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The Trouble With Black Gold: 7 Sins of Oil Production

Sustainability Activism
by Nicholas Rosen Mar 26, 2009

Drill, baby, drill.

The global hunt for oil is on. From western Uganda to northern Greece, from the shores of Cuba to the coast of Ghana, multinational firms and state corporations are drilling test wells in hopes of striking black gold.

It’s easy to understand why.

The world is hooked on oil; in recent years, we’ve been consuming more than 80 million barrels of the stuff per day. It’s a staggering amount and, setting the recession aside, it has been trending upwards for the past two decades.

Oil sales earned exporters more than a trillion dollars (US) last year, a vast transfer of wealth from those countries that need oil to those countries that have it.

Who wouldn’t want a piece of that action?

Look at the list of major oil exporters, however, and you will find Angola, Iran, Algeria and many other countries beset with major social and economic problems.

This points to a sad truth: despite (or sometimes because of) the enormous income it generates, oil production can bring a host of problems.

Every country’s experience is different, but we can identify some common problems petroleum exporters have faced.

1. Corruption:

In 2004, a US Senate investigation determined that $35 million had been siphoned out of the bank account in which Equatorial Guinea’s oil revenues were paid.

Then it was announced that the central African country’s president had bought a $35 million mansion in Malibu.

Mystery solved.

That’s how it goes in Equatorial Guinea, which joins fellow oil exporters Iraq, Sudan, and Chad in the bottom 10 of Transparency International’s corruption rankings.

Maybe it’s due to the irresistible lure of the big dollars, the generosity of the big oil companies, or the fact that oil profits accrue directly to the government, but government officials in petroleum exporting countries can’t seem to keep from dipping into their countries’ piggy banks.

2. Environmental Degradation:

Oil extraction is a messy business, especially in developing countries with lax environmental regulations and little ability to police polluters.

This has certainly been the case in Ecuador, which is blessed with large oil reserves but cursed by those reserves’ location beneath virgin Amazonian rain forest.

The result has been environmental catastrophe. The region’s indigenous people have gone to court seeking financial compensation from the oil companies, but the damage has been done.

3. Dictatorship:

The rallying cry of American rebels was, “No taxation without representation.” That reflects the bargain most governments have struck with their citizens; if you pay taxes, you get a say in government.

What happens when citizens don’t have to pay taxes, though?

You get Saudi Arabia. Flush with oil revenue, the government gives more money to its citizens in subsidies than it collects from them in taxes. As a result, there has been little pressure on the government to introduce democracy. Saudi citizens get subsidized fuel, education and food; in return, the House of Saud has gotten to rule for 77 years.

4. Debt:

This year, you may have noticed how volatile oil prices are. It’s not only consumers who struggle with these fluctuations, but also economic planners.

In the 1970s, oil prices skyrocketed and many oil-producing countries went on sprees, spending liberally on luxury items and making huge investments in infrastructure. One such country was Mexico, but when oil flooded the market in 1981 and prices fell, Mexico was left with debt it could not afford. In 1982, it defaulted on its loans, marking the beginning of the global “debt crisis.”

5. Dutch Disease:

In the 1960s, the Netherlands began extracting oil from a large field located in its portion of the North Sea. It should have been a boon to the Dutch economy.

However, foreign demand for Dutch oil dramatically raised the value of the guilder, increasing the cost of Dutch goods abroad and reducing the cost of imports in the Netherlands. Dutch industry was crippled, and instead of a boon, the Netherlands got high unemployment, a stagnant economy, and a new economic phenomenon named after it.

6. Civil Conflict:

Oil is a huge source of wealth, so it’s not surprising many people want to control it. Some of them will launch wars to do it.

The war in South Sudan was cataclysmic, and while there were a number of causes, the desire of both the South Sudanese and the central government in Khartoum to control the region’s vast oil reserves was one of the most important of them.

7. Foreign Invasion:

It is not only groups within a country that seek to control oil, but foreign governments as well.

We are not here to discuss the motivation for the 2003 US invasion of Iraq, but even if it was a desire to seize the country’s oil, Saddam Hussein would have had little ground on which to complain. Iraq’s invasions of both Iran and Kuwait were, in large part, designed to secure lucrative oil fields in those countries.

This follows a long tradition of wars fought over oil, stretching as far back as Paraguay’s and Bolivia’s 1932-1935 war over the Chaco region.

Community Connection:

Do you own a car? Are you concerned about oil dependence? Check out this popular article from the Matador archives to learn how you can stop paying for gas and run your car on vegetable oil. Learn about the ways oil dependence affects developed countries, too, by checking out this interview with the filmmakers of the documentary, “Crude Independence.”

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