OPINION: The resource curse, revisited

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Thursday, March 19, 2015

The price of oil is at its lowest point in six years, and oil-rich nations in Latin America are floundering. Venezuela, in particular, is on the brink of collapse. Inflation is rampant, the economy is shrinking and long lines for basic goods bring to mind the bleakest days of the Soviet Union.

The question must be asked: How does the country with the largest oil reserves on the planet end up like this? Isn't energy credited for an economic resurgence in the US? Doesn't Norway afford its citizens cozy standards of living thanks to its oil industry?

The answer, simply, is that Venezuela spectacularly squandered its oil income when prices were high, and today – with oil below US$50/b – the country has nothing to show for it.

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Natural resource prices are fickle and impossible to predict. Venezuela should have invested in its macroeconomic stabilization fund during the high-price period, instead of, for example, heavily subsidizing gasoline at home and exporting cheap oil to neighboring countries like Cuba via PetroCaribe, handouts that do little more than engender oil dependency and rarely help the poorest.

Founded in 1998, almost the entirety of Venezuela's stabilization fund was withdrawn to cover fiscal needs in 2003 – a time, too, of low oil prices. Today, according to the Sovereign Wealth Fund Institute, the country's fund is worth US$800mn. To put that in perspective, at current oil production rates and even with oil at its depressed price, Venezuela could earn that amount in about five days. To further put that figure into perspective, Norway's fund, created only a few years before Venezuela's, is worth about US$860bn.

The result is that any social gains the Bolivarian regime might have achieved are now being lost. To many in Venezuela, oil is a filthy curse.

Further south, Brazil also is under duress. Massive demonstrations against President Dilma Rousseff underline a struggling economy, a population that is losing faith; and oil is at the center of the debate. The country has invested hundreds of billions of dollars in the costly and technically complex offshore 'pre-salt' zone – a resource which led former president Luiz Inácio Lula da Silva to famously declare that "God is Brazilian." But today the pre-salt is best known as the root of mass corruption.

The 'Car Wash' affair, a multibillion-dollar scandal of kickbacks and graft involving former executives at state oil company Petrobras and some of Brazil's largest construction firms, as well as members of the ruling workers' party, saw the CEO and five other top executives of the company resign in February. Many Brazilians believe that Rousseff herself, who was once head of the Petrobras board, was aware of what was occurring.

Moreover, Brazil, which only a few years ago was growing at 8%, is cash-strapped. The country's (non-commodity) sovereign fund is worth only about US$5bn, one third of the value of tiny Chile's copper fund, while in January the central bank announced a US$14bn primary deficit (the gap between government revenue and spending) – the first annual deficit of its kind since the central bank adopted its current methodology in 2001.

Despite this, Brazil is set to become one of the few areas of significant new global oil supply in the next five years: some 2Mb/d of new production is planned to come online by 2020. And Venezuela, which receives 96% of its export revenue from oil, still has close to 300 billion barrels of oil in its territory. In essence, oil will not lose its primacy in either country.

What do both countries need to do to fight the resource curse? Learn from the past; but more importantly, learn from Norway, a country that produces less oil than both Venezuela and Brazil, and was able to raise almost a trillion dollars over the course of a few decades from oil revenues.