment does not have to mean dependence – in Norway petroleum is only 46 percent of exports. Its gross domestic product is almost double that of Kuwait, which has a similar amount of oil per head.

Champagne runs out

Where sub-Saharan Africa has failed and Malaysia won, is in Africa’s lack of commitment to economic reform, limited investment in human capital and restricted access to export markets.

Gabon is a good example of the consequences of a failure to diversify. It has been a producer since the 1960s, but pumping peaked at 365 million barrels a day around 1996 and has since declined by about a third, as fields have become depleted. Analysts estimate production may fall further to just over 100 million barrels a day by 2012 unless major new discoveries are made. Gross domestic product reached $6,000 per head in nominal terms making Gabon one of the richest countries in Africa – and famously the greatest consumer of champagne per person – in the 1960s.

‘We used to laugh at our neighbours,’ the BBC News website quoted a Gabonian as saying recently. ‘The Cameroonians and the Equatorial Guineans – we used to mock them because they were not as rich as us. Now we have unemployment, inflation and beggars on the streets.’

The International Monetary Fund commented in 2003, ‘Over the last 10 years the authorities have not taken sufficient actions to reduce Gabon’s oil dependency’. By 2012 wealth will decline dramatically unless the urgent needed diversification programme is a success.

As the recent Africa Commission concluded, good governance is key. The richer and more diversified producers also tend to have lower levels of corruption, as measured by the transparency perception index. However, as Jeffrey Sachs points out in his book, The End of Poverty, poorer countries are not necessarily poor because they are more corrupt – ‘higher incomes lead to improved governance’. Improved governance will certainly help, but it is not enough on its own.

Countries that can be considered successful in this context, such as Iran, Malaysia, Thailand and Argentina have very different systems of government, so it is clear there is more than one recipe for success.

Maximising benefit

Along with good governance and a commitment to diversification, any country hoping to maximise the benefits needs to increase the developmental impact of each barrel produced.

Petroleum producers are actively tackling this in three ways. The arrangements to share profits with international oil companies are being redesigned to maximise government revenue. Secondly, national oil companies are taking larger direct stakes in production assets. New national oil companies are being formed, reversing the previous trend toward privatisation, for example in Russia, Argentina and Chad. But ultimately there is only so much tax and revenue available to be captured by the state.

Other national oil companies are exporting knowledge gained from domestic production to acquire productive assets and generate profits overseas.

Malaysia’s Petronas and Noway’s Statoil are notable examples. Chinese and Indian national oil companies are expanding abroad for different reasons – primarily to secure supplies for their domestic markets to fuel non-oil economic growth.

The third way for producers is tougher local procurement directives to ensure more capital is spent locally rather than abroad. West African oil investment is thought to support more jobs in the US than in West Africa itself.

Understandably, Nigeria is committed to raising local content from less than five percent to forty percent or more.

The oil and gas sector is capital intensive and international. It cannot transform economies through direct job creation because the number employed is small. However, the more money spent locally with viable businesses, the bigger the economic impact on employment and wealth.

The key is to focus more on local job generation than local ownership. A country cannot survive on just oil. The black gold, once thought of as a country’s saviour, can also be its downfall. There is a path to success, but can low income producers take it, and can developed countries help?