Resource Blessing or Resource Curse: Corruption in Petrostates and The Energy Transition’s Effect

“Petrostates,” countries dependent on the export of oil, empirically face high levels of corruption. However, is this a correlation of two facts or is oil causing poor governmental practices? A worldwide energy transition to green energy will be less beneficial than we originally thought.

In 2008, Papua New Guinea, an island country off the coast of Australia, was forced into a defensive position when global energy conglomerate ExxonMobil encroached on their land. PNG’s government promised land in the Hela Territory of the country to Exxon for oil drilling without informing its residents [1]. 

However, due to political fragmentation caused by the presence of many different indigenous groups, local authority is valued over the power of the Prime Minister. Because of this, along with the fact that they reaped no rewards from the conquest of their land, the indigenous people of this area mobilized forces against corporate opportunists and the government alike, sparking a civil war in the region. 

ExxonMobil, as a descendant of the Standard Oil Company, is the western hemisphere’s leading oil and natural gas producer. They operate in reserves in the US, Argentina, and throughout Asia, amounting to 30 billion barrels of oil and 38.1 billion cubic feet of natural gas. The company has faced many claims of predatory and environmentally damaging practices, from predatory selling to inhumane labor practices and understating environmental damages [2]. 

This 2008 incident isn’t PNG’s first instance of commercial intrusion. Twenty years prior they faced a similar situation, which resulted in a civil war. Almost twenty years after ExxonMobil, similar perils persist.

Dubbed a “resource curse,” developing countries with precious minerals and resources are often worse off because of them, instead of receiving a boost to their economy [3]. Financially, countries with a resource curse are heavily invested in one sector of their economy, leading to volatile economic growth. Though they may experience improvement after the discovery of new natural resource reserves, the overall impact depends on exogenous factors, including the size of the reserve discovered. Also, because of the inherent volatility of commodities, the lack of a diversified economy harms resource curse countries more than they could expect to gain. This observation has occurred empirically and has been dubbed “the Dutch disease,” where advancements in one sector lead to declines in other sectors. 

“The Dutch Disease,” a term coined when the Netherlands faced economic decline after finding natural gas reserves, presents a potentially serious problem to any country faced with new resource reserves. Two mechanisms of the “disease” occur when the spending on the resource export sector crowds out other exports: the spending effect and the resource movement effect.

Imagine a country with three sectors: natural resource exports, other exports, and domestic goods. When a country finds more natural resources and begins to export them at a higher rate to other countries, they experience an influx of foreign currency into their economy. As this foreign currency is converted into local currency and is spent on domestic goods, this artificially drives up the money supply and makes the local currency less valuable. This makes the country's other exports unattractive to nations as they are priced higher. 

The resource movement effect is when the country’s resources shift to increase in the domestic goods and natural resource exports sector, in the face of increased demand. This will further harm the already declining other exports sector [4].

Not only susceptible to economic decline, resource curse countries are also more likely to experience a conflict. In fact, these countries have a 20% chance in engaging in a civil war. Even more concerningly, “petrostates,” oil resource curse countries, are twice as likely to engage in inter-state conflict, mainly due to the lack of political oversight common among them. This allows them to remain in power despite violent geopolitical and poor economic decisions through coerced political support [5]. Examples of petrostates include Qatar, Venezuela, and Nigeria.

Further, most oil-producing countries lie in regions with pre-existing geopolitical tensions, including the Middle East and Crimea, where conflicts first arose for other reasons, whether that be religious, political, or cultural. This coincidence is significant because it demonstrates the lack of causation between resource curses and geopolitical tensions. 

For example, Nigeria experienced a civil war in the late 20th century due to power struggles between ethnic groups after the country gained independence. With this persistent friction, many militant groups have begun illegally poaching oil (“bunkering”) to fund themselves. This practice has cost the government over $4 billion and has magnified anarchy in the area. It has also had environmental impacts, as the source of over 77% of oil spills in the area from 2015 to 2017 [6]. 

Many analysts believe that one way to help better the situation is if world superpowers, including the United States, reduce their foreign oil dependency through an energy transition to green energy. In order for this to happen, developed countries would have to aid oil-dependent, developing countries through a “just transition [7]." This will be done by helping them diversify income sources and provide jobs for citizens employed directly and indirectly for the oil industry [7]. This is needed in order to prevent the destabilization of oil countries that would come with transitioning away from oil as their main export. 

Even with these accommodations, I don’t believe that an energy transition will help alleviate the issues associated with being a petrostate. First, most sources of green energy require precious metals, including solar panels and wind turbines, which will drastically increase their aggregate demand by 500% by 2050 [8]. Since many of these mines are in fragile states, with corrupt governments and continuous violence, this would only lead to more resource curses. 

Two leading theories for why an energy transition would provide political and economic benefits are the “energy democracy” and “capitalist peace” theories. 

“Energy democracy” states that decreasing carbon reliance would decrease interstate conflicts due to the fact that environmental and political policies go hand-in-hand. The “capitalist peace” theory implies that renewables bring about economic development and conflict reduction in countries that fund a transition. 

Both of these theories have been proven wrong theoretically and in practice and show that instead concentrated investments into renewables are needed over decentralized ownership. However, petrostates are not likely to fund these initiatives due to lack of incentives since it would decrease their economic and political power [9].

The only way to truly diminish the quantity of resource curse states around the world is through the diversification of exports. For this to occur, world organizations must crack down on underlying issues that fuel oil violence, whether that be human rights violations or corruption. This issue is always entangled with multiple underlying contentions that require delicate consideration.

All content is the intellectual property of the Virginia Undergraduate Business Review.

REFERENCES

[1] VICE on HBO season 2: The resource curse & deliver us from drought (Episode 8). (n.d.). Retrieved April 6, 2024, from https://www.youtube.com/watch?v=rpJXHkF4x8M

[2] Exxonmobil. (2024). In Wikipedia. https://en.wikipedia.org/w/index.php?title=ExxonMobil&oldid=1217032792

[3] Resource curse: Definition, overview and examples. (n.d.). Investopedia. Retrieved April 6, 2024, from https://www.investopedia.com/terms/r/resource-curse.asp

[4] Ebrahimzadeh, C. (n.d.). Dutch disease: Wealth managed unwisely. International Monetary Fund. https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Dutch-Disease

[5] Petro-aggression: When oil causes war | wilson center. (n.d.). Retrieved April 6, 2024, from https://www.wilsoncenter.org/event/petro-aggression-when-oil-causes-war.

[6] Black market crude: Organized crime and environmental externalities in Nigeria’s oil sector. (n.d.). Kleinman Center for Energy Policy. Retrieved April 6, 2024, from https://kleinmanenergy.upenn.edu/research/publications/black-market-crude-organized-crime-and-environmental-externalities-in-nigerias-oil-sector/.

[7] Saha, D., Walls, G., Waskow, D., & Bergen, M. (2023). To shift away from oil and gas, developing countries need a ‘just transition’ to protect workers and communities. https://www.wri.org/insights/just-transition-developing-countries-shift-oil-gas

[8] A ‘green economy’ risks new conflicts—But that’s avoidable. (n.d.). United States Institute of Peace. Retrieved April 6, 2024, from https://www.usip.org/publications/2021/04/green-economy-risks-new-conflicts-thats-avoidable.

[9] Braunstein, J., Goldthau, A. C., & Veit, K. (2023). Does climate action bring peace? Assessing the geopolitics of renewables using global investment data. Npj Climate Action, 2(1), 1–12. https://doi.org/10.1038/s44168-023-00045-6