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DEVELOPMENT: Oil Booms End Up a Bust, Study Shows

Emad Mekay

WASHINGTON, Jun 30 2005 (IPS) - The U.S. strategy to increase oil production from non-Middle Eastern nations in the least developed countries may serve consumers in Western nations, but is likely to add to those poor nations’ burdens of debt and economic hardship, according to a new study released Thursday.

In general, doubling a country’s annual production of crude oil will pump up its total external debt by 43 percent as a share of its Gross Domestic Product (GDP) and increase debt servicing by 31 percent, says a report by a coalition of independent research and civil society groups.

"It is, if you will, another leg for the ‘resource curse’ that has been discussed and is well documented," said Steve Kretzmann of Oil Change International, one of the report’s authors.

The resource curse is a phrase coined by development experts to refer to the traditional failure of the management of the revenues that flow from natural resources in poor nations.

Developing nations that depend heavily on natural resources – especially oil – have historically been ruled by authoritarian, corrupt governments, with few or no benefits trickling down to the poor.

The 53-page study comes ahead of meetings of the Group of Eight (G8) most industrialised nations in Scotland next week, where African development and global warming will be two key themes.


Ahead of the summit, the G8 finance ministers, who represent Britain, France, Russia, Germany, the United States, Japan, Italy and Canada, have also indicated that they want to talk about spiraling oil prices.

The study is particularly relevant because a G8 finance ministers’ meeting in London on Jun. 11 issued a communiqué committing to the "elimination of impediments to private investment" in Africa. Oil and minerals receive at least 60 percent of foreign direct investment in Africa – and the figure is much higher in oil-exporting countries.

The report by Oil Change International, the Institute for Public Policy Research and Jubilee USA Network faults the G8 energy strategy, which is based on encouraging more private investment in oil and energy projects in Africa.

"The energy strategy for the G8 is at odds with the development strategy for Africa, and in fact with the rest of the world," said Kretzmann.

"Our report documents the energy strategy followed by the United States, particularly with regards to the LDCs (Least Developed Countries), where they want to increase oil supply and production from non-OPEC nations, (which) has actually severally deepened those nations’ debts."

The United States is working hard to end what many in the White House and the U.S. Congress call a dangerous dependence on Middle East oil and exports from the Organisation of Petroleum Exporting Countries (OPEC).

Congress is now finalising a sweeping energy bill that seeks to increase production of energy at home while the administration, and international institutions controlled by Washington, like the World Bank, are joining forces to promote oil production in countries that are not members of OPEC, especially in Africa, Central Asia and Latin America.

West Africa is widely regarded as one of the priority areas for investment by the oil industry, and oil production from the region is universally projected to rise.

Nigeria, the largest oil producer in Africa and one of its most indebted, now says it has plans to increase production by 160 percent. But the study warns that, based on past trends, this will cause a rise in external debt for Abuja by an additional 21 billion dollars by 2010.

Although Nigeria has proven oil reserves of 35.2 billion barrels, and goals of expanding proven reserves to 40 billion barrels by 2010, the country’s external debt stands at a whopping 30.5 billion dollars, one of the world’s highest.

Kretzmann says that the 160 percent projected increase in oil production in Nigeria virtually guarantees that "they’ll be out of the frying pan and right back into the debt fire."

The World Bank estimates that 80 percent of revenues from Nigeria’s oil industry accrue to only one percent of the population.

On the technical side, the report says that the relationship between debt and oil is due to the interplay of a number of factors.

Increased oil revenues push oil-exporting countries to increase their spending dramatically in anticipation of continued export earnings. Higher oil revenues also improve the international credit ratings of oil-exporting countries, giving them access to vast amounts of capital at relatively low interest rates.

Debt also rises because of unwise fiscal policies and the volatility of the oil market, the report found.

The study cites the examples of leading oil producers that are still saddled with huge debts, like Venezuela, Indonesia, the Republic of Congo, Mexico and Ecuador.

"Once countries are in debt, the temptation to turn to oil as a means of digging oneself out of debt is great," says the report. "If the G8 nations, and the world, want to seriously tackle climate change, poverty, and debt, its time to look deeply at the common thread between all of them: oil."

 
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