Oil Dependence As Virtue

Oil Dependence As Virtue

Mini Teaser: In short, a world that doesn't need oil may also be a world that doesn't need the United States.

by Author(s): Daniel W. Drezner

So this time, these states saved enough during the oil spike of 2008 to maintain their standard of living even after petroleum ceased to be a strategic commodity. Governments across the region began by investing in the basic infrastructures necessary for a diversified, modern economy. Qatar was already spending more than $1.5 billion a year on research and development. Saudi Arabia commissioned six "knowledge cities," at a cost of more than $100 billion, for construction in the kingdom's less developed regions. And they ploughed significant sums-$20 billion by 2008-into their educational infrastructure.

The emirate of Dubai took it a step further, leading the way toward sustained economic growth in the post-oil era. During the final oil boom, it was the hub of nonpetroleum business activity. The $10 billion foundation the emirate established to fund higher education in the region was just the beginning. Since Dubai anticipated running out of oil by 2020 anyway, it took the lead in remaking itself as a financial and transport hub in the global economy. It liberalized its markets and began to tolerate a much more cosmopolitan lifestyle than the rest of the Middle East.

Out of desperation and jealousy, the other emirates of the UAE adopted similar strategies and policies. Abu Dhabi created new SWFs like Mubadala for the express purpose of partnering with Western multinational corporations, like General Electric. In exchange for acquiring stakes in these firms, the Western companies agreed to invest in Abu Dhabi. With depressed markets elsewhere, they were eager to establish a toehold in the Middle East.

The rest of the Gulf governments took notice of the success of their more cosmopolitan neighbor. Thus they were able to make a fairly smooth transition to ordinary, non-resource-based economies by following the Dubai model. With ballooning numbers of young people entering the workforce, anything that promoted job creation was deemed consistent with the Koran as a way to achieve sustainable non-oil development. The Saudi regime protected itself from clerical criticism by offsetting its new liberalized visa regime with the innovation of a two-hundred-mile "zone of Islam" around the holy shrines of Mecca and Medina. This grand compromise allowed the GCC states to take more radical steps, such as recognizing Israel, without losing the support of conservative clerics.

All this has left a region filled with economic prosperity, more open societies and decreased extremism. The Gulf states are liberalized, but not completely democratized. Though not all of these states have made the transition with the same success as Dubai, the GCC states have integrated their economies to the point where they share a common currency and a common external tariff. The combination of enhanced security and an economic union created a rising tide lifting all the sheikhdoms.


THOUGH POORER energy-exporting states were initially hit hard by plummeting oil prices, as it turned out they have also faired well. The first stages were difficult because most of these countries were unstable or failing regimes that lacked diversified economies. States like Nigeria, with nondemocratic and weak governments unable to force change, stripped of oil rents, had only a few years to adjust to a much harsher economic environment. This time political scientists and economists were proven right. Exactly what was expected to happen did in fact come to pass: the end of oil for these governments meant the end of several bloody and divisive conflicts, and these states became more stable and prosperous.

During the oil era, theory held that despite the apparent boost in revenues, an economy dependent on the export of natural resources like diamonds or oil suffered from a "resource curse." Oil revenues brought a host of negative effects, civil war being the most obvious.1 The reasoning behind this relationship was assumed to be straightforward. The more wealth controlled by the state, the more incentive for political groups to wrest control of it by any means necessary. At the same time, oil wealth would increase the likelihood of a "rentier state"-one that is disconnected from its citizens because it does not need to rely on them for resources. Rentier states are therefore more vulnerable to external and internal challenges to their authority.

After the first OPEC oil shock in 1973, the likelihood of a petroleum-rich state being involved in a conflict more than tripled. Long-standing disputes in Colombia, Nigeria, Sudan and Indonesia were linked to or exacerbated by conflicts over the distribution of oil wealth. Theorists saw a tight correlation between a country having an oil-rich economy and being enmeshed in civil war. Disputes over the distribution of oil revenues helped to extend the civil war in post-2003 Iraq. Five years after the overthrow of Saddam Hussein, different ethnic groups were still battling over the final administrative status of oil-rich Kirkuk.

Without oil, many economists and political scientists predicted that these smaller, resource-dependent states would be free of the "resource curse." Nigeria, Iraq, Angola and Sudan would see an end to resource-driven conflicts and become more stable.

And for many states, these assumptions about a post-oil era held. The removal of internal and external oil did contribute to the end of long-standing conflicts. Shockingly enough, the end of the oil era meant that Iraqi ethnic groups cared a lot less about who administered Kirkuk. Across the globe, fears of resource wars in sub-Saharan Africa and Central Asia disappeared. Fragmented states like these became less divided and more representative.

Granted, the effects of declining oil prices weren't all magical. In some of these war-torn societies, like Sudan, the bitterness and blood feuds have a self-sustaining momentum, propelling continued fighting even after the main catalyst disappears.


AND TRULY, not all of the oil-dependent governments were as fortunate as the GCC. For the middle-income states-like Russia, Venezuela and Iran-the end of the oil age turned out to be a disaster. These regimes once had leveraged their oil revenues to increase their power. With only empty coffers and domestic chaos left after the oil crash, however, nuclear states ended up launching diversionary wars and nonnuclear governments built atomic weapons in the hopes of regaining some semblance of control, all in the vain hope of bolstering domestic support and cohesion. Yet, everyone predicted that without oil, these autocratic oil-exporting behemoths would disintegrate because of domestic instability and spending sprees, and that's exactly what happened.

Populist leaders like Vladimir Putin, Hugo Chávez and Mahmoud Ahmadinejad responded to the oil boom by dramatically increasing government expenditures. For instance, state-owned firms in Russia, with the expectation of sustained oil revenues, went on a borrowing spree. These types of actions bought popular support for the regimes, but the collapse of oil prices left them abjectly unprepared to sustain those expenditures. Like the GCC economies, many of these countries had official reserves and sovereign wealth funds. But their reserves were much smaller than the Gulf states-within a year or two after the end of oil these governments spent most of their principal. It did not help that some of these reserve funds had been raided before the oil boom even ended. Iran's Oil Stabilization Fund, for example, was quickly depleted because Ahmadinejad and his political allies proved unable to stop themselves from draining it for domestic spending programs during the boom years. Hugo Chávez did the same thing with the state-owned oil company Petróleos de Venezuela, S.A. (PDVSA). When the financial storm came, these rainy-day coffers were bone dry.

And then these states got desperate. They faced rising levels of domestic unpopularity and great powers eager to see them toppled. They undertook two types of actions in response to their predicament. Some countries launched diversionary wars in an effort to rally disaffected citizens around the flag. Azerbaijan revived its simmering dispute with Armenia, and Libya intervened in Chad-again. Ecuador announced an "alliance" with the last fragments of Colombia's FARC rebels, while Russia attempted to annex the Russian-speaking provinces in Kazakhstan.

Each of these moves led to short-term increases in support for the regime. But none of them successfully prolonged their leaders' grip on power. After all, diversionary wars have never been a terribly successful tactic to hold power over the long term. After the initial euphoria, discontent with the notion of a prolonged war led to coups d'état in each of these countries. Russia was hardest hit. Domestic instability following its Kazakh misadventure deepened the political and social malaise triggered by its demographic decline. In the ultimate sign of its weakness, Moscow essentially outsourced the mineral resources of Siberia to China.

Other post-oil regimes tried to ensure their longevity by developing nuclear weapons. Typically, nuclear programs serve multiple purposes. They can be a credible deterrent against aggression by external actors. Internally, the announcement of joining the nuclear club can swell national pride in countries that already have strong nationalist sentiments-i.e., Iran and Venezuela.

By the time the nationalist rapture in response to their nuclear programs wore off, the regimes were convinced that they had cemented their hold on power. But in Venezuela this was not the case. Regional outrage at the government's nuclear announcement-led by former near-nuclear states Brazil and Argentina-undermined Venezuela's international support, and Chávez did not survive. In the end, South America remained a nuclear-free zone of democratic countries.

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