Blogspot by Patricia l. Vasquez: Should the private sector have a deeper role in trying to curb the curse of oil?

I think so. Many poor, developing countries see the discovery of oil as the door to economic growth, at last. If well managed, oil revenues should help poor producing nations to build sustainable, long-term growth for their current and future citizens. But if not well managed, many perverse scenarios could ensue. Experts often blame corrupt, inept or simply unprepared governments for what is known as the paradox of the plenty. But what about other stakeholders, like the private sector? Don’t they also have a responsibility in avoiding countries they operate in from taking the wrong turn?

If badly managed, oil moneys could quickly end up in the wrong pockets. Moreover, the inflow of oil revenues could lead to an overvaluation of the currency, making exports less competitive. In this scenario, the export sectors of the economy give way to oil, which suddenly becomes the leading economic activity. In a context of a corrupt or inefficient government, oil revenues often turn into a populist tool for the distribution of basic services, putting a lot of strain on the country’s economy. In some countries, a relatively solid institutional framework may be in place to allow for a fairly effective distribution of oil revenues from the central to the sub-national government levels. But institutional glitches in the process of transferring the resources may get in the way of the final desired outcome of having oil resources serve the population. Any of these scenarios leave the overall population worse off than before oil was discovered and prevents citizens from enjoying the fruits of oil. Thus, oil becomes a curse rather than a blessing.

When an oil company makes a corrupt deal with a corrupt politician, the company is as much to blame as the politician. The oil sector is full of junior players ready to take larger investment risks. Smaller oil companies have arrived in large numbers to Latin America and Africa in the past two decades. There, high oil prices turned previously economically risky oil areas into investment opportunities. Companies that are not publicly listed and thus do not have to undergo the intense shareholder scrutiny of the larger corporations, may be more tempted to add political risk to the typical operational risk. They can do this because no one is watching over their shoulders and the host country may not have enough economic or human resources to monitor the private sector. Politicians in the host country may not be sufficiently accountable to their constituencies. In this context, making oil deals outside of the law and/or of the public scrutiny may be tempting in the host country. Generally speaking, large international oil corporations have become more careful in their deals with host governments. This is because they have an image to protect and because they learned from past experience that they eventually will pay for their questionable actions.

In recent years, large oil corporations have slowly increased their scrutiny of the performance of smaller companies they intend to buy. This is a crucial indirect way of monitoring the actions of companies along the oil chain. If more such actions become the norm rather than the exception, corrupt politicians would be more careful for fear of loosing business, and the society as a whole would benefit in the long term.

Patricia I. Vasquez is an independent consultant for conflict management and natural resources. As a Fellow at the United States Institute of Peace (USIP), she wrote a book about local oil-related conflicts in Peru, Ecuador and Colombia that will be published by the University of Georgia Press in February, 2014.