March 16, 2012 9:03 pm

Pump politics

Is oil wealth a curse? Perhaps so, but those who run out will not feel blessed

The Oil Curse: How Petroleum Wealth Shapes the Development of Nations, by Michael L. Ross, Princeton, RRP£19.95, 296 pages

Carbon Democracy: Political Power in the Age of Oil, by Timothy Mitchell, Verso, RRP£16.99, 288 pages

The treasure that brings ill fortune is a constant theme of western literature, from the Icelandic Eddas to Scott B Smith’s A Simple Plan. Political economy has its own version in the shape of the “resource curse”: the idea that rich endowments of natural resources, especially oil, can actually be harmful to a country’s economic growth, democracy and human rights.

Mineral wealth is not the blessing it might seem, the theory goes, because a strong natural resources sector stunts the growth of the rest of the economy, and because it encourages conflict and corruption to secure control of the revenues from extraction. When you compare the development of Nigeria, which has huge oil and gas reserves, with Taiwan, which has none, the corrosive effect of petroleum, in particular, seems obvious. The histories of many producing countries make it easy to sympathise with Juan Pablo Pérez Alfonso, energy minister of Venezuela in the 1970s, who described oil as “the devil’s excrement”.

Among academics, however, the existence of the resource curse has been vigorously debated since the argument was set out in the seminal 1995 paper “Natural Resource Abundance and Economic Growth” by Jeffrey Sachs and Andrew Warner, both then at Harvard. Subsequent studies have suggested that the connection between mineral wealth and bad political and economic outcomes is less clear-cut than it might seem. There are oil-rich countries that are prosperous and well-governed, such as Norway and Canada, and plenty of countries with little or no oil, from Afghanistan to Zimbabwe, that are poor and chaotic. The conclusion some have drawn is that what really matters is governance, not resources, and there is no necessary relationship between the two.

The question of whether the resource curse is an inescapable fate has become increasingly salient in recent years, as a result of the long upswing in commodity prices caused by booming demand in emerging economies. In that context, The Oil Curse by Michael L. Ross, director of the Center for Southeast Asian Studies at the University of California, Los Angeles, is particularly timely. He argues that the resource curse is a reality, albeit not always in the ways that it has generally been understood, and that there are steps both oil-producing and oil-consuming countries can take to mitigate it.

 

The presentation is rather dense, thick with charts and tables, but Ross has an easy style and his central points are made clearly. His conclusion, supported by an impressively marshalled array of evidence, is that oil-producing countries have not, in the long run, grown more slowly than non-producing countries or had clearly worse political institutions. Their rates of child mortality have fallen faster than in non-producers. However, their economies have also been more volatile, swinging up and down with the oil price, and their governments have generally done a bad job of managing that volatility. They have typically had lower female participation in the workforce, and the lack of economic opportunities has held back progress in women’s rights. Oil wealth also has a tendency to sustain incumbent governments in power, whether they are democratic or authoritarian.

Ross’s interest in this field is more than academic: he is on the advisory board of the Revenue Watch Institute (RWI), a non-governmental organisation that promotes transparency and accountability in countries’ management of their oil and other natural resources, and some of his proposed solutions to the problems of oil wealth echo that group’s agenda. (In an appropriately transparent way, he reveals that the RWI provided “a generous grant” to enable him to finish the book.) He urges both oil producers and consumers to open up more information to public scrutiny, including details of revenues such as royalties and signing bonuses, and suggests oil companies should “publish what they pump” by disclosing the origin of the fuel they sell.

In his preface, Ross disarmingly admits that his previously published papers on resource wealth contained “more than a few errors, omissions and hard-to-defend assumptions”; failings that he believes he has now corrected with The Oil Curse. Someone else with a low opinion of his earlier work is Timothy Mitchell, who demolishes a 2001 article by Ross with a flurry of well-aimed kicks in a footnote in his book Carbon Democracy.

Mitchell, a professor at Columbia University’s department of Middle Eastern, South Asian and African Studies, does not engage in the resource curse debate head on, but instead comes at it sideways. By turns engrossing and frustrating, Carbon Democracy is a sweeping overview of the relationship between fossil fuels and political institutions from the industrial revolution to the Arab Spring, which adds layers of depth and complexity to the accounts of how resource wealth and economic development are linked.

 

Much of the book amounts to a critical dialogue with Daniel Yergin’s best-selling The Prize, the rip-roaring history of oil in the 20th century. Where Yergin tells the stories of swashbuckling entrepreneurs and other colourful individuals, Mitchell focuses instead on the roles of ideology, power relations and industrial logic in shaping political structures and the energy systems that support them. For him, it was the coal age that fostered democratic politics, by encouraging the emergence of organised labour. In the oil age that followed, new, more capital-intensive, geographically dispersed centres of energy production emerged, increasing the power of authoritarian governments.

Mitchell’s style is unapologetically academic, heavily footnoted and with a weakness for digression. He has a tendency to tell you what he is going to say, then say it, and then tell you what he has just said. Nor does the didactic approach always serve the interests of clarity. There is one chapter, about the connection between the oil industry and the discipline of economics, that left me mystified. Elsewhere he coins the hideous neologism “McJihad”, a play on Benjamin Barber’s Jihad vs McWorld, which jangles all the fillings in my teeth every time I read it.

Nevertheless, the book at times yields rich rewards. Its account of the manoeuvring by western powers to control the oil of the Middle East, going back to before the first world war, is essential reading for understanding the conflict in the region today. It is also scattered with thought-provoking insights, such as the observation that the huge arms purchases by Arab states are a form of “institutionalised waste”, more to do with recycling petrodollars to support jobs and activity in the west than with the genuine military needs of those countries.

Mitchell ends with a reflection on the two limits that the world may now be approaching: supply constraints that prevent us from meeting an ever-rising demand for oil, and climate change that threatens the conditions that have allowed our societies to develop. For one reason or another, we may not be able to rely on the unrestrained use of fossil fuels in the 21st century the way we did in the 20th. Mitchell suggests that “more democratic futures” could be within reach in the post-oil age. Perhaps. It is also possible that the greatest curse of all will be not having the oil when we want it.

Ed Crooks is the FT’s US industry and energy editor

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