The Great Oil Race

Will the new African oil rush doom these countries or save them?

Two generations ago, international oil companies flocked to Algeria, Gabon, Libya, and Nigeria. Today, they are descending on Angola, Chad, Equatorial Guinea, Sudan, and (once again) Nigeria. And with good reason. West Africa accounts for 21 percent of the new oil reserves discovered throughout the world between 1996 and 2005. The future of oil is in offshore reserves, experts say, and the future of offshore oil is in the Gulf of Guinea: The region is expected to produce 20 percent of all new barrels by 2010. Its barely tapped supplies–an easy to refine, high-quality crude–sit deep in the ocean bed and far from most political disturbances, ready to be loaded and transported anywhere in the world. Big oil consumers covet them. Nigeria already supplies 10 percent of all U.S. oil imports and has become the Bush Administration’s poster child for its effort to wean the United States off oil from the Middle East. State-owned enterprises from emerging nations, most notably China, are making massive investments in production facilities throughout Africa.

The journalist John Ghazvinian, who visited half a dozen new African oil producers in 2004 and 2005, sees this sudden interest as another “scramble” for the continent–probably an exaggeration, but a useful evocation of nineteenth-century colonialism, with its rushed bargains, greased hands, and dashed hopes. Historically, Africa’s resource riches have benefited foreign investors and local elites handsomely, but not so much everyone else. Will Africa’s latest oil producers do any better, Ghazvinian asks? It’s a good question, and through a generally lively mix of anecdotes, potted histories, and economic précis, Untapped offers the beginning of an answer: The odds of success are slim.

Still, there is one small reason for hope, and Ghazvinian should have made more of it. With much of the recent investment in African oil coming from state-owned firms in India, China, and other developing countries, African nations have a second chance to do oil right with partners that conduct business differently from the Western oil majors. How they play their new Asian partners in this rematch of the old exploitation game will largely determine whether this second African oil era is a boon–with the potential for broad-based social and economic improvement–or another bust.

Counterintuitive though this may seem, the discovery of oil in Nigeria, Gabon, and Congo-Brazzaville has been a mixed blessing at best. In fact, as Ghazvinian explains, it has become a trope of development economics that generous oil or mineral resources generally hinder progress. A 1995 study of 97 countries by the Columbia economist Jeffrey Sachs showed that oil-rich states grew four times slower than states without oil. The usual culprit for this seemingly mysterious lag is a chain reaction of perverse economic effects known as “Dutch disease” (named after its first victim, the Netherlands, which was struck after discovering natural gas in the 1960s).

Dutch disease works something like this: Oil exports bring in a lot of cash from abroad, which bloats foreign-money reserves. Those reserves strengthen the domestic currency, and that in turn drives the prices of imports down relative to those of local products. Consumers buy fewer domestic goods, depressing manufacturing, and as politicians and business leaders massively invest in the oil business, the industrial and agricultural sectors atrophy. Soon enough, the entire economy depends on oil and is a hostage to the volatile prices of the world market. Meanwhile, corruption takes hold: Because oil production requires substantial capital and sophisticated technology but only a small, highly skilled workforce, it brings investors and the governments that control the resources a lot of money quickly for rather little work. Returns far outweigh costs, yielding what economists call “rents”–hefty profits that can be siphoned off easily. Rents are an instant recipe for abuse of power and corruption, not to mention irrational spending. Ghazvinian sums up their impact in Gabon, where oil was discovered in the 1970s: “By 1984, Gabon had become the world’s leading per capita consumer of champagne.”

Nigeria is another textbook case of Dutch disease. After the boons brought on by the world oil crises of 1973 and 1979, many producers there, as elsewhere, hurried to develop production capacity–only to be crushed when the price of crude plummeted in the 1980s. While Nigeria’s oil revenues skyrocketed from $295 million to $2.5 billion between 1965 and 1975, other sectors imploded; the production of cotton and groundnuts, for instance, fell by more than 60 percent between 1972 and 1980. A generation later, the agricultural sector basically has been wiped out. An anemic electric grid cripples industrial production. Though one of the world’s top 10 producers and exporters of crude, Nigeria must import all of its gasoline because it has virtually no functioning refinery. By many accounts, living standards in Nigeria are worse today than they were when the country became independent in 1960. And while they have deteriorated, the government has reportedly misused some $400 billion in oil revenues.

On top of inflicting economic havoc, oil wealth has nasty political side effects. UCLA political scientist Michael Ross has argued that it breeds authoritarianism because it obviates the government’s need to levy taxes and an untaxed people tends to demand less of its government. The politicians it benefits often spend the windfall on boosting the military, buying patronage, and blocking the emergence of a bourgeois middle class or civic organizations. Resource wealth is also a risk factor for civil war, especially where the goods are located in areas dense with ethnic minorities. Again, consider Nigeria. Clamoring for a bigger share of oil proceeds, the militias in the oil-rich mangrove swamps of the Niger Delta, where living conditions are among the worst in the country, have been putting pressure on the central government with organized theft, vandalism, and kidnappings. They repeatedly cut the country’s oil output last year–on some days, by as much as 25 percent.

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