Can oil and democracy mix?

The 11 countries that comprise the OPEC cartel amassed nearly $180 billion in oil revenues last year. None is a thriving democracy. Coincidence?

Oil wealth hinders development of a tax-paying middle class, the very segment of society most likely to agitate for a voice in government, political economists say. Bountiful crude reserves also discourage the kind of diversification needed for a successful capitalistic economy.

This is the dilemma the Bush administration must confront if it hopes to plant democracy in Iraq. In fact, the White House is pondering a radical approach.

To boost democracy's chances in Iraq, many oil industry experts are calling for full privatization. Already, some of the new oil industry leaders in Baghdad are calling on the new regime to sell off minority stakes in new fields to foreign companies.

Others argue that privatization, at least for now, would be too revolutionary -- after all, the Organization of the Petroleum Exporting Countries held its first meeting in Baghdad. Such a move, they say, would only confirm suspicions that the war was really just an American grab for oil.

White House officials are debating whether a program like that in Alaska, in which the state cuts a check for each resident out of Alaska's share of oil revenues, can be exported to the Persian Gulf.

"The interesting concept that has been used in Alaska for so many years is under consideration," Secretary of State Colin Powell told a Senate panel recently. While officials are studying various models, they are keen to make sure a portion of the oil revenue "goes directly to the people, so that they can make a choice as to where they want the money to go."

For months, the Bush administration has focused on the benefits of Iraq's oil reserves -- Powell recently called them a "marvelous treasure" -- but political thinkers have long recognized the downside of oil wealth. One-time Venezuelan Oil Minister Juan Pablo Perez Alfonzo, in a famous phrase, dubbed it "the devil's excrement."

An official with the new Office of Reconstruction and Humanitarian Assistance argues that Iraq's dependence on oil exports is not the key problem in building a democracy there. But crude wealth poses some particular challenges, industry experts say.

In the world's successful democracies, governments raise money to pay for schools, care for the aged and build armies by winning over a tax-paying middle class. In return for their money, citizens demand a role in the government and a transparent system, so they know how their dollars or shekels or yen are being used.

Take the rabble-rousers who sparked the American revolution. They galvanized public support with this slogan: "No taxation without representation."

But oil wealth has allowed the oil-producing countries to strike an alternative social contract: "No taxation, so no representation."

The oil-rich nations fund their regimes with petro-dollars and thus have no need to put up with interference from a pesky middle class. Since achieving political power is also the main avenue to acquiring wealth, the incentives for holding onto power are great, noted Arvind Ganesan with the New York-based Human Rights Watch.

Because only a few leaders control the wealth, such systems are open to abuse. Witness Angola, where the International Monetary Fund estimates $1 billion disappeared in 2001.

Nigeria has a civilian government again after years of military rule, but corruption remains rampant, while Venezuelan oil workers failed in their effort this winter to bring down the government of President Hugo Chavez, who, while arguably a demagogue, had his country's constitution on his side.

Among oil-exporting countries, Mexico, perhaps, may claim the greatest success after Vicente Fox's election and the end of one-party rule after 70 years. But corruption there remains problematic.

Vice President Dick Cheney lauds democratic progress in Persian Gulf states like Kuwait, Bahrain and Qatar, but few Westerners would consider those reforms anything but modest.

"I look to Norway," noted Vera de Ladoucette, senior director of Middle East research for Cambridge Energy Research Associates. Norway enjoys the most successful democracy among the major oil-exporting countries, but Norway had a vibrant parliamentary system long before oil companies moved offshore to pump crude from the North Sea's stormy waters.

In wealthy Gulf states such as Kuwait and Saudi Arabia, the ruling elites have adopted a strategy of buying off the populace, giving citizens free health care, a university education and jobs in exchange for political complacency.

"You build massive projects to keep the people happy. You dole out the goodies," noted Robert Ebel, director of the Washington-based Center for Strategic and International Studies' energy program.

Years of political repression and isolation have made freedom something of a mystery in Iraq. Jabar Alabie, the de facto head of Iraq's South Oil Co., seemed to think democracy meant a refinery manager would have to be elected.

Defense Secretary Donald Rumsfeld insists Washington will not permit the new regime in Baghdad to be hijacked by religious extremists. But many Shiites in southern Iraq say an Islamic state like that in Iran is exactly what they want for their country.

Most Iraqis, contends Patrick Clawson, deputy director of the Washington Institute for Near East Policy, identify not so much with the Iranians or Kuwaitis but with the Palestinians. And with the appointment of a new prime minister in the Palestinian Authority, the hopes for democracy there are brighter than any time in years.

White House officials remain optimistic that the democracy experiment can succeed in Iraq.

"If there's a potential in that part of the world to create a modern state with a good, strong representative government, I think, hopefully, Iraq is it," Cheney told a group of newspaper editors last month.

Historically, Iraq was "a sophisticated nation, with a well-educated middle class," Cheney said.

But after years of economic isolation, that is no longer the case. In fact, before the war, about 60 percent of Iraqis relied on food shipments from the United Nations' oil-for-food program for their survival.

The debate really centers on how to re-create a middle class and lessen the nation's dependence on oil.

Leo Drollas, chief economist for the London-based Centre for Global Energy Studies, argues the new regime in Baghdad should privatize the oil sector.

"Giving a voucher to every man, woman and child -- that has a powerful theoretical logic," Drollas said.

"What you've got to do is open up the entire economy. You can't carry the cost of the reconstruction just on the narrow shoulders of oil."

Even before the war, Iraqis running the country's oil sector had reached something of a consensus, calling for partial privatization.

Yousif Mohsen Abdelrahman, the interim head of Iraq's trade ministry, told reporters in Baghdad last week that the new regime is considering selling minority interest -- up to 40 percent -- in certain oil projects, Bloomberg News reported.

Such a move would bring much-needed capital to a country that after three wars and years of economic sanctions is in desperate need of repair.

But the occupying powers would have to tread carefully. There are few aspects of society as politically sensitive in any crude-exporting country as oil patrimony.

"Obviously there is a risk of undue interference, a kind of colonial tinge," Drollas said.

Here in Washington, policy experts on Capitol Hill and in the White House are buzzing about the Alaska model.

Back in 1976, Alaskans, realizing their oil wells would eventually run dry, created a permanent fund to invest part of the money the state receives from royalties on oil production for future generations.

Rather than use the rest of the royalty payments for state government programs, Alaska distributes dividends each year to the state's residents. Last year, each Alaskan received a check for $1,540.76. For a family of four, that amounted to a tidy sum of $6,163.04.

Oil Patch senators such as Alaska Republicans Ted Stevens and Lisa Murkowski and Louisiana Democrat Mary Landrieu had been pushing the administration to adopt such a plan in Iraq. Indeed, the Senate could have a resolution on the floor on this issue as early as this week.

But Adeed Dawisha, a political science professor at Ohio's Miami University and an Iraqi native, believes talk of privatization is premature. He believes Iraq will need five years or so before the country can begin to think about major changes to its oil sector.

Dawisha argues that, in order to ensure democracy survives, Iraq must begin taxing its people. Trying to levy new taxes on an already desperately poor populace would be politically difficult. But Iraq had a national taxation system as late as the 1970s, Dawisha said. Such a program would not seem so foreign to the public.

While policy experts in Washington, London and elsewhere may debate the merits of various democratization plans, the Iraqis themselves will have to decide how to proceed, Powell said.

I don't want to knock the article, but it was rather more than $180 billion, and Nigeria is a democracy (just).

In 2001, according to "Statistical Review of World Energy June 2002" by British Petroleum global oil production was 74.5 MBPD (million barrels per day, a barrel is 159 liters). Of this, 30 MBPD (40.7% of the total) was produced by the OPEC countries.

Table 1: OPEC Countries and their Incomes

Country	Date Joined OPEC	Location	2001 Oil Production (MBPD)	2001 Oil Production (% Of World Total)	2001 Population (Million)	2001 Total GDP (Unadjusted MUSD)	2001 GDP Per Capita (Unadjusted USD)	National Oil Income (Unadjusted MUSD)	Annual Per Capita Oil Income (Unadjusted USD)	2001 GDP Per Capita (PPP-USD)
Saudi Arabia	1960 *	Middle East	8.768	11.8	22.8	186,489	8,179	80,063	3,512	10,600
Iran	1960 *	Middle East	3.688	5.1	66.1	114,052	1,725	33,676	509	6,400
Venezuela	1960 *	South America	3.418	4.9	23.9	124,948	5,228	31,211	1,306	6,100
Iraq	1960 *	Middle East	2.414	3.3	23.3	NO DATA	NO DATA	22,043	946	2,500
United Arab Emirates	1967	Middle East	2.422	3.2	2.4	NO DATA	NO DATA	22,116	9,215	21,100
Nigeria	1971	Africa	2.148	2.9	126.6	41,373	327	19,614	155	840
Kuwait	1960 *	Middle East	2.142	2.9	2.0	32,806	16,403	19,559	9,780	15,100
Libya	1962	Africa	1.425	1.9	5.2	34,137	6,565	13,012	2,502	7,600
Indonesia	1962	Asia	1.41	1.9	228.4	145,306	636	12,875	56	3,000
Algeria	1969	Africa	1.563	1.8	31.7	54,680	1,725	14,272	450	5,600
Qatar	1961	Middle East	0.783	1	0.77	16,454	21,369	7,150	9,285	21,200
TOTALS			30.18	40.7	533	750,245		275,590

Sources: List of OPEC countries from OPEC - (*) indicates a founder member . Population figures and PPP GDP estimates from the CIA World Factbook via theodora.com. The unadjusted GDP figures are from the World Bank. The unadjusted GDP per capita is calculated by dividing total unadjusted GDP by the population. Oil production figures are from BP; please note that there are slight discrepancies in some of the percentages; Indonesia has a higher % than Algeria, but a lower MBPD figure, likewise Iraq vs. UAE. I am awaiting corrected data from BP. The errors are slight and do not affect conclusions drawn.
Populations: Several OPEC states have large populations of non-nationals. The population figures above include 5.4 million non-nationals for Saudi Arabia, 1.6 million for UAE, 1.2 million for Kuwait and 0.66 million for Libya. These populations have been included when calculating the GDP per capita figure.
National Oil Income USD: This figure is calculated using the formula Income = Production_in_MBPD * $cost_per_barrel * 365.25. Cost per barrel is set at $25, in line with recent oil prices. Since extraction costs are ignored, the result actually inflates the oil income slightly. The over-estimate is minor for the Gulf states, where extraction costs are $2 to $3 per barrel, but rather more for non-Gulf countries. No allowance has been made for export of refined products rather than raw oil - refined products are more valuable than raw oil. Also, no allowance has been made for domestic consumption. Dividing the figure in this column by the population gives the per capita oil income.

I have highlighted the countries where oil income per person is at a level which I consider significant from a Western perspective.

Kuwait, UAE and Qatar stand out as societies that generate truly impressive income per person, even by Western standards, however they all have tiny populations. Indonesia, Iran and Nigeria have large populations and correspondingly small incomes per person. Saudi Arabia stands out for combining a moderate population and high oil income, fulfilling its reputation as the 800 pound gorilla of OPEC. Opinion varies as to what is the "natural" market price of oil, i.e. what would the average price be if the international market were fully efficient and free from the distorting impact of OPEC. A figure of $20 is often mentioned, yet the oil price was as low as $10 as recently as 1998. If $10 pertained, then these figures would need multiplying by 0.4. Such a factor would leave only Kuwait, UAE and Qatar as having a significant per-capita oil income!

One figure not shown in the table is population growth rate, but all the countries have positive population growth. The Gulf States have some of the highest rates in the world - 2-5% - their populations will double in about 20 years at such rates, and all other things being equal their oil income per person will therefore halve during that period. This is not a new trend, it has been in place for many years. Historical data is hard to come by, but Iran's oil income per person income in 1995 was less than 10% of what it was in "the boom years" of the 1970s. According to The Economist's survey of the Gulf Cooperation Council countries, Saudi Arabia's GDP per head is now half its 1980s peak. This combination of rising populations and declining oil prices constitutes a severe, ongoing and worsening problem for the OPEC countries.

The per capita incomes for Iran and Iraq are notably low, given the prominence these two countries usually receive as "oil titans". The Iranian figure of $509 is so low as to make it debatable whether Iran should be considered a petro-economy at all. Iraq's production could well double in the next decade as sanctions are lifted, modern technology is introduced and the country seeks to rebuild, but this will still not propel the country into a sybaritic life of pleasure and ease.

March 1, 2002 - Oil and communism don't mix: Venezuela faces energy standoff at petroleum company*** Chavez ignited employees' ire when he fired the company's respected president, army Gen. Guaicaipuro Lameda, last month. Lameda had repeatedly clashed with the Energy Ministry over policies he and many employees viewed as putting left-wing nationalism ahead of good business practices. Chavez replaced Lameda with a leftist economist and academic, Gaston Parra Luzardo, who was then first vice president of the Central Bank of Venezuela. With a long history of supporting state control of the industry, the 68-year-old Parra is expected to acquiesce to Ministry orders with little fuss. When Parra entered the company cafeteria for the first time two weeks ago, he was greeted by employees clinking glasses and tapping trays in unison as a sign of protest.***

Feb 1, 2003 - Venezuela's oil output may be halfway back - Oil chief: PDVSA's only duty is to benefit treasury***Rodriguez said there would be no return for thousands of fired Petroleos de Venezuela workers, whom he accused of sabotaging the country's oil industry and betraying the nation by trying to topple President Hugo Chavez. PDVSA employees who were pardoned for their role in a failed coup attempt against Chavez last April had re-offended by organizing the strike, Rodriguez said. The PDVSA chief said he had fired almost every one of PDVSA's 700 senior executives for joining the strike. The number of dismissed workers already topped 5,300 and could reach 6,000, he added.

Rodriguez, a former communist guerrilla, said PDVSA had grown fat during the past 20 years. "PDVSA should be nothing more than an instrument to secure maximum benefit from the export of (oil) through its contribution to the treasury," Rodriguez said.***

[Rodriguez used to sabotage oil pipelines]

April 15, 2003 - Left turn: 'Revolution' hits Venezuela's oil culture - PDVSA beachhead for Chavez's vision*** In addition to the classless cafeteria, volunteerism is up, and salaries are said to be on their way down. The dress code has been loosened, and in some departments the high-five has replaced the curt nod in the hallways. "There has been a change of mentality in all levels of the company," says a member of PDVSA's board of directors, who speaks on the condition of anonymity. "We believe that PDVSA should be subordinated to the needs of the state. For us, job No. 1 is fighting poverty."

……………. "We're here to establish a beachhead, move in, and clean the place up," he says. "When we are finished ... we will move on." A humanitarian oil company is almost a contradiction in terms, though, and many critics are dismissive of the lofty sentiments heard inside the company. "Plain and pure rhetoric," says Edgar Leal, senior associate with Cambridge Energy Research Associates, in Cambridge, Mass. "What are they going to do, have PDVSA start distributing food? They have a business to run."

The man in charge of this business is Ali Rodriguez, a former guerrilla fighter who ran the OPEC oil cartel until he was installed by Chávez as company president. Mr. Rodriguez has not won over his critics, including the far left, who question his decision to eschew an oil embargo against the United States by countries opposed to the war in Iraq. But Rodriguez has signed on with the government game plan - to divert some revenue to federal coffers that would otherwise be reinvested in PDVSA. The government says infusions of cash into schools and hospitals has already pushed down illiteracy and infant mortality rates.

Previously, PDVSA's management used its considerable degree of autonomy to aggressively explore for oil, develop new technologies, and acquire overseas assets. The new PDVSA management says much of that money was wasted, and points to operating costs that are three times higher than other oil majors as proof. Officials at the energy ministry say that restructuring will save $1 billion a year.

But critics say the new system can't be sustained. "Chávez and Rodriguez will probably use whatever they can get out of PDVSA for projects this government wants to do," says Michael Coppedge, a political science professor and Venezuela specialist at the University of Notre Dame in South Bend, Ind. By some measures, PDVSA's production capacity has already suffered as a result. The company was operating 120 oil rigs only four years ago. Today that number has fallen to less than 40. "They may be able to extract more revenue from PDVSA than before for a short time, and then production capacity will fall, and the oil industry will deteriorate and won't be able to produce as much and earn as much," Mr. Coppedge adds……………..***

May 7, 2003 - New Venezuela `oil show' makes Houston debut*** We could brush off Venezuela's travails as yet another internal strife in a much tormented oil producing country with an endemic history of corruption and ineptitude. But this is too close to home, with Venezuela's oil playing a huge role on the U.S. energy security and a direct linkage with our gasoline prices. Venezuela is the largest exporter of refined products to the United States and holds a significant position in U.S. domestic refining capacity. PDVSA also owns Citgo, one of the largest retailers of gasoline in this country. What has been going on in Venezuelan oil production the last few months?

After a devastating and permanent removal from the market of at least 250 million barrels during the strike, the country's oil production is now about 2.6 million barrels a day, compared with 3.4 million before the PDVSA strike. This partial rebound is misleading because 1 million barrels a day comes from foreign company "associations" in Venezuela and 800,000 barrels a day come from the giant North Monagas and El Furrial fields. These fields are now being produced at full throttle with many technical questions as to the long-term damage that this overproduction may cause. Decapitation of the engineering staff has led to a big drop in production from the more challenging fields. Such a decline will accelerate further and will become devastating next year and thereafter. It is not just the dearth of know-how; there will be no money to reinvest.

PDVSA today has the largest debt in its history. Service companies, oil carriers and suppliers are now owed probably $3 billion to $5 billion, accumulated over the last five months. Coupled with the fact that the Exim Bank has eliminated all credit guarantees for Venezuela and Chavez's own debt to his constituents, whose bribing will have to be manifested in increased welfare spending and giveaways, point toward a very turbulent time ahead. It will be interesting and somewhat breathtaking to watch the "show" by the new PDVSA delegation this week in Houston. ***

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