Book Reviews

The Great Oil Race

Will the new African oil rush doom these countries or save them?

By Stèphanie Giry

Tagged AfricaDevelopmentOil

Untapped: The Scramble for Africa’s Oil By John Ghazvinian • Harcourt • 2007 • 320 pages • $25

Two generations ago, international oil companies flocked to Algeria, Gabon, Libya, and Nigeria. Today, they are descending on Angola, Chad, Equatorial Guinea, Sudan, and (once again) Nigeria. And with goodreason. West Africa accounts for 21 percent of the new oil reserves discovered throughout the world between 1996 and 2005. The future of oil is in offshore reserves, experts say, and the future of offshore oil is in the Gulf of Guinea: The region is expected to produce 20 percent of all new barrels by 2010. Its barely tapped supplies–an easy to refine, high-quality crude–sit deep in the ocean bed and far from most political disturbances, ready to be loaded and transported anywhere in the world. Big oil consumers covet them. Nigeria already supplies 10 percent of all U.S. oil imports and has become the Bush Administration’s poster child for its effort to wean the United States off oil from the Middle East. State-owned enterprises from emerging nations, most notably China, are making massive investments in production facilities throughout Africa.

The journalist John Ghazvinian, who visited half a dozen new African
oil producers in 2004 and 2005, sees this sudden interest as another
“scramble” for the continent–probably an exaggeration, but a useful
evocation of nineteenth-century colonialism, with its rushed bargains,
greased hands, and dashed hopes. Historically, Africa’s resource riches
have benefited foreign investors and local elites handsomely, but not
so much everyone else. Will Africa’s latest oil producers do any
better, Ghazvinian asks? It’s a good question, and through a generally
lively mix of anecdotes, potted histories, and economic précis,
Untapped offers the beginning of an answer: The odds of success are

Still, there is one small reason for hope, and Ghazvinian should have
made more of it. With much of the recent investment in African oil coming
from state-owned firms in India, China, and other developing countries,
African nations have a second chance to do oil right with partners that
conduct business differently from the Western oil majors. How they play
their new Asian partners in this rematch of the old exploitation game
will largely determine whether this second African oil era is a
boon–with the potential for broad-based social and economic
improvement–or another bust.

Counterintuitive though this may seem, the discovery of oil in Nigeria,
Gabon, and Congo-Brazzaville has been a mixed blessing at best. In
fact, as Ghazvinian explains, it has become a trope of development
economics that generous oil or mineral resources generally hinder
progress. A 1995 study of 97 countries by the Columbia economist
Jeffrey Sachs showed that oil-rich states grew four times slower than
states without oil. The usual culprit for this seemingly mysterious lag
is a chain reaction of perverse economic effects known as “Dutch
disease” (named after its first victim, the Netherlands, which was
struck after discovering natural gas in the 1960s).

Dutch disease works something like this: Oil exports bring in a lot of
cash from abroad, which bloats foreign-money reserves. Those reserves
strengthen the domestic currency, and that in turn drives the prices of
imports down relative to those of local products. Consumers buy fewer
domestic goods, depressing manufacturing, and as politicians and
business leaders massively invest in the oil business, the industrial
and agricultural sectors atrophy. Soon enough, the entire economy
depends on oil and is a hostage to the volatile prices of the world
market. Meanwhile, corruption takes hold: Because oil production
requires substantial capital and sophisticated technology but only a
small, highly skilled workforce, it brings investors and the
governments that control the resources a lot of money quickly for
rather little work. Returns far outweigh costs, yielding what
economists call “rents”–hefty profits that can be siphoned off easily.
Rents are an instant recipe for abuse of power and corruption, not to
mention irrational spending. Ghazvinian sums up their impact in Gabon,
where oil was discovered in the 1970s: “By 1984, Gabon had become the
world’s leading per capita consumer of champagne.”

Nigeria is another textbook case of Dutch disease. After the boons
brought on by the world oil crises of 1973 and 1979, many producers
there, as elsewhere, hurried to develop production capacity–only to be
crushed when the price of crude plummeted in the 1980s. While Nigeria’s
oil revenues skyrocketed from $295 million to $2.5 billion between 1965
and 1975, other sectors imploded; the production of cotton and
groundnuts, for instance, fell by more than 60 percent between 1972 and
1980. A generation later, the agricultural sector basically has been
wiped out. An anemic electric grid cripples industrial production.
Though one of the world’s top 10 producers and exporters of crude,
Nigeria must import all of its gasoline because it has virtually no
functioning refinery. By many accounts, living standards in Nigeria are
worse today than they were when the country became independent in 1960.
And while they have deteriorated, the government has reportedly misused
some $400 billion in oil revenues.

On top of inflicting economic havoc, oil wealth has nasty political
side effects. UCLA political scientist Michael Ross has argued that it
breeds authoritarianism because it obviates the government’s need to
levy taxes and an untaxed people tends to demand less of its
government. The politicians it benefits often spend the windfall on
boosting the military, buying patronage, and blocking the emergence of
a bourgeois middle class or civic organizations. Resource wealth is
also a risk factor for civil war, especially where the goods are
located in areas dense with ethnic minorities. Again, consider Nigeria.
Clamoring for a bigger share of oil proceeds, the militias in the
oil-rich mangrove swamps of the Niger Delta, where living conditions
are among the worst in the country, have been putting pressure on the
central government with organized theft, vandalism, and kidnappings.
They repeatedly cut the country’s oil output last year–on some days, by
as much as 25 percent.

Is all this inevitable? Though such bleak examples hardly suggest so,
Dutch disease can be prevented. In a 1998 study of 28 developing
countries, the French economist Marie-Pierre Arzelier found that
Indonesia and other oil-rich Asian states had fared better than their
African peers by spending their oil revenues on non-oil sectors and
adopting abstemious fiscal practices. Other economists have argued that
the few resource-endowed states that have done well had strong
institutions or a vibrant democratic tradition before striking it rich.
Norway is the ultimate success story. Alaska, Alberta, and the United
Kingdom have managed well. There is also the more intriguing case of
Botswana, a major diamond exporter, which according to the economists
Nancy Birdsall and Arvind Subramanian managed to double per capita
income in the 1980s, thanks to tribal traditions encouraging political

Even without the right legacy, there are, in theory at least, creative
ways to manage resource wealth in order to limit its perverse effects.
One option is to set up special independent funds to invest oil
proceeds in long-term social projects. Another, which Birdsall and
Subramanian once advocated for post–Saddam Hussein Iraq, is to
distribute the funds directly to the people–the idea being to quickly
boost per capita income and trigger market activity while limiting
government graft. Birdsall and Subramanian reasoned that in countries
with weak institutions, individual households generally manage money
better than do governments.

All of which is to say that the new kids on the African oil block are
prime candidates for disaster. They have few democratic institutions or
practices to buffer the shock of sudden oil prosperity. And for the
poorest among them, the shock is likely to be especially severe.
According to Ross, the authoritarian effect of oil wealth hits poor
countries harder than wealthy ones, and–this point is less obvious–it
hits those with modest long-term oil exports even harder. (Ross doesn’t
explain why this is, but his regression analyses of data from 113 states observed between 1971 and 1997 establish very strong statistical evidence that it is.) This is very bad news for, say, Chad, Equatorial Guinea, and Sudan, which are destitute to begin with and sit on far smaller oil reserves than do Saudi Arabia and Kuwait, or even Nigeria and Angola.

Another cause for concern is that so far even clever social engineering
has not overcome such structural handicaps. Recent efforts to create
specialized funds are failing. In Chad, the citizens’ panel known as
the Collège, which the World Bank set up to oversee the distribution of
75 percent of Chad’s oil royalties, has been ineffectual, partly
because it depends on the government for funding. Chad remains
pathetically poor. (According to Ghazvinian, the ExxonMobil compound
there produces six times more electricity than the entire country.)
Birdsall and Subramanian’s direct-distribution project also has few
prospects. Since they proposed it, in mid-2004, a lot has happened in
Iraq to ensure that it will not be conducted there; Africa, whose
institutions aren’t being rethought as thoroughly as Iraq’s, is an even
less likely laboratory for such a bold experiment.

There is, though, one feature of the African oil craze today that could
help Africa’s new oil producers: The unprecedented participation of
China, India, and other developing countries in their development.
Indeed, China and other growing oil guzzlers are moving onto the
continent in full force–heading another massive wave of investment but
guided by slightly different rules. Rather than simply buying the oil
they need from the world market, these countries are sending out their
national oil companies to secure shares in exploration and production
projects throughout the world. And according to one industry expert,
half of the 30 new international contracts for energy assets that China
and India have signed since the beginning of 2005 (totaling $11
billion) were in Africa. African crude accounted for 31 percent of
China’s total crude imports in 2005, up from 11 percent in 1995. Last
year, China bought more than 60 percent of Sudan’s oil production and
25 percent of Angola’s. And business is good for more than just the
energy sector. Overall trade between China and Africa grew from $4
billion in 1995 to $40 billion in 2005, and it is projected to reach
$100 billion by 2010. (Given the magnitude of China’s involvement, it
is disappointing that Ghazvinian only tackles the topic in a late
chapter.) India, Malaysia, and other Asian states are also intensifying
relations. Total exports from Africa to Asia grew by 20 percent between
2000 and 2005, and Africa now exports roughly as much to Asia as to
Europe or the United States.

Chinese companies, especially, are already changing the playing field,
both because of the scale of their activities and because they operate
differently than Western stand-bys like Shell, ExxonMobil, and Total.
In Gabon and other old-time producers, they pick up the crumbs left by
international operators and buy proven assets with waning supplies. In
sketchy spots like Sudan, they make high-risk, high-return investments
others don’t dare touch. And sometimes, as in Nigeria, they offer to
share with international companies the risks and costs of major
projects in exchange for exposure to complex operations they have
little experience with, such as deepwater drilling. All this means new
opportunities for African governments. When Chinese companies invest in
mature oil fields or frontier projects, they help develop resources
that would be overlooked otherwise. And they often pay more for assets
than Western companies would or agree to throw in the construction of a
road, a hospital, or some other piece of infrastructure. (As companies
at least partly controlled by the state and unaccountable to pesky
shareholders, they can afford the extra expense.) Frequently, too, the
Chinese government sweetens the deals with generous debt-relief, aid,
and loan packages.

With its promise of “win-win” partnerships and unconditional
assistance, moreover, Beijing is presenting itself as an
equal-opportunity partner that will not, unlike Western states,
interfere with domestic African politics. Serious China enthusiasts say
that it offers an alternative to the Washington consensus and could
inspire development in Africa where the neoliberal model has failed.
And with India and Malaysia, among others, also joining in, African
governments have more and more eager oil investors to play off one
another. Harry Broadman, a World Bank economist, argues in Africa’s Silk Road that increased business ties with Asia is a “major opportunity” for growth in Africa because it could help African companies learn to become more efficient, develop labor-intensive manufactured goods and services, and further integrate into regional and international trade networks.

For now, however, there are also real costs to China’s deepening
footprint on the continent. For several years Beijing has hindered U.N.
efforts to sanction the Sudanese government for atrocities in Darfur,
and it has supported, partly by arming it, the repressive government of
Robert Mugabe in Zimbabwe. Out of the 30 countries featured in
Transparency International’s 2006 Bribe Payers Index, China and India
were the two whose companies were the most likely to bribe for business
abroad. Cheap Chinese goods–clothes, plastic containers, basic
electronics–flood local markets, compounding the effect of Dutch
disease by squeezing indigenous manufacturing. In April, Moletsi Mbeki,
the South African president’s brother and a political analyst, told the
trade publication Platts, “We sell the raw materials, [and the Chinese] sell us manufactured goods with a predictable result–an unfavorable trade balance against South Africa.” Backlashes are inevitable. A South African trade union has called for limiting Chinese imports and urged retailers to stock at least 75 percent local goods. During elections last September in Zambia, where dozens of Chinese companies run copper, coal, and cobalt mines, the opposition contender Michael Sata campaigned on an anti-China platform, calling Chinese investors “exploitative.” The Chinese ambassador then threatened to suspend aid from China if Sata was elected.

Fortunately, there is reason to believe that China’s aspirations to
become a global power will force it to modulate its politics. Beijing
has recently become less protective of Khartoum and has distanced
itself from Mugabe, notably by keeping quiet after a particularly
brutal government crackdown in the spring. According to Stephanie
Kleine-Ahlbrandt, a fellow at the Council on Foreign Relations, these
shifts suggest that Beijing is reconsidering whether it is worth
sullying its international reputation to maintain close ties with
near-rogue regimes. This points to the fact that, as former Assistant
Secretary of State Richard Holbrooke wrote this summer in the Washington Post, there are more and more areas of mutual interest between China and the United States. The broader implication is that China’s diplomacy inAfrica will progressively converge with that of major Western states, including, presumably, on human rights and good governance.

China’s energy strategy will also evolve. As it becomes a more
sophisticated oil consumer, it is likely to be less aggressively
mercantilistic. David Victor, the director of the Program on Energy and
Sustainable Development at Stanford University, argues that China’s
eagerness to buy shares in oil production facilities in Africa–and
sometimes even overpay–is a rookie’s mistake. Oil is a fungible
commodity traded on a global market that sells for the same price
wherever it is bought, and so as long as there are enough total
supplies to meet total demand, owning the means of its production
offers no advantage. Beijing may be starting to get the point: Erica
Downs, a former CIA energy analyst, wrote in a report for the Brookings
Institution late last year that some members of the Chinese government
were questioning the effectiveness of its energy policy in Africa.
Thus, as China continues to grow into a great energy consumer, as well
as a world power, it will become less eager to buy oil stakes in Africa
at any price or at any cost. That won’t happen overnight, of course,
for as both Downs and Bates Gill, a China expert at the Center for
Strategic and International Studies, have written, Beijing doesn’t
control Chinese oil companies as much as it would like–if anything,
there seems to be an increasing disconnect between China’s national
interests and the interests of its biggest enterprises. Eventually,
though, China’s oil business will probably be less lucrative for
African governments and less dangerous for their people–at once a
smaller opportunity and a smaller risk.

That leaves the question of how much Africa’s young oil producers
profit or suffer from China’s practices–and from Dutch disease, for
that matter–in the hands of their governments. This will depend, for one
thing, on how those governments bargain with their new customers over
concession rights, profit-sharing, hiring local workers, and
environmental protection. So far, the record has been mixed. On the one
hand, there is the government of Chad, which reportedly secured for
itself only 28 percent of the value of a big oil production deal it
recently signed with ExxonMobil. (Angola usually insists on 60 percent
and Nigeria on 80 percent.) On the other, there is tiny Equatorial
Guinea, which has been asking foreign oil investors to set up joint
ventures with local operators, and there is Angola, which joined OPEC
in December, becoming the cartel’s second sub-Saharan African member,
after Nigeria. Even if the governments of oil-rich African countries
become savvier dealmakers, there remains the more significant question
of what good this would bring their people. Broadman, the optimistic
World Bank economist, acknowledges that without unprecedented reforms,
such as efforts to diversify African economies and increase
transparency, the coming of China and other growing powers might leave
Africa worse off.

Ghazvinian opens his book wondering whether oil wealth is “a blessing
disguised as a curse or a curse disguised as a blessing.” It is
neither. Oil wealth is an opportunity, and only as much of one as those
who control it make of it. As Akwe Amosu, an analyst at the Open
Society Institute, has written, in these matters, “it’s (still) the
governance, stupid” that will make all the difference.

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Stèphanie Giry is a senior editor at Foreign Affairs.

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