Michael Ross on the Troubling Consequences of Oil Wealth

Michael Ross is a professor at UCLA, whose work explores the ways that oil revenues and oil wealth often disrupt international development and enable nations to disengage from the international community. Some of his recent publications include The Oil Curse: How Petroleum Wealth Shapes the Development of Nations, and Oil and Unbalanced Globalization—a study conducted with Georgetown University’s Professor Eric Voeten. A noted expert, Ross has been published in journals including Foreign Affairs, Foreign Policy, The New York Times, and Harper’s. He currently works on various task forces and committees with the World Bank, Central Intelligence Agency, United Nations, and Department of Interior. This interview is Part 2 of 2. Click here to read Part 1. Oil is not the only raw material linked to the resource curse. But it seems much more impactful than coal, gold, coffee, or basically any other commodity exports. Do you connect this to its high value? Its role as the transportation fuel across the industrialized world? What gives petroleum this unique power? I don’t think anybody really knows the answer to this, and it’s a question that merits much more research. But if we are willing to enter the realm of speculation, I think it has something to do with the fact that oil wealth tends to generate a lot more government revenue than other kinds of mineral wealth.  This is partly because outside of the U.S., subsoil minerals are almost always owned by governments; and because oil is typically extracted with a lot of capital investment but relatively little labor. Hence the money generated from oil production goes right into the government’s hands—it doesn’t get spent on hiring many workers. You have to hire a lot of people to operate a coal or copper mine, and so more of the rents are dissipated through the labor force.  We might find similar ‘resource curse’ effects in countries that depend on other minerals, but they’re on a smaller scale and more subtle. Right… also, we don’t tend to see national gold companies or national aluminum companies as much as national oil companies. Speaking of national oil companies—that’s also important. You see much more government involvement in petroleum than in non-fuel minerals. My book suggests that national oil companies play a big role in the resource curse. Asking you once again to venture into the realm of speculation, one could make the case that Russia’s recent behavior is explained or could possibly have been predicted by your work. What are some of the other vulnerabilities on the global stage—what other countries or regions can we expect to demonstrate troubling levels of uncooperativeness? We’re at a point historically where a lot of low income countries in sub-Saharan Africa and Latin America have discovered significant oil and gas resources. There’s a real possibility they could become cursed rather than blessed by their new resource wealth. One potential danger, drawing again on my research with Professor Voeten, is that they will lose interest in cooperating with their neighbors and resolving conflicts peacefully. Many more Venezuelas and Libyas could be emerging in East Africa or South America. So what about a country like Brazil that has discovered these massive oil resources offshore, but has a fairly well developed and diverse economy? It’s also a BRIC, and we’ve seen poor behavior from its peers Russia and China recently. Based on these findings, can we see it shifting from being a generally cooperative country to one which is more independent? I think this is a greater danger than people realize: a decade from now, these massive pre-salt resources could have a powerful and harmful effect on Brazilian politics. I don’t think that Brazil is on a direct pathway to becoming the next Venezuela. But it’s instructive to remember that in the 1980s, Venezuela was seen as a model for managing its petroleum resources wisely, and it had what many people considered the best run, most independent and business-oriented national oil company in the developing world, PDVSA. All of that fell apart. A huge factor in the shift in Venezuela’s behavior has been the dramatic run up in petroleum prices since 1998.  Chavez became President in February 1999.  Just a few months later, Putin became Russia’s Prime Minister. While both countries have been rich in hydrocarbons for a long time, the price boom allowed both leaders to consolidate power, remove checks and balances on their own authority, and take a more aggressive stance toward their neighbors. If a country that governed its petroleum wealth as prudently as Venezuela did in the late 1980s and early 1990s can turn into Venezuela today, we should also be concerned about the direction of countries like Brazil. What about countries like Argentina, which is currently working on tapping its massive Vaca Muerta shale? Would the conditions that enabled shale in the U.S. inhibit some of the effects you describe in your research—a highly competitive market environment, a type of property rights that don’t really exist in the rest of the world… Shale is also more expensive and labor intensive. I’m pretty agnostic on shale—it’s a different kind of resource, and I’m not sure we’ll see the same kinds of effects. We don’t know if it will generate the same kinds of government revenues as conventional oil and gas, and it tends to involve a more decentralized extraction process. A lot remains to be seen about the political consequences of exploiting shale. Shifting to domestic politics—what can the U.S. do to undermine the negative foreign policy impacts of oil wealth? SAFE makes the case that we need alternative transportation fuels and vehicles that don’t run on liquid fuels, thus divorcing ourselves from the global market. What are other things that can be done? There’s a number of ways to try to counteract some of these effects. The first and most important is the one you mention—to globally reduce fossil fuel dependence. There are plenty of other good reasons to do this, but the contribution of my research is to show that oil exploitation has harmful political consequences in a great many places. So if you can reduce the global demand for oil, you should also see fewer dictatorships, and fewer violent insurgencies, in many places around the world.  But we have to figure out how to reduce demand on a global level – not simply in a few rich countries.  Fortunately, there are many ways to do that. Another thing is to peel back the secrecy in the petroleum industry. By some measures, petroleum is the world’s most valuable commodity—several trillion dollars worth of oil and gas are extracted from the ground every year. Often people in resource rich countries don’t know how much money their governments are accruing and what kind of payments are being made to government officials for the sake of the oil industry. So the more light that we can shed on this issue, the more people will demand the same kinds of accountability in resource rich countries that they demand elsewhere. That’s where the Extractive Industries Transparency Initiative (EITI) and other initiatives can really contribute—by opening up this secretive industry. Finally, I think we need to have more research on how we can help low and middle income countries that are dependent, or on the verge of becoming dependent, on these resources.  It’s critical for their citizens to build more diversified and sustainable economies. We need to find better ways of pulling people out of poverty and helping them achieve more equitable kinds of growth. I’ve been working on this issue for about 15 years now. There’s been so much more progress than I could have imagined on raising awareness of this issue and creating initiatives like EITI, to help countries better govern these resources. A surprising amount of progress has been made, but we’re still at an early stage in really addressing the core pieces of this problem.  A great deal more work must be done to help countries break out of the resource curse.