The financial press this week reported on an interesting and oddly public factual dispute between billionaire Saudi investor Prince Alwaleed bin Talal and the Kingdom of Saudi Arabia’s Oil Ministry. In an open letter to the Saudi Oil Minister, Alwaleed warned that Saudi economy could no longer be as dependent on crude oil production as it has been. Noting changes such as the United States’ advancements in the extraction of shale oil, Alwaleed concluded that “the world is increasingly less dependent on oil from OPEC countries including the kingdom.”
It is hard to overstate just how dependent Saudi Arabia is on crude oil experts. Alwaleed points out, for example, that oil revenue accounted for 92 percent of the state budget and nearly 90 percent of the country’s export revenue. Thus, in his estimation, even a modest decline in demand from the United States (or other nations with technologically recoverable shale deposits) would have dire consequences for Saudi Arabia’s economy and political stability.
Saudi Arabia is not the only country that should be worried about the extent to which its government is dependent on resource extraction. As of 2012:
The academic and policy literature is replete with “resource curse” analyses. Researchers have observed a strong correlation between nations rich in natural resources (oil, gas, gold, and diamonds are oft-repeated examples) and poor governance and economic performance. These resource-curse outcomes are especially tied to situations where the government either has a monopoly on resource extraction, or the revenue generated contributes a disproportionate amount to national budgets. The common explanation for this “resource curse” is that dependence on extraction stunts economic growth in other areas, and entrenches elites who have money to spread throughout patronage networks, perpetuating their place in power.
Poor governance and economic performance can take several different forms. For example, a 2002 Arab Human Development Report found that investment in the oil sector leads to government policies that underinvest in the agricultural sector. As the Report points out, that pushes labor into urban areas. When the supply of workers in those urban areas exceeds demand, it has “turned cities into centres of discontent.”
(Stacy Vandeveer’s recent report nicely summarizes the current conventional wisdom on the resource curse. It’s worth a read.)
Implicit in Alwaleed’s letter is a warning to Saudi leaders: Either begin economic reforms now in some sort of controlled fashion or face the possibility of chaotic—and potentially devastating—changes down the road.
But Alwaleed’s warnings should reach beyond leaders in oil-rich nations. U.S. diplomacy—particularly in the Middle East—is largely predicated upon reacting to various crises. It is an open question whether U.S. officials are prepared to render the type of advice and assistance necessary for a country like Saudi Arabia to diversify its economy without attendant political instability. In writing about this phenomenon for Foreign Policy, Thomas Friedman wrote that any democracy-promotion strategy adopted by the United States should include reducing our own consumption of imported oil (especially through alternative energy).
I would argue that any democracy-promotion strategy needs to go further.
First, the State and Commerce departments should be partnering with countries like Saudi Arabia or Nigeria to draw-up explicit diversification strategies that build better physical infrastructure and develop human (i.e., educational) capital.
Moreover, many oil-dependent countries are in areas with very little regional economic integration. So second, the United States should use its diplomatic clout to initiate and support regional discussions focused on economic integration. Investment and trade freedom, as the non-profit Revenue Watch demonstrates, has a direct link to export diversification.
And finally, as the strategic value of Saudi (or Nigerian, or Iraqi) oil lessens for us, U.S. officials should press harder for democratization in oil-dependent nations. That pressure should be accompanied by advice and technical assistance for ensuring peaceful transitions to democracy.
As the Alwaleed letter demonstrates, time is running out for many of these nations to end their export dependency; the United States needs to be further in the lead of aiding this process.