Fresh Takes on The Resource Curse Hypothesis

The hypothesis that oil damages countries it comes from, in more ways than one, has been with us for some time now. Industry observers and critics perhaps do find common ground in noting that discovery and extraction of crude oil, especially in case of developing economies exporting the stuff, has failed to provide the bonanza and even spread of prosperity that it should for these nations.

On the contrary, oil has stirred up troubles and conflicts. Furthermore, wherever one looks there is a political dimension to the dominance of this single commodity which is limited and will run out in the future, though not as dramatically as sometimes portrayed.

Adding to the debate are fresh thoughts contained in two very interesting books that I have read in recent months. The first is titled Crude World: The Violent Twilight of Oil by Peter Maass. The second is titled False Economy: A Surprising Economic History of the World by Alan Beattie, the fourth chapter of which dwells on the subject (viz. Natural Resources: Why are oil and diamonds more trouble than they are worth? – Pages 95 to 120).

In his book, Maass opines interestingly that the commodity is itself the real villain here. His central argument is that oil has damaged nations it comes from as it artificially strengthens their currencies and makes the rest of the economy uncompetitive. More critically, while wealth creation occurs as a result of oil exports – it does not create what developing economies need most in appreciable numbers – jobs. Furthermore, he offers arguments that oil wealth removes the need for wise spending.

What I liked about this book is that it does not look for fall guys or hammers oil companies, who in the author’s opinion are like any other business seeking the maximum possible returns on investment. Rather, he opines that corruption, greed and strife are also by-products of the oil trade. It is an interesting and unique book though not rich on the economic analysis front.

Along this tangent, the aforementioned chapter in Beattie’s book offers more detailed economic insight. Like Maass, he agrees that it is in the nature of the oil business to benefit fewer workers, as oil and gas extraction is equipment intensive and not labour intensive. Experts believe it is labour intensive mass production industries that do more to lift people out of poverty in the form of job creation with more wages for more people. Hence, oil creates a unique problem for oil-rich developing economies.

Beattie also notes that a significant portion of the return on extraction is used by oil-exporting developing economies to purchase drilling equipment which they cannot manufacture. Throw in the geopolitical permutations and corruption that Peter Maass alludes to, add in the concept of Dutch disease, and we soon arrive at a self-inflicted tragic hotchpotch which may be labelled as a resource fuelled curse that both authors describe in some detail.

No one is discounting the fact that where managed well, oil as a resource has been good for economies exporting it. Norway is often cited as such a nation, but Beattie says it struck oil meaningfully only in the 1970s, by which time it was already a rich economy. Russia is criss-crossing between becoming a meaningful democracy and going down the old Soviet autocratic way. Oil and gas wealth ensures that it may well be, some say already is, heading in the latter direction.

Four of Africa’s longest serving autocrats are from oil exporting nations. More convincing details, especially on Equatorial Guinea, can be found in the work of Dr. Ricardo Soares de Oliveira published in 2007. For lack of a better metaphor, he aptly brands such nations as ‘failed successful states.’

Both these books, especially as they are aimed at a wider readership base rather than academia, rekindle the resource cruse discussion. I particularly like Beattie’s witty observation that oil is bulky, murky and harder to extract, but “like Visa or MasterCard, also widely accepted!”

© Gaurav Sharma 2010. Photo Courtesy Cairn Energy PLC

Crude Year ’09 Ends Just Like the Last One

When 2008 was coming to an end, the price of crude oil was stuck below half its record peak price of US$147 a barrel seen in July that year. Yet fears about a new spike persisted despite a dire global economy. As the curtain falls on 2009, with the price of crude futures hovering around $80, market commentators have voiced similar concerns. Most of the reasoning banks on sound conjecture that oil consumption in India and China is rising beyond expectation and that OECD economies are also witnessing an economic recovery of sorts after facing negative growth for much of 2009.

The year saw some memorable as well as predictable developments. As the price of oil weakened so did the black gold weighted currencies, most notably the Russian Rouble. OPEC continued to maintain production levels at its March meeting, resisting temptation to cut production in wake of falling prices. It ended the year with a production level of 24.84 million barrels per day (bpd), excluding Iraq's output. On the M&A front, Suncor and Petro Canada announced a CAD$ 19.3 billion (US$ 15.3 billion) merger. ExxonMobil topped the Fortune 500 Index, dethroning Walmart as USA’s biggest company. The Texas-based oil giant, according to published sources, employed 79,000 people and produced 3% of global oil as of April 2009. It was followed closely behind by Chevron in third place and ConocoPhillips in fourth, highlighting the dominance of energy companies in the U.S. corporate world.

Clamour for biofuels grew, along with arguments for and against them and new methods of production. One of the most unique theories came from three researchers at the University of Nevada (Reno, U.S.A.) whose research was carried by a number of media outlets in 2009. Lead by Dr Manoranjan Misra, they found that coffee grounds can yield 10-15% of biodiesel by weight. However, so far there are no indications that Starbucks would enter the oil trade.

Perhaps still haunted by the fact they sold minerals rich Alaska to the U.S.A. in 1867 for two cents an acre, the Russian government launched fresh and detailed territorial claims within the Arctic Circle determined not to miss out on a perceived oil bonanza in the region. Despite extracting oil from seabed being mighty awkward, Canada, Denmark, Iceland, Norway and U.S.A. also made their respective claims beyond agreed international borders (to be heard at a later date).

Nigeria’s maritime troubles related to oil, dogged production for most parts of the year. The militant group curiously named MEND (Movement for the Emancipation of the Niger Delta) offered nothing more than temporary respite. While Nigerian production fell, Uganda and Ghana struck oil. Armed with petrodollars, China, Russia, Iran and Venezuela dished out their own respective international versions of how to win friends and influence people noted The Economist.

Major oil firms frowned at the miserly terms offered by Iraq’s government at the first opening of competitive bidding for production rights in July and some seemingly held out for better prices. Iraqis said it was their moral right to protect the country’s wealth. As security is a distant prospect, something has to give way with negotiations and fresh bidding slated for 2010.

Last but not the least, bashing 'speculators' emerged as the most popular way for American and European politicians to spend time when called upon by their electorates and the popular press to explain first high and then low oil prices. Ultimately settling on 'volatile' as an apt description, politicians hailing from no less than 19 developed countries echoed the common message of 'damn the speculators' - some in more colourful language than others.

For most of the motley crew, alternative investors such as exchange traded funds which hold large commodity positions for extended trading durations were behind price volatilities seen in anything traded on earth from gold to garlic, and not just oil. However, a U.S. CFTC study from 2008 seemly exonerated them and the Commission’s new boss Gary Gensler has so far not rejected the validity of its findings.

Maybe for some, it’s rather difficult to palate that ‘speculation’ in itself mirrors supply, demand and global instability premiums. While the latter impacts oil more than most, supply and demand permutations hit traded commodities of all descriptions.

© Gaurav Sharma 2009. Photo Courtesy Cairn Energy PLC

OPEC’s Decision Hardly a Surprise

At their latest meeting on December 22, 2009, in Luanda (Angola), OPEC ministers did precisely what the market expected them to do, i.e. nothing! Some murmured that OPEC’s inaction in terms of holding output at 24.84 million barrels per day (bpd), excluding Iraq’s output, did cause a brief spike and nothing more.

Nonchalant shrugs from traders and analysts alike suggest that some members would flout their respective agreed quota anyway which seems to be the norm. As usual, containing Saudi Arabia, which accounts for 30% of OPEC’s output, will prove mighty hard for the cartel. Regional estimates on the volume by which the Saudis usually exceed their daily quota, varies from 90k bpd to 200k bpd. However, OPEC insisted it would improve members' compliance with target quotas.

The cartel noted with “great concern” that, whilst the worst of the global recession appears to be over, the world economy remains confronted with the deepest, most wide-spread contraction since the 1940’s.

More importantly, for the first time since early 1980’s, demand for black gold was seen to be in decline for the second year running, according to OPEC. Faced by shrinking global industrial production, low private consumption and high unemployment, the cartel said it would leave oil production levels unchanged for the time being with a review slated for March 17, 2010.

There was also the customary call on non-OPEC producers to cooperate with the cartel to support oil market stabilisation and the restoration of market equilibrium. Status quo it is then.

© Gaurav Sharma 2009. Photo Courtesy Cairn Energy PLC

Just Getting Started - Initial Thoughts

Geopolitics and oil are near inseparable. The market for black gold and trading patterns have long fascinated me since my first attempt at commodities reporting with a story on Cairn Energy in 2004 for a weekly newspaper. Several articles, exchanges with traders and analysts, books on the subject and OPEC summits later, I have arrived at a juncture where I feel I ought to pen my thoughts on the subject minus the constraints of third party editorial rules. The oil world, its players, supply and demand permutations, politics and the stuff itself will be the subjects of this blog as I see them in the weeks, months and years to come. I hope to get the ball rolling in earnest from Jan 2010. I have thought long and hard about writing a blog on oil and hope to do justice to it.