When world oil prices fall fast and far – as they have since June by more than 20 percent – the effect is often met with jubilation or tribulation. Consumers rejoice. But oil producers retrench.
For oil-abundant countries, however, there is another effect: They are left exposed in how well they govern themselves. Have they made their economies too dependent on a limited material resource – the so-called oil curse? Or are they prudently planning for the day the oil runs out?
The ebbing tide in oil prices can reveal much.
This latest price drop, caused by a slower global economy and rising oil production in the United States, has seen the Organization of Petroleum Exporting Countries scrambling once again to control the oil market. Its members plan to meet Nov. 27. Those countries most desperate to boost prices, such as Venezuela and Russia, are also the ones with leaders who govern with the least democracy. Their oil revenue has not been wisely invested. Instead it mainly helps maintain political stability, either by paying off a powerful elite or providing expensive subsidies to the poor.
Other countries that smartly manage their oil reserves, such as Norway, tend to be more democratic. Decisions on oil policy are made with openness and wide public participation. The system is generally set up so as not to be rigged by those with special access.
In a history of Norway’s half century of oil production, scholar Helge Ryggvik writes: “If one central lesson is to be highlighted from the Norwegian oil experience, it must be the presence and significance of conflict between oil actors and society, and the importance of society’s determination to secure its own power and position vis-à-vis the big companies.”
Norway, which is the world’s fifth largest oil exporter, has tried to curb its appetite for oil revenue, to distribute it fairly, and, most of all, leave a non-oil economic base for future generations. In the 1980s, it gave up the idea of a “measured pace” for oil extraction and set up a sovereign wealth fund with strict limits on tapping the money for government use. The fund, now the largest in the world, is more than $800 billion, or about $180,000 for each of Norway’s 5 million people.
Other countries with oil have tried to emulate Norway. Kazakhstan plans to use its oil wealth to build a rail network. Other places, such as Alaska, put much oil money directly in the hands of residents. For decades, Saudi Arabia has tried to build up a non-oil economy in anticipation of its wells going dry and to provide jobs.
In his latest book on the history of governance, “Political Order and Decay,” Francis Fukuyama makes this point about the upward march of civilization: The best modern institutions rule impartially and are not captured by those with superior access to the political system. This holds true for both a democracy and a dictatorship.
Fighting this tendency toward personal favoritism in governance is a must for countries with oodles of oil. Those countries with high levels of trust and transparency are best equipped to succeed.