Good policies, value-addition can save us from the oil curse
Jul 23, 2009
BY ABK KASOZi<br><br>In my previous article, I argued that building a refinery can mitigate some of the negative aspects of the oil curse by adding value to the oil, that such action would lead to the creation of downstream industries that can contribut
BY ABK KASOZi
In my previous article, I argued that building a refinery can mitigate some of the negative aspects of the oil curse by adding value to the oil, that such action would lead to the creation of downstream industries that can contribute to the country’s general macro-economic development.
On the other hand, if crude oil is exported, Uganda would not be using oil for sustainable development, which would increase the possibilities of the “oil curse†devastating Uganda.
Four more ugly consequences of the “oil curse†are discussed in this article starting where we left off in the previous one.
The fifth ugly head of the curse is economic volatility. Windfalls from export of commodities, whether minerals or primary unprocessed commodities, are often followed by sharp drops in prices. When exported crude, oil is nothing, but a commodity with no expert value added and suffers the same volatility as other commodities. For example, copper exporting countries suffered economic downturns since 1970. In the 1970s, copper prices fell by 65% and between 1980 and 2000, prices fell a further 50% from $630 to $300 a tonne. Countries dependent on copper like Zambia, were hard-hit. Our own copper town, Kilembe Mines enclave, could not remain as vibrant as it was in the 1950s and 1960s.
Between 1970 and 2008, the price of oil has risen and fallen like empires. When the prices of these commodities are low, producing nations cannot balance their terms of trade, and often revert to excessive borrowing. It is not surprising that African countries depending on oil for over 50% of the GDP; (Equatorial Guinea 86%, Gabon 73%, Congo Brazzaville 67%, Angola 45%, and Nigeria 45%), have some of the poorest human development indices (Nigeria 158, Angola 160, Equatorial Guinea 121, Gabon 123, Cameroon 148, Congo Brazzaville 142, Sudan 141, Sao Tome and Principe 126 and Chad 173).
The sixth ugly head of the oil curse is the emergence of enclaves that have higher economic activities than the rest of the country. These develop around oil fields and have an adverse impact on the even development of a nation. They create a relatively wealthy enclave in comparison to the rest of the country. Second, and because of the first factor, they pull populations from the rest of the country as people migrate there for economic opportunities. These could include some of the best skilled human resources, thus causing a negative brain circulation.
However, because they are isolated, enclaves do not enhance the development of the local national capacity.
Third, if enclaves are located in areas of a people with a common identity that is separate from the rest of society based on ethnicity or religion, rich enclaves encourage secession movements — unless the natives of the enclaves feel they are sharing equitably in the oil wealth.
Previous experience, however, indicates that enclaves have generated secession conflicts and wars (e.g. Biafra 1968–1970, the Katanga rebellion in the 1960s and 1980s.
Lastly, if enclaves contain protected expatriates, slums or satellite shanty towns swarming with prostitutes and unemployable vagabonds develop. These can spread diseases to the rest of the country.
However, if oil is used as a catalyst to build more downstream industries — which can be away from enclaves, these horrors can be avoided.
The seventh ugly head of the “oil curse†that has afflicted nations that export oil before adding value to it and or, not using their oil to spur other sectors of the economy, is getting into the vicious cycle of (economic) inflexibility. The oil mining sub-sector is inflexible. It requires specific infrastructure that cannot easily be used in other sectors of the economy (power grids, drilling equipment, specialised workers etc).
If left to stand alone, the oil mining industry does not enhance diversification of the general economy as it is an (extractive) industry taking away resources in crude form.
But if a refinery is built, this problem can be partly mitigated. The refinery can build a bridge to the rest of the economy by generating downstream industries that can create more wealth, employ more people and enhance poverty alleviation efforts.
The refinery can create industries of oil byproducts like soaps, plastics, pesticides, paints, etc. These need not be built in the oil enclaves. They can be spread to other areas of the country to enhance even regional development.
Export of crude oil is associated with violent changes of governments (often coup d’etats), secessions, interstate wars and moral degeneration. The struggle for the control of oil — or other valuable minerals like diamonds — by various armed elites provokes conflicts, civil wars and international wars. In Africa, we have witnessed, and we are still witnessing, these conflicts in Nigeria, Sudan (Southern Sudan conflict, Darfur), the Central African Republic (coup d’etats), Chad (the current civil war), Congo Brazzaville and Sierra Leone (diamonds).
The instability of the Middle East is largely explainable in the desire of world powers to access or to keep an area endowed with massive reserves of oil.
In Africa and the Middle East, successful groups of men (often soldiers) who seize oil enclaves normally seize the state and administer it as “petro-statesâ€, whose interpretation of national governance is the administration of oil (i.e. defense of oil installations, exporting crude oil and distributing resources among themselves, their supporters and the suppression of contenders).
In petrol states, international oil companies become part of the conflict and usually side with the strongest contender for the control of the state, however undemocratic the regime. This has happened in Nigeria’s suppression of the Ogoni people by the military.
If oil is exported as crude, moral degeneration sets in. Gangs of oil thieves emerge to claim their share of oil proceeds. Between 1988 and 2003, there were over 400 major theft or vandalisation with oil losses of up to $1b in the Niger Delta. It is estimated that about 10% of oil imports of major western nations is stolen oil.
Studies have shown that underdeveloped countries depending on export of crude minerals particularly oil for 25% of their GDP have a 35% risk of having conflict, whereas countries dependant on diversified economic activities and are only 5% dependant on crude exportation, have only a 6% likelihood of conflict.
Building a refinery can reduce the impact of the oil curse. If built, then Uganda’s oil resources can enhance macro-economic development, leading to faster poverty eradication.
The writer is the executive
director of the National Council for Higher Education
In my previous article, I argued that building a refinery can mitigate some of the negative aspects of the oil curse by adding value to the oil, that such action would lead to the creation of downstream industries that can contribute to the country’s general macro-economic development.
On the other hand, if crude oil is exported, Uganda would not be using oil for sustainable development, which would increase the possibilities of the “oil curse†devastating Uganda.
Four more ugly consequences of the “oil curse†are discussed in this article starting where we left off in the previous one.
The fifth ugly head of the curse is economic volatility. Windfalls from export of commodities, whether minerals or primary unprocessed commodities, are often followed by sharp drops in prices. When exported crude, oil is nothing, but a commodity with no expert value added and suffers the same volatility as other commodities. For example, copper exporting countries suffered economic downturns since 1970. In the 1970s, copper prices fell by 65% and between 1980 and 2000, prices fell a further 50% from $630 to $300 a tonne. Countries dependent on copper like Zambia, were hard-hit. Our own copper town, Kilembe Mines enclave, could not remain as vibrant as it was in the 1950s and 1960s.
Between 1970 and 2008, the price of oil has risen and fallen like empires. When the prices of these commodities are low, producing nations cannot balance their terms of trade, and often revert to excessive borrowing. It is not surprising that African countries depending on oil for over 50% of the GDP; (Equatorial Guinea 86%, Gabon 73%, Congo Brazzaville 67%, Angola 45%, and Nigeria 45%), have some of the poorest human development indices (Nigeria 158, Angola 160, Equatorial Guinea 121, Gabon 123, Cameroon 148, Congo Brazzaville 142, Sudan 141, Sao Tome and Principe 126 and Chad 173).
The sixth ugly head of the oil curse is the emergence of enclaves that have higher economic activities than the rest of the country. These develop around oil fields and have an adverse impact on the even development of a nation. They create a relatively wealthy enclave in comparison to the rest of the country. Second, and because of the first factor, they pull populations from the rest of the country as people migrate there for economic opportunities. These could include some of the best skilled human resources, thus causing a negative brain circulation.
However, because they are isolated, enclaves do not enhance the development of the local national capacity.
Third, if enclaves are located in areas of a people with a common identity that is separate from the rest of society based on ethnicity or religion, rich enclaves encourage secession movements — unless the natives of the enclaves feel they are sharing equitably in the oil wealth.
Previous experience, however, indicates that enclaves have generated secession conflicts and wars (e.g. Biafra 1968–1970, the Katanga rebellion in the 1960s and 1980s.
Lastly, if enclaves contain protected expatriates, slums or satellite shanty towns swarming with prostitutes and unemployable vagabonds develop. These can spread diseases to the rest of the country.
However, if oil is used as a catalyst to build more downstream industries — which can be away from enclaves, these horrors can be avoided.
The seventh ugly head of the “oil curse†that has afflicted nations that export oil before adding value to it and or, not using their oil to spur other sectors of the economy, is getting into the vicious cycle of (economic) inflexibility. The oil mining sub-sector is inflexible. It requires specific infrastructure that cannot easily be used in other sectors of the economy (power grids, drilling equipment, specialised workers etc).
If left to stand alone, the oil mining industry does not enhance diversification of the general economy as it is an (extractive) industry taking away resources in crude form.
But if a refinery is built, this problem can be partly mitigated. The refinery can build a bridge to the rest of the economy by generating downstream industries that can create more wealth, employ more people and enhance poverty alleviation efforts.
The refinery can create industries of oil byproducts like soaps, plastics, pesticides, paints, etc. These need not be built in the oil enclaves. They can be spread to other areas of the country to enhance even regional development.
Export of crude oil is associated with violent changes of governments (often coup d’etats), secessions, interstate wars and moral degeneration. The struggle for the control of oil — or other valuable minerals like diamonds — by various armed elites provokes conflicts, civil wars and international wars. In Africa, we have witnessed, and we are still witnessing, these conflicts in Nigeria, Sudan (Southern Sudan conflict, Darfur), the Central African Republic (coup d’etats), Chad (the current civil war), Congo Brazzaville and Sierra Leone (diamonds).
The instability of the Middle East is largely explainable in the desire of world powers to access or to keep an area endowed with massive reserves of oil.
In Africa and the Middle East, successful groups of men (often soldiers) who seize oil enclaves normally seize the state and administer it as “petro-statesâ€, whose interpretation of national governance is the administration of oil (i.e. defense of oil installations, exporting crude oil and distributing resources among themselves, their supporters and the suppression of contenders).
In petrol states, international oil companies become part of the conflict and usually side with the strongest contender for the control of the state, however undemocratic the regime. This has happened in Nigeria’s suppression of the Ogoni people by the military.
If oil is exported as crude, moral degeneration sets in. Gangs of oil thieves emerge to claim their share of oil proceeds. Between 1988 and 2003, there were over 400 major theft or vandalisation with oil losses of up to $1b in the Niger Delta. It is estimated that about 10% of oil imports of major western nations is stolen oil.
Studies have shown that underdeveloped countries depending on export of crude minerals particularly oil for 25% of their GDP have a 35% risk of having conflict, whereas countries dependant on diversified economic activities and are only 5% dependant on crude exportation, have only a 6% likelihood of conflict.
Building a refinery can reduce the impact of the oil curse. If built, then Uganda’s oil resources can enhance macro-economic development, leading to faster poverty eradication.
The writer is the executive
director of the National Council for Higher Education