March 30, 2003

Oil just clogs the works

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Fitzcarraldo is a classic. The first time I saw the film I was fascinated by the story, and the era in which it is set. Klaus Kinski plays Brian Sweeney Fitzgerald, a mad half-German, half- Irish opera fanatic who builds an opera house in the Amazon jungle at Manaus, Brazil.

The most extraordinary aspect of the story is the wealth of Manaus. In the late 19th century this city in the middle of the jungle was one of the richest places on earth, fuelled by an unprecedented rubber boom. The local barons, who allegedly sent their laundry to Paris and imported fine foods and wines,built the fantastic opera house to match anything Milan could offer.

Within four decades the money was gone, Brazil eclipsed by Borneo’s rubber plantations, but Manaus stands testament to the incredible political, social and economic roller-coaster that follows finding mineral wealth.

Most commentators believe that finding oil, gas or rubber is a godsend for a country. In fact,the balance sheet is much more complex. The war in Iraq, the mess that is the Middle East, the grabbing hands by the Caspian Sea plus the myriad of resource-based wars in Africa, suggest that there are many countries that would have been better off not finding the stuff at all.

When I was a young fella my geography teacher lamented that Ireland had no natural resources. My economics teacher suggested that without resources it was amazing that there were any of us left in the country because, after all, a country with no resources couldn’t prosper.

I also have hazy memories of big headlines in the then Cork Examiner in my granny’s pub in the late 1970s: Oil had been found in the seas off Bantry.The lads in the bar agreed that such a find would be the answer to all our prayers.

But history links the discovery of vast mineral resources to weakening thepolitical, economicand social structure of a country, destabilising the political system and corrupting the economy. This is worth fleshing out as the world enters week two of the war, which (among other things) is about oil, steady supplies and stable energy prices.

Conventional theories argue that a country finds oil, extracts it and the revenue flows into the country’s coffers.These revenues are then spent on raising the education and wealth of the people, and everyone benefits.

In reality,with perhaps a few exceptions, such as Norway, oil discoveries have led countries to a litany of woes. There are three main reasons to doubt the value of mineral wealth these days.

First, any contemporary commodity bonanza has come about a century or two too late for most countries. Commodity prices have been falling precipitously since the mid-1970s, and in relative terms falling since the 1890s.

Second, the discovery of oil occurs in many countries ahead of strong institutions of state, and a fragile state finds itself corrupted by oil wealth rather than profiting from it.

We have innumerable examples of this, from Nigeria to Venezuela, Indonesia to Russia.

Finally, oil wealth attracts unwanted attention from big powers such as the US, France and Britain, leading to governments being supported just to keep the oil in private hands, or nationalised, or whatever the vogue of the master happens to be.

Take Africa today. Every one of the 28 wars waged in that wretched continent in the past three years has been about the control of mineral re-sources. The two Republics of the Congo would be better off economically, morally and politically without copper.Who can contend that the Angolan civil war would have dragged on without the diamonds? How many teenagers in Sierra Leone would have functioning limbs rather than pathetic stumps if it wasn’t for the diamonds and rubber on the Liberian border?

And what about the odious generals who run these places and terrorise their people? Most of them are there because of mineral wealth.

The generals, their cronies, the trumped up bullying armies and the gloriously grandiose courtiers have typically corrupted the system to get their hands on mineral wealth. If it is not the wealth itself, it is the licence to extract the wealth.

Everything is corrupted by the existence of mineral wealth and greed. The best continental breakfast I have ever tasted, with deliciously buttery croissants, freshest orange juice, perfectly strong, smooth espresso, plus gooey fruity jams and marmalades, was in Abidjan, the fetid, steaming commercial centre of the Ivory Coast.

The ghastly contrast between our hotel – guarded by French Foreign Legionnaires – and the swamp that was the rest of the city was reinforced by the fact that everyone we met was in some extraction business or other.

The entire fabric of the economy and many of those economies around it had been jaundiced by the desire to get close to the easy money just beneath the ground. Instead of the oil making the country rich, it actually makes the country poor. Corruption is rife.The government skews all activity and laws towards the oil or diamond industry. The productive marrow of the country is hollowed out by the desperate gold rush. Nobody is anybody unless they are touched by the black gold.

More insidiously, hard work and trade are typically replaced by the lure of the quick buck. This, more than anything else, cripples the country.

Trade, innovation, saving and hard work are why countries get rich. Political irreverence – as opposed to sycophancy – helps, as does being surrounded by reasonably civilised neighbours. The most important lesson from economic history is avoiding war at all costs.

The existence of oil or gas or precious metals makes this orderly advance to general prosperity less likely.

The middle classes tend to grab the asset, forge alliances and keep others away from the stuff. They then tend to sit on their laurels and learn to spend, rather than save. How else do we explain the ongoing current account deficits in Saudi Arabia?

Hard work is replaced by rent-seeking, which is a bit like a large game of beggar-thy-neighbour that one section of a society plays with others.

With so much economic power vested in those who have the oil, we traditionally see the emergence of a class of political yes-men whose economic fortunes are dependent on arse-kissing and political subservience to the boss.

Finally, the existence of the black gold renders the entire system unstable, because someone is always trying to get their grubby hands on the stuff, whether through coups, invasions or arbitrary changes to property rights and laws. Hitting a gusher implies that sooner rather than later a country will stop thinking, stifling innovation to the detriment of most of the citizens.

As we live in a country where the stuff between your ears is of far more value than the stuff under the ground, we’re blessed that we never found anything off the coast, particularly in the late 1970s. Could you imagine the white elephants left by home-grown Fitzcarraldos who would have sprung up here in a 1970s oil rush? 


  1. Richard

    Also a very good Frames album David, the title of which
    was inspired by the movie. Worth checking out.
    Love the radio show and Agenda.

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