Friday, 15 April 2016

Is Oil a curse or a blessing for modern economies?

Oil is only a curse when it is managed poorly, and as an essential non-renewable resource for state survival has been mis-managed by states that have traditionally been exploited by the West. This assumption will be demonstrated by an analysis of the impact of the governance of oil on social, economic, political policies as well as international relations. The securitization of energy will also be explored to establish the importance of oil for forming state relations and development. I also suggest that the Norwegian model of managing oil and indeed any non-renewable natural resource is universally applicable and if applied within Saudi Arabia would curb the effects of the resource curse.

Norway and Saudi Arabia produce the same amount of oil and have traditionally seen the same rises in GDP “in both 1990 and 2005” (Tzannatos, 2013), however the similarities end here. The resource curse is defined as “an empirical term that applies to the failure of converting natural resource wealth into sustainable economic growth and equitable development” (Tzannatos, 2013) that results in “the observation that that countries rich in natural resources tend to perform badly” (Sachs & Warner, 2001), my argument will follow the notion that this is politically, socially and economically with those who lose out the most as the citizens themselves.

Oil is used for a plethora of manufacturing and energy considerations, which makes it the most important natural resource on the planet, the subsequent securitization of energy represents its power as a tool within politics and the effect of its management on international relations, the economy and internal state provisions. A nation that offers particularly stark evidence of the existence of the resource curse is Nigeria[1] which with an abundance of oil has resulted in an ‘economy within an economy’ with a stark divide between the nations richest and the nations poorest.

Evidently it is only neo-colonial Oil rich states are prone to the elements suggested within the definition of the resource curse, this is evident across the Middle East and indeed in many post-colonial African states that have been created around the idea of oil as a central pillar for export and economic policy. Areas where states are seen to perform badly are within the rate of economic growth, political conditions within a country (representation & democracy) as well as the mis-management of the resource itself.

 Oil and resources were found in Saudi Arabia prior to its establishment as an independent state, which I argue, has ensured that the state systems established after colonialism were to benefit the old colonial powers who implemented them. This is evident through the struggle for control over the oil prices during the 1970’s  “where Saudi Arabia and other oil bearing nations were able to wrestle control over oil pricing policy from other major Western Oil companies” (Jones, 2010, p. 4), which shows not only how the Western influences managed to maintain exploiting the regions resources, but how strong the dependency on Middle Eastern oil is.

Oil rich Norway is able to provide an abundance of political and civil freedoms for its citizens as an established meritocracy. However the political and economic system was in place prior to the discovery of oil and has been managed strategically without any regression in terms of civil/political rights. In comparison to Saudi Arabia this is because Norway was able to lay its own claim on the resource within existing political structures. The fact Norway is considered number one in the world in terms of its “high level of human development” (UNDP, 2014) dismisses absolutely the idea that by having a high level of a natural resource it is preforming badly in terms of it’s social, civil and political policies, supportive that good governance of oil has resulted in positive development. On the other hand Saudi Arabia is considered 34th in the world in terms of development despite having consistently matched the GDP of Norway. Further to this it would be incorrect to suggest that Norway has suffered economic regression as a result of having large oil reserves, as it was considered “11th in the World” (World Economic Forum, 2014) in terms of global economic competitiveness, further supportive of my argument that oil is a curse, but with good management can result in positive development.  

Poor social and political development as a result of the resource curse is demonstrated through the lack of political and civil rights provided in Saudi Arabia. One may argue that it is the feudal system of Shar’ia law that has lead to a poor record of women’s rights and political freedoms, however I argue that patronage politics plays a significant role and that Islamist policies are manipulated in order to sustain the absolutist monarchy. An example of this is the dismissal of many elements of sha’ria law. For example there is no “qanam (code)” (Cotran & Yamani, 2009, p. 128) that is required under shar’ia law that establishes a codified constitution or set of political or civil rights, suggestive of the Saudi manipulation of the political system to serve their own greed and interests. Further evidence to suggest that it is not Islamic economic policies that serve to regress development is the comparison of Malaysia who also operate an Islamist system of government, yet still provide a high level of civil and political freedoms.

Under patronage “politicians influence the bureaucrats” (Muella, 2009), which is reflected in Saudi Arabia through the influence of the absolutist monarchical system upon positions of political power. The high amount of revenue gained from the sale of oil gives the Saud family the ability not to charge taxes (apart from the Islamic Zackat, a charity tax), but establish reasonably good services such as infrastructure and a free health service. This establishes the importance of oil in providing the revenue to sustain this political system, supportive of the argument that oil is a curse as it has funded the manipulation of an entire political system.

This political system then serves to provide a regressive economic system cannot be put down to trends in the global economy. I argue that it was this system of patronage politics as a result of disagreements within the Saud family as to who will take over the monarchy, changes of personnel that manage the distribution and prices of oil that led to dramatic drops in the percentage of Gross Domestic Product (GDP). At the end of 2013 it was evident that the nations GDP was on the decline from “6.3% between 2008 and 2012 to 3.5% in 2013” (PRS Group, 2013). This is evident today, as the price of oil has plummeted; this is due to “weak economic activity, turmoil in Libya and Iraq[2], the rise of America in exporting oil and a switch from oil to other fuels” (The Economist, 2014). The continuing fast pace of production despite a decline in global demands puts the country at risk of Dutch disease, a core element of the resource curse and a direct result of the irresponsible governance of oil.

The threat of Dutch disease as “spending too much too fast, resulting in the overheating of the economy” (Stoltenberg, 2013)is the underlying motivator for states to efficiently manage the revenue gained from oil. This has been successfully displayed in the Norwegian case and indeed evidence to suggest that it is the management of oil that determines whether it is a blessing or a curse. The Norwegian economic management of oil is not what defines the nation, as it does in Saudi Arabia. It strategically manages oil through three effective policies. I argue that it is the inter-relation of these strategies that should be attributed to the success of them as opposed to any individual one and could be applied to any resource rich nation as a way of avoiding the resource curse.  

The first strategy is the “separation of earnings from the spending of oil and gas” (Stoltenberg, 2013) that has enabled the government to be able to save oil revenues and spend only the returns. This curbs the economically regressive element of the recourse curse as well as the threat of Dutch disease. Ex-Prime Minister, Environment Minister and Energy Minister of Norway Jens Stoltenberg suggests that for Norway to not fall into economic overheating it has to only invest money from its sovereign oil fund into international projects that will benefit Norway long term. In the case of Saudi Arabia all revenue gained from oil is put straight into the monarchical treasury, for the house of Saud to spend as it pleases. Despite no evidence to suggest the Saudi economy is overheating, the principle of avoiding risk evident in the Norwegian case represents how oil can serve to be a curse when managed improperly.

 As demonstrated in figure one this fund has been invested into equities and bonds, however this came under threat during the financial crises of 2008 which saw  “$1 billion invested into six failing US and European banks, including the Lehman brothers which resulted in a loss of $500 million” (Tomlinson & Laroie, 2009) which shows the scheme is not flawless. However the figure also demonstrates the trend in increased savings, which shows the speedy recovery the nation, was able to make during such a dire global economic period. 

Figure 1. (Stoltenberg, 2013)

“Keeping people in work” (Stoltenberg, 2013) as the second strategy of economic management within Norway targets not only the intended economic developmental aspects of the resource curse but the social and civil. By keeping people in work Norway has not only successfully managed to ensure a domestic contribution to the economy but ensured that the female contribution to the economy counts for more than the revenue gained from oil and gas, which Stoltenberg suggests represents how “female participation is a blessing” (Stoltenberg, 2013). This also contributes to the efficient pace of development that is seen in Norway, which without the contribution of oil still exceeds that of the USA.

Domestic policies that ensure that there is a strong contribution to the economy are evident in Norway, which not only curbs reliance on oil revenue but also increases civil and political development. Strong social policies also increase participation in the work place such as “A year paid leave when a child is born, with 14 weeks of which has to be taken by the father” (Stoltenberg, 2013), further contributes to the domestic economy, as well as social and civil development. On the other hand Saudi Arabia has the potential to implement such policies, however its oil-centric approach to policy and economic reliance has failed to ensure that there is a considerable domestic contribution to growth. This has resulted in a considerable gap between the richest and the poorest within the population as I argue the limited labor contribution arguably reduces the states obligation to assist citizens; this has resulted in a position of “61st out of a total of 177 countries within the human development list” (Fadaak, 2010). Thus representative of how oil is a curse when it comes to investing in domestic economic policies than can aid social development.

The management of the revenue gained on oil in Saudi Arabia is consistent with the symptoms of the resource curse. As previously stated the revenue gained goes straight into the monarchical treasury, ever “since they seized control of national oil company Armco” (The Economist, 2014) in the 1970’s. This has not led to a healthily growing economy due to complex spending strategies to keep the population on side with the authoritarian regime. This comes in the form of “direct welfare payments to the people… where the budget is 80% based on oil revenues” (Globalization 101, 2014), which is not only unsustainable, but irresponsible as there is alternative for generating this money when the resource runs out, especially without a substantially contributing domestic economy.

Membership of international organizations can serve to curb the effect of ‘economic overheating’ as a symptom of resource curse as in the case of Norway. I argue this is because international organizations serve to provide a forum for accountability and collective progression. Despite not being a full member of the EU, Norway has taken a strategic position by opting in to some elements such as the European Economic Community (EEC), Frontext and the European Free Trade Association (EFTA). This suits not only to provide benefits for its citizens through participation in the free movement of goods, trade and people, but its internal traditional economic activity of “fishing, shipping and aluminum production” (European Commission, 2014). Membership of the EU has also served to aid Norway in its role as a “strong global advocate of climate change mitigation” (IEA, 2011) and has been pressured to lower its use of carbon in its extraction process. This represents how good governance as a result of membership of an international organization can serve to curb regressive developmental aspects of the resource curse.

On the other hand one may argue that Saudi Arabia has attempted responsible economic management through its membership of the Organization of the Petroleum Exporting Countries (OPEC) who’s mission is to “coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets to secure an efficient, economic and regular supply of petroleum” (OPEC, 2015). As an organization that has served to attempt to govern oil responsibly it has been manipulated by the power Saudi Arabia has recognized it holds as an individual member. It’s massive oil reserves overshadow other OPEC members and it is responsible for allowing the prices of oil to plummet in order to gain a monopoly over the other OPEC members in the region mostly due to the fall in demand due to the rise of the USA in producing oil and secondly because “risking their stocks could serve to benefit Iran and Russia, countries they detest” (The Economist, 2014). Which unfortunately represents how the abundance of oil can be used as a tool to increase the nations importance in the organization, which in turn lessens the principle of equal partnership in managing the resource.

A subsequent effect of the politicization of oil has resulted in its securitization post 1973, which has furthered its importance on the global agenda, which I argue, intensifies the symptoms of the resource curse. This is due to the global dependence on oil and a recognition of how its absence “threatens military power, transport and manufacturing needs” (Özcan, 2013) this represents how the state producing a particular resource not only has the power to ensure another actors sustainability, but its development. This is evident in the EU who as a securitizing actor “transformed the issue of energy security into the form of existential threat towards European people’s standards of living and the EU’s stability” (Özcan, 2013).

The securitization of energy has been a blessing as it has raised the importance of oil on the global agenda has created recognition of its scarcity and the importance of energy for state survival. This has led to countries looking beyond traditional non-renewable sources of energy in order to sustain them and for oil producing states such as Norway and Saudi Arabia has forced them to pursue alternative sources of energy. At the current stage, I argue Saudi Arabia is slow to recognize this and is potentially desperate to get the largest amount of revenue before being forced to depend on other sources of income, as suggested by Saudi Minister for the interior in 2002, “The Stone Age didn’t end because we ran out of stones.’ It ended because we invented bronze tools, which were more productive.” (Wight, 2014). This supports my argument that it is the governance of oil that has led to it becoming a curse, as a security concern it also gives the nation greater power in defining its own terms of management.

On the other hand, the securitization of oil by international actors has forced Saudi Arabia to recognise that it will have to explore other options for energy generation such as solar power, for which “it is working with China in order to provide 30% of its energy demands” (Clover, 2014), however I argue that this could just be a way of sustaining the status quo while it sells off the remainder of its oil reserves. In comparison Norway is currently working with the UK and Germany to create a “sub-sea electric power connector, to ensure energy security to Northern Europe as well as its own supply” (Hanna, 2012)which not only supports my previous argument that certain international organisations serve to curb the resource curse, but how international co-operation can support securing energy for state survival.

The future for oil
As demonstrated, Norway has recognized that oil is quickly depleting and that it would be unable to sustain an economy, social policy and nation completely dependent on it and has therefore sought other means to ensure revenue. On the other hand, Saudi Arabia views oil as a commodity or a trend, the state has already recognized that the oil age is coming to an end and is evidently doing everything it can to get whatever price is available for it resulting in plummeting prices for oil.  Good governance is evidently the only way for oil to be successfully managed; through strong domestic policies both economically and socially will serve the states appreciation of the labor market, lessen dependence on a non-renewable resource and result in positive social, political and economic development arguably the opposite effects of the resource curse.




Bibliography

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[1] More information on how neo-colonial states bare the brunt of the resource curse is evident here: http://www.globalcitizen.org/Content/Content.aspx?id=2e0d195b-5b4b-41d2-9c3a-bac3d7957be7
[2] Also major oil producing states