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The Oil Curse

The discovery of large oil deposits under Cambodian waters was enough to make the folks in government buy all the drool cups in town over the last two years, and to make even conservative economists cringe. With peak-oil now a widely-acknowledged reality, and the intense weakness and undemocratic nature of the current regime, we’re looking at a situation which could easily and quickly resemble that of Nigeria. I’m publishing the entire article below the fold, which puts into plain language the argument that most of us have been making, with less economic sense, perhaps, for a few years now. Cheers to Dr. Al Madani for getting this piece published. Original here.

The world’s newest petrol-state

By Abdullah Al Madani, Special to Gulf News

Reports from Phnom Penh say that oil companies from Japan, South Korea, China, Malaysia, Singapore, Kuwait, Australia and France have been lining up for licences to tap Cambodia’s gigantic oil wealth.

According to several studies conducted by the United Nations, World Bank, Harvard University and other reliable institutions, Cambodian reserves could contain as many as 2 billion barrels of oil and 10 trillion cubic feet of gas.

Based on the current world price of oil and gas, this may provide Cambodia with annual revenues of $6 billion a year over the next two decades, an amount more than the country’s gross domestic product, which is only about $5 billion a year, and several times greater than its current level of domestic revenue and overseas development aid combined.

What has supported the findings of these studies was the actual discovery of oil off the southwestern coast by US energy giant Chevron Corp. Chevron drilled six exploratory wells in the Gulf of Thailand in the past two years and found oil in five of them. It is now planning to drill 10 more wells this year in these waters.

This, of course, is good news for a country that has long suffered poverty, tyranny and civil war, and where 40 per cent of its population of 14 million live below the national poverty line of 50 cents a day, 50 per cent of children never complete their primary education, 30,000 children die every year from preventable diseases and only half of the countryside has access to electricity.

However, many observers and several international institutions argue that Cambodia’s potential oil revenues may not act as a powerful engine of genuine national development. It could rather lead to the so-called “oil curse”, a paradox where a massive influx of oil money causes corruption and instability and widens the gap between rich and poor – a recipe for civil unrest.

The argument is based on what several Third World countries have experienced following their emergence as oil producers and exporters.

The best example is Nigeria, the biggest oil-producing nation in Africa but also a country marred by extreme poverty and rampant graft. Since the discovery of oil in the 1970s, Nigeria has exported more than $400 billion in oil, but that has not benefited its people, 70 per cent of whom continue to live on less than $1 a day.

Moreover, the country is carrying a $30 billion debt due to corruption, mismanagement and successive dictatorial regimes.

Follow in Nigeria’s footsteps

Given its fragile democratic institutions and poor records on governance, transparency and human rights, Cambodia could easily follow in Nigeria’s footsteps.

Despite having witnessed some positive changes since the mid-1990s, the country is still viewed as one of the most corrupt in the world with favouritism and bribery in awarding government contracts and the use of violence in maintaining the influence of the ruling Cambodian People’s Party.

In fact, Prime Minister Hun Sen’s regime has already circumvented law by creating a Cambodian National Petroleum Authority under his full direct control.

So far, international donors have relatively succeeded in using their aid and grants to force Hun Sen’s regime to launch some reforms and commit itself to respecting international standards on human rights and other issues.

But with oil revenues flowing, Cambodian government will be free from its reliance on foreign aid and consequently may ignore reforms and the adherence to the rules of international institutions such as the World Bank. It may become even more autocratic and less responsive to the people’s needs.

On the other hand, full-scale production of oil, which is not expected earlier than 2009, may make Thai-Cambodian relations tense, unless an agreement is reached on an overlapping area claimed by the two neighbouring countries in the Gulf of Thailand, wherein lie oil and gas reserves.

Having been desperate to tap the offshore blocks, Cambodia proposed in 2000 that the issue of sovereignty be shelved so that joint exploitation could begin.

But Thailand rejected the proposal, a response that many attributed to historical differences and nationalist emotion.

In 2001, however, the two countries signed a memorandum of understanding on resolving their dispute over the area, but so far neither a deal on a joint-development area nor an agreement on demarcating national boundaries has been reached.

To sum up, Cambodia can avoid the “oil curse” only if it diversifies its economy, reforms its institutions, tackles corruption and strengthens public financial systems. In other words, without adequate checks and balances in place, the benefits of the discovery may be siphoned off by powerful officials and not be felt in the nation’s wider economy.

And to use the discovery as a tool for development and peace, Phnom Penh needs to work harder with Bangkok to determine just where their common border lies.

Dr Abdullah Al Madani is an academic researcher and lecturer on Asian affairs.

UPDATE:

Sralanh Khmer (as reported in the Mirror – see new link in sidebar), predicts that “Cambodia will have war because of oil.”

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