The Oil Curse: A Case Study of Nations’ Developments
By: Valeria Gonzalez
ABSTRACT
The oil curse, also known as the resource curse, refers to the paradox that many countries that are rich in natural resources, especially in minerals and fuels, show less economical development, fewer democratic practices, and less of a commitment to social justice than countries that are not mineral rich. This paper focuses on those countries that are petroleum wealthy. The oil curse issue was first brought to light by Juan Pablo Perez, Venezuela’s former oil minister, and founder of the Organization of Petroleum Exporting Countries (OPEC). This paper compares 3 different countries and how they have been either affected or unaffected by the oil curse. This includes political, economic, and societal impact. The first country, Saudi Arabia can be seen as a country that has experienced the full effects of the oil curse, and is currently still experiencing the affect of the oil curse. The second country, Mexico, has been affected by the oil curse but has been able to reverse some of the effects of the curse and has moved towards a more stable political and economic position. The last country is the United States who has benefited from oil instead of being hurt by it since its discovery of oil. Comparing these countries led to an analysis of what factors are causing the oil curse, how it can be prevented if oil were to be discovered elsewhere, and more importantly, what can be done to reverse some of the negative effects of the oil curse currently on countries worldwide.
Introduction
The oil curse, more commonly known as the resource curse, refers to the paradox that many countries that are rich in natural resources, especially in minerals and fuels, show less economic development, fewer democratic practices, and less of a commitment to social justice than countries that are not mineral rich. This issue was first brought to light by Juan Pablo Perez, Venezuela’s former oil minister, and founder of the Organization of Petroleum Exporting Countries (OPEC)[1]. He is famously quoted saying, “It is the devil’s excrement. We are drowning in the devil’s excrement.”
Economically, a number of countries have been drastically affected; from 1980 to 2006, per capita income fell 6 percent in Venezuela, 45 percent in Gabon, and a shocking 85 percent in Iraq.[2] Besides this financial impact, countries like Algeria, Angola, Colombia, Nigeria, Sudan, and Iraq have seen decades of civil wars. One of the cases where the oil curse is seen most dominantly is in Middle Eastern countries. Although these countries are home to over half of the world’s known oil reserves, they are behind the rest of the world in making promising progress towards democracy, gender equality, and economic prosperity. Overall, oil producing countries are 50 percent more likely to have autocratic governments and twice more likely to have civil wars than non-oil producing countries.[3] These countries also tend to be more secretive, and financially unstable, and they do not provide women with the same political and economic opportunities as non-oil producing countries. Since Juan Pablo Perez introduced this concept, many economists and political scientists have researched this idea. Although not everyone agrees that the country’s economic situation is due to being resource rich, there does seem to be an overwhelming consensus that good geology results in bad politics. Below is a graph of countries that depend on oil for a large part of their GDP. A high majority of these
countries also suffer from political and financial instability.
Although the oil and resource curse seems to be a dominant trend, there have been historical exceptions to this curse phenomenon. Countries like Norway, Canada, Great Britain, and The United States are seen as both exceptions to the resource curse and as examples of how countries might be able to break from the oil curse. Some common factors that these exceptions share are high incomes, economies that do not just depend on oil, and a strong democracy prior to discovering oil. The effects of the oil curse have led to what many economists call the irony of oil wealth. Poor countries that are in urgent need usually do not benefit from their oil discovery, while those with already stable economies and governments do.
Factors that Cause the Oil Curse
Many social scientists blame the developing countries’ oil curse on foreign powers that are known to intervene in oil rich countries and therefore manipulate their governments. Another belief is also that international oil companies can exploit the resources of oil-rich countries in order to obtain profits. International oil companies like Exxon, Mobil, Shell, and British Petroleum made a remarkable impact on oil producing countries for most of the 20th century, and most of oil-producing problems could be traced back to these companies.[4] However, the role that these companies had over the oil production of these countries diminished vastly in the early 1970’s. This is when most of the oil-rich developing countries decided to nationalize their oil. By 1980, national oil companies were producing over half of the crude oil available for sale worldwide. It became evident that oil companies prospered when the principal source of economic power in the oil business was sovereign control over oil reserves rather than private control. [5] Another reason why oil-rich governments decided to nationalize their oil companies was because international companies could no longer guarantee price stability or access to supplies. National companies were set up in order to try and fix these problems. However, it seems that the problem got worse instead of better for oil-rich countries after this decision.
The purpose of this paper is to compare 3 different countries and how they have been either affected or unaffected by the oil curse. This includes the political, economic, and societal impact. The first , Saudi Arabia can be seen as a country that has experienced the full effects of the oil curse, and is currently still in a “cursed” state. The second country, Mexico, has been affected by the oil curse but has been able to reverse some of the effects of the curse and has moved towards a more stable position. The last country is the United States, which has benefited from oil instead of being hurt by it. The goal in comparing these countries is to determine what exactly is causing the oil curse, how it can be prevented if oil were to be discovered elsewhere, and more importantly, what can be done to reverse some of the negative effects on countries worldwide.
Saudi Arabia
There was an extensive search for oil in Saudi Arabia due to the Anglo-Persian oil company finding oil in Persia in 1908. However, many believed that Saudi Arabia did not contain any oil reserves. Saudi Arabia found itself in economic trouble during the Great Depression due to the fact that pilgrims stopped traveling to holy cities, something it received taxes off of. Due to this, King Abd-al’Aziz took the search for oil very seriously. After nearly 16 years of searching for oil and even out-sourcing to foreign engineers and companies to search, oil was finally struck in large quantities in 1938. The California Arabian Standard Oil Company (CASOC) discovered the world’s largest known oil reserve in current day Dhahran. This discovery would change the fate of this country, as well as most other Middle Eastern countries forever.
Prior to the discovery of oil, Saudi Arabia’s economy was very weak. They depended on subsistence agriculture and provisions of pilgrim travels to holy cities. After the discovery of oil, the attention of the government and civil society became devoted to solely maximizing the profits of the energy industry. This focus came at the expense of other potential economic developments, and appeared to dominate the country’s political and social life. Because Saudi Arabia depends so much on the energy industry, their economy is very volatile. During the 1973 oil crisis, Saudi Arabia became very wealthy and powerful, reaching its peak around 1980. Since the price of oil was so high, there was a large development of oil fields worldwide, which caused a reduction in price because of too much supply. [6] This led to a drop in oil prices from around $40 per barrel to around $5 per barrel in the mid 1980’s, causing the country to build up large amounts of debt overseas.[7] This also caused Saudi Arabia’s oil production to decrease by 80 percent in just four years. Even when the country has seen very high profits due to oil, its citizens have not benefited from these profits. Since the discovery of oil in Saudi Arabia, millions of foreigners migrated to work in the energy industry. This included engineers and technicians, as well as those engaged in administrative and field-work. In 2013, it was estimated that around 9 million foreign workers were in Saudi Arabia. The country became very dependent on these foreign workers, mainly because it needed their skills in order to keep expanding as an energy provider.[8] This has also hurt the economy of Saudi Arabia because their own citizens are not receiving this income; most foreign workers will send their money back to their home countries, which affects the money cycle in Saudi Arabia. The country also lacks an economic diversity, as a vast majority of its revenue comes from the oil industry. This leaves the country very vulnerable when there are changes in oil prices. [9]
Besides the lack of a skilled population, Saudi Arabia also needs to import foreign workers due to cultural beliefs. The Saudi government has implemented a complete segregation of the sexes, which has made it very difficult for Saudi citizens to create jobs, while this segregation is not enforced on foreign workers. Foreign women are allowed to work, whereas Saudi women are not since that would expose them to work alongside an unrelated male. Saudi women are also not allowed to drive, and Saudi men are not allowed to chauffeur them, which is why there are thousands of foreign male drivers. Because of some of these cultural restraints, foreigners keep benefiting from Saudi Arabia’s economy, while its own citizens get the short end of the stick. [10]
Economists also believe that there is correlation between a country’s political systems and how much they grow from oil discovery. Saudi Arabia is an absolute monarchy. Political parties and national elections are not permitted, and the citizens of Saudi Arabia are seen as some of the least free citizens in the world. The Royal Family has been accused of corruption for most of Saudi Arabia’s existence, and takes a lot of the country’s oil revenue. In addition, the citizens of Saudi Arabia are also forbidden to protest, even if it is peaceful. Saudi Arabia’s authoritarianism has hindered the country from expanding economically after becoming oil rich. [11] Because of the combination of its pre-oil economic standing, its social construct, and political conflicts, Saudi Arabia has allowed for the riches of oil to serve as a curse in their country instead of a source of economic empowerment.
The chart below shows a breakdown of Saudi Arabia’s economy in 2011, and it is evident that its economy is extremely dependent on crude oil, with crude oil composing over half of its economy.
Mexico
Oil in Mexico was discovered in very different circumstances, as compared to other countries. Natives used oil on a small scale prior to Spaniard arrival. However, it wasn’t until 1869 that both Mexican and U.S. entrepreneurs drilled oil wells large enough for selling within the energy industry. Prior to this oil extraction, Mexico’s economy depended on mining, agriculture, and trade. So although their economy wasn’t very rich, it had a little more diversity than other oil-producing countries. Because at the time Mexico was not very advanced in skill and technology, they required foreign assistance in order to maximize their profits in the energy industry. However, Mexico soon realized that this foreign “help” seemed to take advantage of its natural resources and Mexicans were not benefiting from the profits of this endeavor, to the point where 17 foreign companies were reaping the rewards from Mexico’s oil[12]. Exploitation of oil rich countries by foreign powers has been very prevalent in oil history, and is another reason economists believe that oil rich countries suffer the way they do. However, in 1938 Mexico decided that they had had enough and nationalized its oil[13]. This decision was able to reverse some of the effects of the oil curse since now Mexico was actually profiting from its oil reserves.
Politically, Mexico’s constitution called for democracy since 1917. However, it was no secret that elections were rigged and that the votes of people were not really taken into account. Ironically, Mexico’s oil money fueled a lot of this corruption, which in turn damaged Mexico’s social standing and therefore its economy. Because the government was able to use oil revenue for its expenses, it was never consistent with taxing its people. This led to the Mexican government not feeling obliged to ask for the input of its people since they were not paying taxes. However, in 2000 things got a little better for Mexico as democratic elections started to become the norm. In the last 40 years, Mexico has also been able to double the amount of women in the workforce, which has helped expand its economy. However, all things aside, the main reason that Mexico was able to reverse some of the oil curse effects have been due to its effort to diversify its economy. From the graph below, it is clear that Mexico has been investing into many different fields like vehicles and electronics, and has been able to decrease its oil exports to 6 percent, when a hundred years ago oil made up a large amount of its economy. However, with only 6 percent of its exports being oil, Mexico has still managed to be the number 13 leading exporter of oil in the world.
Currently, one of Mexico’s leading problems with the energy industry involves Pemex, the state oil company. The government taxes Pemex heavily, which leaves the monopoly with very little money that it needs in order to invest in production and expansion. In 2013, Mexico’s current President Enrique Pena Nieto announced that the tax burden on Pemex would decrease, and that Mexico would create a taxing system to treat Pemex like any other oil firm in the world. However, it doesn’t seem like this has been a priority since Pemex is still being taxed heavily. In 2012, Pemex paid 69.4 billion in taxes on a 69.6 billion profits they had that year, an enormous 99.7 percent tax.[14] This has hurt Mexico a lot because Pemex has not been able to invest in research, which Mexico could really benefit from since the known reserves in Mexico are not estimated to last a lot longer. During the past few years, in particular, Mexico has seen a decline in crude oil production; so investing in alternative energy would be greatly beneficial to the country’s economy. Overall, however, Mexico has overcome many of the problems that they have faced through oil production and is a big reason that they have been able to come out of the oil curse slump.[15] In order to keep this going, Mexico will need to show that it is capable of expanding their energy industry and not depending solely on crude oil.
United States
Petroleum became a major industry following the oil discovery at Oil Creek Pennsylvania in 1859. For a vast majority of the 19th and 20th century, the United States was the largest oil producing country in the world, and is currently the third largest producer.[16] The oil well in Pennsylvania was huge for the history of the United States because it encouraged people to drill more wells, and eventually created a supply of petroleum large enough for a business. [17]
Because of the United States’ strong established democracy prior to the extraction of oil, people had the freedom to take part in the oil industry or in supplying those who chose to do so. This opened doors for many Americans, allowing them to benefit personally while also helping the economy as a whole. However, democracy wasn’t the only thing that helped the United States not fall into the oil curse. Prior to the discovery of oil, the United states already had a strong and diverse economy. As such, adding oil to this economy was just the icing on the cake, in contrast to many other countries that hoped oil would be the foundation of their economy.
After further development in the oil industry, the United States was able to become less dependent on foreign powers because they no longer relied on importing oil from other places. Besides this, there was also a large social movement in the 20th century that has shaped the United States into what is today. The United States was able to successfully increase women’s rights and shape a culture for women in the workforce, as well as equality among races.[18] It is not a secret that countries with the most social justice tend to be stronger politically and economically. Other countries that have benefitted greatly from the oil industry include Norway, Canada, and Great Britain. Factors that these countries share are high incomes prior to the discovery of oil, diverse economies, and strong democracies.
Although the United States is an economic example of an oil rich country, this does not mean that it has been completely scar free throughout the history of oil. Even currently, the United States’ oil industry is hurting. Because of worldwide oil issues, there is currently an over production of oil happening around the world, especially with OPEC. Because of this, the price of oil has dropped drastically. Although this has made many Americans very happy, states that rely heavily on oil have seen their economies plummet. These states include Texas, North Dakota, Alaska, Oklahoma, Wyoming, and New Mexico. Thus, even though the overall economy of the country is not in recession, many of these states have been affected. Thousands have been laid off, and 42 North American countries have filed for bankruptcy. [19] However, economists still believe that the benefits of cheap oil throughout the country have outweighed the negatives in oil producing states. This is mainly because the United States is an oil importer; so cheap oil prices help the overall economy.
Conclusion
Besides just Saudi Arabia, Mexico, and the United States the discovery of oil has shaped several other countries in different ways. However, one pattern that cannot be ignored is the fact that most of these countries, with a few exceptions, have been doomed by this oil curse. Many economists and social scientists have spent years researching the oil curse and trying to classify its effects on different countries. However, I think it is important to not just study the effects of the oil curse, but to be able to implement a plan around these studies in order to improve the well-being of oil rich countries. It is clear from the three countries that have been studied, that a concrete legal system along with diverse economy and potential for social growth has been essential for those countries that benefit from oil production. So how can this be implemented onto current countries suffering from the oil curse? In theory it would be easy to just tell a country to be more democratic and diversify its economy, but of course politics are a lot more complicated than that. Because the research on this topic has been so extensive and a lot of it is very profound, these results need to be made more public. If countries like Saudi Arabia learned from Mexico’s history and how it has been able to better the lifestyle of its people, then they might try and implement similar tactics. This might sound very extreme since Saudi Arabia’s political system and culture is so different from that of Mexico. However, this isn’t such an extreme idea for countries like Venezuela, who has also suffered from the oil curse but has a lot of potential to be able to reverse some of the effects just like Mexico did.
It is also important to note that even the “best” oil-producing countries can be hurt economically by oil, as we are seeing now. So is there really such a thing as escaping this? Is oil so truly cursed that no matter what a country does it will be hurt at some point by oil? Maybe or maybe not, but like with all things countries should be aware of how to avoid the majority of these problems so that they are able to have the odds in their favor. The bottom line is that oil, as any other commodity, is very unreliable and volatile, so a country’s economy should not depend on it. Having unstable governments and economies seems to add to the unreliableness of oil, and the combination of the three has shown to be disastrous to many countries.
Works Cited
[1] Juan Pablo Perez was a Venezuelan diplomat, politician and lawyer responsible for the origin of OPEC as well increasing oil revenues for the country by raising taxes through what later became known worldwide as the 50/50 formula.
[2] Ross, Michael L. The Oil Curse : How Petroleum Wealth Shapes The Development Of Nations. n.p.: Princeton : Princeton University Press, 2012., 2012. ST EDWARDS UNIV’s Catalog. Web. 9 Apr. 2016.
[3] Ross, Michael L. The Oil Curse
[4] Large international oil companies are still blamed for causing the oil curse. In 2005, a representative from Exxon was quoted saying, “We don’t like to call it the oil curse, we prefer ‘governance curse’. We are private investors, and it is not our role to tell governments how to spend their money.”
[5] Goodermote, Dean, and Richard B. Mancke. “Nationalizing Oil in the 1970s”. The Energy Journal 4.4 (1983): 67–80. Web
[6] Lib. of Cong. U.S. Govt. Web. 10 February 2012. <http://www.loc.gov/>
[7] “External debt of Saudi Arabia”. CIA World Factbook. 2012.
[8] Gibney, Matthew J.; Hansen, Randall (2005). Immigration and Asylum: From 1900 to the Present. p. 404.
[9]http://www.sama.gov.sa/sites/samaen/ReportsStatistics/ReportsStatisticsLib/5600_R_Annual_En_48_2013_02_19.pdf
[10] Saudi Arabia and the Paradox of Plenty. American Bedu. July 5, 2012
[11] “History of the Kingdom”. Ministry of Foreign Affairs.
[12] Mexico. The True Facts About the Expropriation of the Oil Companies’ Properties in Mexico: Government of Mexico. Mexico City: Talleres Gráficos de la Nación, 1940. Web.
[13] Santiago, Myrna I. The Ecology of Oil : Environment, Labor, and the Mexican Revolution, 1900-1938. Cambridge: Cambridge University Press, 2006. Web. Studies in environment and history; Studies in environment and history. pg 51
[14] David Alire Garcia, “Mexico to keep pumping Pemex for tax money despite promised reforms”, Reuters, 30 Oct. 2013.
[15] Even though Mexico has reversed so many of the effects of the oil curse, it still has a long way to go. Its improvements have been significant but still fall short of where Mexico needs to be in order to maintain a stable government and economy.
[16] US Energy Information Administration, International Energy Statistics: Crude oil including lease condensate.
[17] Edgar Wesley Owen (1975) Trek of the Oil Finders, Tulsa, Okla.: American Association of Petroleum Geologists, p.12.
[18] The Women’s Rights Movement, 1848–1920. History, Art, and Archives.
[19] Dent, Millie. How Plunging Oil Prices Threaten the U.S. Economy. 27 January 2016. The Fiscal Times.
AUTHOR BIO
I am a senior at St. Edward’s University majoring in Mathematics with a minor in Physics. I was raised both in Mexico and then later in Laredo, TX. I am very passionate about mathematics and after graduation hope to get a Masters in business where I can apply mathematics on a daily basis. My interest in business has led to my curiosity of worldwide economics and how political and social situations shape the economy of a country. I aspire to combine both my passion for mathematics with my curiosity of economics and continue learning about the factors that shape the world’s economy.