Reuters - Is oil windfall a curse for poor countries?

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Is oil windfall a curse for poor countries?

Wednesday, May 28, 2008 9:5PM UTC

By Ed Stoddard - Analysis

DALLAS (Reuters) - Red-hot oil prices are a blessing for big energy companies but often prove a curse for poor oil-producing countries.

Exxon Mobil Corp and other energy giants traditionally use good times as an occasion to make prudent investments with their cash. But oil-rich countries that are poor -- and often poorly run -- tend to squander their windfall profits on dubious projects or have them stolen by corrupt officials.

So when the inevitable price bust occurs, developing countries are ill-prepared.

"The oil majors have many decades of experience in smoothing out their revenues and investing the money during the fat years to prepare for the lean years," said UCLA political scientist Michael Ross.

Exxon, which was holding its annual meeting on Wednesday, enjoyed full-year earnings last year of $40.61 billion.

State coffers in oil-producing countries like Angola are also overflowing but many lack the transparency of publicly listed Exxon. Many have neither the capacity to handle such an income surge nor the will to spend it in an equitable manner.

"New oil producers especially are largely unprepared for revenues of this scale ... oil-producing countries today are being hit with a tsunami of cash, and the danger is that they will squander it just like they squandered the surpluses of the 1970s," Ross, a noted expert in the field, told Reuters.

The new oil club includes African nations such as Equatorial Guinea, Chad and Sudan.

Grounds for optimism are scant. Equatorial Guinea has risen in a few short years to become sub-Saharan Africa's third-largest crude exporter after Nigeria and Angola.

Yet most of its half-million people live in grinding poverty, and income disparities are glaring. Equatorial Guinea stands out as its small population means that oil cash could actually make a meaningful impact on the lives of its people.

President Teodoro Obiang Nguema has been in office since he overthrew his uncle in a coup in 1979, and human rights groups say he tolerates little dissent. The country was ranked as the tenth-most-corrupt in the world last year by Berlin-based watchdog Transparency International in a 180-nation survey.

Angola has been accused of graft on a grand scale while many of its people are among the world's poorest. According to the International Monetary Fund it could not account for at least $4.2 billion in oil revenue between 1997 and 2002.

"When you have a situation with little fiscal transparency in the context of high oil prices, you have problems. But Angola is doing better now, it is publishing details of what it's paid by the different oil companies," said Razia Khan, the Africa economist for Standard Chartered.

"But the criticism is that that data is only out with a considerable lag," she added.

Oil prices on Wednesday rose to near $130 per barrel, not far from the U.S. crude record high of $135.09 reached last week. Oil prices have doubled in the last year as speculators pile into commodities and as demand soars in emerging economies.

OIL, GUNS AND BUTTER

Red-hot oil prices strengthen the hand of repressive governments that can buy more guns and that seldom give much thought to the "butter" side of expenditure.

They can also grease the wheels of conflict as the stakes in the game are so much higher. The militant attacks in Nigeria's impoverished but oil-soaked Niger Delta which have helped keep prices on the boil are an example of this trend.

A botched coup attempt in Equatorial Guinea a few years ago is another. In a commentary in the current issue of "Foreign Affairs," Ross writes that oil-producing states today host about a third of the world's civil wars, up from one-fifth in 1992.

Rivers State in Nigeria's Niger Delta is often held up as a prime example. Elections in 2003 and 2007 were overwhelmingly won by the country's ruling party but widely dismissed by outside observers as farces.

"The spoils of controlling political office in the Delta are higher now than they've ever been, especially because so little has been done to prevent public officials from stealing the money they are accountable for," said Chris Albin-Lackey, the senior African researcher at Human Rights Watch.

"It really seems that the primary consequence of increasing revenues going into government coffers has been increasingly violent and corrupt struggles for political power," he said.

Many developing countries also simply lack the capacity and technical expertise to deal with such a sudden flow of revenue and would have trouble allocating it efficiently even with the political will to do so.

"There are several studies which show that the national oil companies are much more inefficient in terms of how they spend or invest their money because they are not market-driven companies," said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University in Dallas.

"But some have matured over time such as Petrobras in Brazil, which is an outstanding company," he told Reuters.

(Editing by Matthew Lewis)