Escaping the Resource Curse

A message for us all

Richard O’Rourke, ASPO Ireland, October 2007

Macartan Humphries
Assist. Prof. of Political Science, Columbia University, New
York
Jeffrey Sachs
Director, Earth Institute, Columbia University, New York
Joseph Stiglitz
Professor, Columbia University, New York

Nobel Prize winning economist, Joseph Stieglitz,

Head of the UN Millennium Project, Jeffrey
Sachs, and fellow Irishman, Macartan
Humphries, recently edited a collection of papers
dealing with the peculiar phenomenon: the
resource curse, observed in resource rich (oil
specifically) developing countries whose people
remain impoverished despite the nations apparent
wealth. Having studied the collection, four
specific messages resonated with my broader
study of the ‘Peak Oil’ problem, namely:

- a call for greater transparency

- oil is a depletable resource, Fig 3.7
- selling oil is really a form of asset
disposal, ‘selling the family silver’ (pg
170)
- prepare an exit strategy (pg 191)

Kuwait will never disclose the size of its oil

reserves for reasons of national security,
Oil Minister Sheikh Ali Al-Jarrah Al-Sabah
was quoted as saying after Kuwait
announced a new oil find.

Industry newsletter Petroleum Intelligence

Weekly (PIW) said in January 2006 it had
seen internal Kuwaiti records showing
reserves were about 48 billion barrels —
half the officially stated 99 billion, or some
10 percent of global oil reserves.i

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On the first point, a call for greater
transparency, which is repeated throughout the
book, attention is drawn in particular to Dr.
Heals’ paper ‘Are Oil Producers Rich?’ in which
he argues that most conventional statements of
national income overestimate the incomes of
such countries by failing to account for resource
depletion. He has quite reasonably used the
officially quoted figure for Saudi Arabia’s proven
reserves of 262.7 billion barrels of oil to make his
point that images of ‘extreme’ abundance may be
misplaced. I outline below how such
misconceptions may be more so. He extends the
point in the subsequent paragraph referring to
Saudi Arabia’s daily production of 8 million
barrels of oil daily (although the latest edition of
BP’s statistical reviewii puts the Saudi production
level at almost 11 million barrels, 13.1% of the
81.7 million barrels produced daily in 2006).

These two numbers, proven reserves and annual

production, are important for different but
implicitly related reasons. The founder of ASPO,
Dr. Colin Campbell(New Scientist Ref), a retired oil
geologist now living in Ireland, has campaigned
tirelessly for much of the last ten years on the
issue of transparency around oil reserve and
production reporting. In particular he has drawn
attention to apparent discrepancies between what
is reported and what might reasonably be
estimated as reserve figures for some of the
OPEC producers.

In the 1980s OPEC decided to switch to a quota

production system based on the size of reserves.
The larger the reserves the larger the production
quota and consequently the revenue generated. In
1984 Kuwait revised upwards its reserve
estimates by 50%. It was soon followed by the
United Arab Emirates, Iran, and Iraq. In 1988
Saudi Arabia revised its reserve estimates, adding
88bn barrels. The average price for oil that year
was $16/barrel, down from an average the
previous year of just over $19/barreliii.

As a footnote to the opening news article on

Kuwait’s oil reservesiv:

The resignation on 30 June of Kuwait’s Oil

Minister Shaikh ‘Ali al-Jarrah al-Sabah after
a cabinet meeting brought to a conclusion

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the latest bout of political infighting
between the opposition-dominated
National Assembly and the government.

Since Kuwait’s official oil reserves figure of

101.5bn barrels was challenged by the
industry press in early 2006 (MEES, 30
January 2006), the government has been
under pressure to present an accurate
picture of national oil reserves to MPs.
Former minister Shaikh ‘Ali al-Jarrah in
mid-2006 promised MPs a full report on
reserves but later went back on this
commitment.

Neither of these latest figures (51bn

barrels or 24bn barrels) has been officially
endorsed, but the 24bn barrel figure, if
true, represents a 75% reduction in
officially-stated Kuwaiti reserves. As such,
it represents a political bombshell that will
undermine the government’s credibility and
have major reverberations outside the
country.

This summer, in what can only be described as a

very frank interview with the International
Energy Agencies’ Chief Economist, Fatih Birol,
he called for greater transparency when reporting
oil reserve datav:

Y a-t-il des raisons de s’attendre à des

mauvaises surprises de ce côté-là ?

Je crois que le gouvernement saoudien

parle de 230 milliards de barils de
réserves. Je n'ai pas de raison officielle de
ne pas y croire. Cependant l'Arabie
saoudite de même que les autres pays
producteurs et les firmes internationales
devraient être plus transparents dans la
présentation de leurs chiffres. Car le
pétrole est un bien très crucial pour nous
tous, et notre droit est de savoir, selon des
standards internationaux, combien de
pétrole il nous reste.

On the second point, oil is a depletable resource,

Mr. Fatih Birol warned that there will be a peak
in 2015 of non-OPEC oil production coinciding
with China’s economic expansion:

Page 3
Les capacités de production existent-
elles pour répondre à une telle
augmentation de la demande ?

D’ici à 2015, le marché et l’industrie du

pétrole vont être sévèrement mis à
l’épreuve. D’ici cinq à dix ans, la
production pétrolière hors-OPEP va
atteindre un maximum avant de
commencer à décliner, faute de réserves
suffisantes. Il y a chaque jour de nouvelles
preuves de ce fait. Au même moment aura
lieu le pic de la phase d'expansion
économique de la Chine. Les deux
événements vont coïncider : l'explosion de
la croissance de la demande chinoise, et la
chute de la production hors pays de l'OPEP.
Notre système pétrolier sera-t-il capable de
répondre à ce défi, c’est la question.

Predicting when OPEC will peak, which will

determine a global peak, is now the subject of
much concerned debate. Oil demand projections
prepared by the IEA, the EIA, and OPEC, all
show it growing to over 100 mbpd by 2020,
largely driven by growing demand in the
developing world and China in particular. In
contrast, the oil industry expresses serious
concerns about its ability to supply in excess of
that thresholdvi and there are those that are
speculating that global oil production is peaking
as we speakvii. Greater transparency over Middle
East oil reserves is critical to getting an accurate
picture of the situation.

Projections of world oil demand for 2020viii

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Mr Birol also advises us that we must get used to
the current high oil price and the challenge that
will be for developing nations:

Depuis 2005, la hausse du prix du baril

s’est confirmée : le prix actuel, proche de
70 dollars, est un signal important pour les
grands pays consommateurs.

L’économie a accepté quasiment sans

difficulté cette augmentation du prix
du baril.

Vous avez raison, l’économie riche l’a

acceptée. Mais le monde ne s’arrête pas
aux pays riches. L’Afrique est en grande
difficulté. La dette se creuse pour acheter
le pétrole. Pour les générations futures, il y
a là quelque chose de grave.

UN Foundation Chairman, Ted Turner, also

highlighted this problem in his speech at a WTO
meeting last yearix:

“Ten years ago, when the world agreed on

debt relief for the poorest countries in Sub-
Saharan Africa, the price of oil was 22
dollars a barrel. Over the last four years,
the price has more than tripled. Higher oil
prices now cost Ethiopia 5 times as much
as they are gaining from debt relief. Other
developing countries who import oil face
the same burdens.

Gambia now spends six times as much

money on fuel as it does on health. Sierra
Leone now spends twice the money on fuel
as it does on all efforts at poverty
reduction combined.

And the energy problems of developing

nations go beyond higher budget
expenditures. Most of Sub-Saharan Africa
has no electricity at all. In many countries,
women gather and carry loads of firewood
for miles each day.”

It is interesting that Mr Turner continues in this

speech to advocate strongly the opportunity
presented by biofuels. Just weeks prior, Lestor
Brown warned in a Washington Post Op-Ed
articlex:

Page 5
Whenever the food value of a crop drops
below its fuel value, the market will
convert it into fuel. Ultimately, this
dynamic risks driving up world food prices,
destabilizing governments in low-income
nations and disrupting global economic
growth.

And only five months later the New York Times

reportedxi:

Tens of thousands of workers and farmers

filled this city’s central square on
Wednesday to protest spiralling food
prices, ratcheting up the volume over a
problem that has dogged President Felipe
Calderón in his first weeks in office.

I participated in a one week workshop on the

Millennium Development Goals (MDGs) at the
UN HQ in New York last summer organized by
the Buckminster Fuller Institute. As I immersed
myself in the goals, understanding their
objectives, and evaluating initiatives, I couldn’t
help but be struck by the fact that 20% of the
world’s population currently use 80% of all
energy consumed. Non-OPEC oil production will
start to go into decline (and hopefully not sooner)
to coincide with the target date for the
achievement of the MDG’s.

On the third, and in my opinion the most

significant, point, ‘selling the family silver’:

The figures suggest that no resource-rich

countries are attaining appropriate
investment levels: All are depleting their
natural capital and not replacing it with any
other form of capital, a sure road to
poverty in the long run.xii

Given the focus of my studies over the past two

years I was immediately struck by the question
‘Is it not also true of a resource-poor country?’
Ireland is a case in point; total energy import
dependency was 90% in 2005xiii.

Over the last fifteen years Ireland’s Total Primary

Energy Requirement (TPER) has grown on
average 3.4% per annum to 15,600 ktoexiv in 2005

Page 6
(64% in absolute terms). Ireland must import all
its oil, some 200,000 barrels per day (bpd). Per
capita, this translates to a TPER of 102,000 kcal
per day – compared to the 2,500 kcal consumed
by the average person. Ninety percent of that is
‘family silver’ acquired from an energy exporter.

While Ireland’s economy has been the envy of its

European partners throughout this period, GDP
grew by over 250% between 1990 and 2005, a
closer inspection reveals that, in terms of
sustainability, it has not invested its energy
capital wisely, instead creating a society which
demands continued consumption of largely
imported energy. Examining Ireland’s residential
sector is instructivexv:

Residential Sector Energy Balance 2004

In 2004 the “average” dwelling consumed a total

of 57,700 kcal/day of energy and was 112 square
metres in size (515 kcal/day/m2). There were an
estimated 1.44 million permanently occupied
dwellings in the State at the end of 2004, an
increase of 43% (2.6% per annum) over 1990.
Building these dwellings has been an enormous
investment of both financial and energy capital
but because of how they’ve been built (‘high’
energy consumption per square metre) and
located (low density, sprawling suburbs with poor

Page 7
public transport infrastructure) Ireland has
engineered a society that must continue to depend
heavily on imported fossil fuels to sustain itself,
an ultimately unsustainable situation. To re-
engineer a sustainable energy society will require
further significant investment of both financial
and energy capital just at the time when we can
only expect the cost of energy to rise as its
availability declines.

If we believe it is prudent to manage the risk of

oil supply going into decline at some point in the
not-too-distant future, the challenge facing
Ireland’s newly elected coalition government and
it’s newly appointed energy minister, Deputy
Eamon Ryan, T.D., in particular, comes into
sharp relief. Holding office during a period of
sustained energy price increases and potential
disruptions of supply is unenviablexvi.

The Minister for Communications, Energy

and Natural Resources, Eamon Ryan T.D.,
has announced that funding for housing
developers to build more sustainable
energy houses, will now require builders to
ensure that the units they build are 60%
more efficient than the requirement under
current building regulations.

The Minister announced the new provision

at an event to mark the fifth anniversary of
the establishment of Sustainable Energy
Ireland (SEI). Speaking at the event,
Minister Ryan said: “The last five years
have been marked by many ground
breaking initiatives, led by SEI, which give
us a good basis for moving ahead. The
hallmark of the next five years will be
accelerated and intensive delivery of
change to ensure a truly sustainable
energy future for Ireland.”xvii

On the final point, prepare an exit strategy, Dr.

James Schlesinger, former US Secretary of
Defence during the first oil crisis and Secretary
of Energy during the second, warned before the
US Senate Committee on Foreign Relations in
2005xviii:

‘In the long run, unless we take serious

steps to prepare for the day that we can no
longer increase production of conventional

Page 8
oil, we are faced with the possibility of a
major economic shock – and the political
unrest that would ensue.’

In a separate article he remarksxix:

‘It is interesting to note, in light of the

recent discussion of Chinese ambitions in
acquiring oil assets, that the Chinese seem
to believe that world production will reach
a peak around 2012.’

In complete contrast and just last month, Michael

Spence was quoted in a speech given in
Shanghai, that he could not ‘see anything in the
way’ of continued economic expansion for
decades to come. A problem of asymmetric
information?

Spence, who won the Nobel Prize for

Economics in 2001 for his contribution to
the analysis of markets with asymmetric
information, however, says: "The economy
is more global in every dimension and it
just seems to me that there is lot of
potential. The reason I am optimistic is
that I don't see anything in the way; your
government seems to understand perfectly
the dynamics (required for sustained high
growth)."xx

In early 2005 the US Department of Energy

commissioned a risk mitigation study on Peak
Oil. Prepared by the Science Applications
International Corporation (SAIC), and titled
"Peaking of World Oil Production: Impacts,
Mitigation and Risk Management", it is known
commonly as the Hirsch Report after its primary
author Robert L. Hirsch. The executive summary
of the report warns that "as peaking is
approached, liquid fuel prices and price volatility
will increase dramatically, and, without timely
mitigation, the economic, social, and political
costs will be unprecedented. Viable mitigation
options exist on both the supply and demand
sides, but to have substantial impact, they must
be initiated more than a decade in advance of
peaking." We may not be so lucky as to have ten
years to implement a mitigation program and
would do well to manage that risk by insisting on
greater transparency.

Page 9
My recently completed masters in sustainable
energy made it clear that there is no quick fix and
no mix of sustainable solutions that will allow us
to enjoy the same per capita energy consumption
that we now do in the developed world. And
while there are ample opportunities to reduce our
current level of ‘spend’, to really get us to a
sustainable level while continuing to enjoy a
relatively high standard of living will require
capital investment and certainly more
importantly, a profound and fundamental change
in our attitude towards energy and how we use it.
Our collective behaviour, however, based on the
desire and expectation of ever more people to
continuously ‘raise’ our standard of living and
consume more is clearly at odds with this. We’ve
grown up in a world that demands economic
growth. I can’t imagine an Irish person would
enjoy any more than a Chinese person being told
that they will have to figure out how to get by
using less energy. The poor and vulnerable in our
society will suffer first and hardest as energy
prices stretch beyond their means, and with our
fossil-fuel dependent industrial agricultural and
distribution system, food prices must surely
follow suit.

In summary, it has been refreshing to read a

consistent call for greater transparency and
repeated statements that oil is a depletable
resource. The call to treat oil revenue as an asset
disposal and to prepare an exit strategy for the
day when that revenue will no longer be available
is simple yet profound. While clearly outside the
scope of ‘Escaping the Resource Curse’, I
suggest that for the oil producer to treat its sale as
an asset disposal then it must follow that the oil
purchaser is in turn acquiring an asset. How it
chooses to invest that asset is critically important
and I have pointed out the challenges a heavily
oil import dependent country like Ireland faces as
this resource is depleted. The challenge is to
maintain a high standard of living for all its
citizens while living within the limits of its
energy current account, a sustainable level.

Page 10
i
‘Kuwait oil reserves secret for national security’, Arab Times, May 2007
ii
BP Statistical Review of World Energy, 2007
iii
Energy Information Agency, US Dept. of Energy (http://tonto.eia.doe.gov/dnav/pet/hist/rwtcA.htm)
iv
Candidates For Oil Portfolio Emerge As Kuwait Plunges Into New Reserves Row, Middle East Economic Survey, July
2007
v
‘Sans l'or noir irakien, le marché pétrolier fera face à un "mur" d'ici à 2015’, Le Monde, June 2007
vi
"Petroleum Investment: Perspective from an International Oil Company" - Mr. Christophe de Margerie, President,
Exploration & Production, Total, Third OPEC International Seminar, September 2006
vii
Matt Simmons, interview: Future Shock: End of the Oil Age, RTE, June 2007
viii
World Oil Outlook 2007, OPEC, June 2007
ix
World Trade Organization Public Forum, Geneva, September 2006
x
‘Starving the People To Feed the Cars’, Washington Post, September 2006
xi
‘Thousands in Mexico City Protest Rising Food Prices’, New York Times, February 2007
xii
‘Are Oil Producers Rich?’, Escaping the Resource Curse, Geoffrey Heal, 2007
xiii
‘Energy in Ireland 1990 – 2005, Trends, issues, forecasts and indicators’, SEI, November 2006
xiv
ktoe: kilotonnes oil equivalent
xv
Energy Consumption and CO2 Emissions in the Residential Sector, 1990 – 2004, Sustainable Energy Ireland, December
2005
xvi
‘Vote for me, dimwit - How the electorate is irrational’, Lexington, The Economist, June 2007
xvii
‘Minister Ryan Moves to Align Schemes with New Programme for Government.’, press release, Dept. Communications,
Energy, and Natural Resources, Irish Government, June 2007
xviii
Statement of James Schlesinger before the Committee on Foreign Relations, United States Senate, November 2005
xix
‘Thinking Seriously about energy and oil’s future’, James Schlesinger, The National Interest, 2005
xx
'Rapid growth to sustain 20 years', China Daily, June 2007