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The paradox of oil
16-07-03 As Saddam Hussein's bronze statue crashed to the ground in Baghdad in late April, crowds of excited Iraqis and millions of television viewers around the world believed it could be a second chance for the country's impoverished people. After all, Iraq has oil -- oil with a capital “O” in fact: 110 bn barrels, the world's second largest reserves after Saudi Arabia. UN sanctions that had stifled the country's economy for 13 years were lifted in May, when the United States and Britain won broad powers to run Iraq and sell its oil until a new government is established.

US ambassador to the United Nations, John Negroponte, declared, "It is time for the Iraqi people to benefit from their natural resources." In reality, the outlook for Iraq is far from certain. A look at some of the world's key oil-exporting regions shows that, like the golden touch of the ancient Greek King Midas, the oil gift often comes with costs that can outweigh the benefits.

The international image of oil nations is one of stark contrasts. On the one hand suffering and woes: strikes in Venezuela, starvation in Angola, and violent ethnic clashes in Nigeria. On the other, sumptuous royal palaces in Saudi Arabia. Juan Pablo Perez Alfonso, a former Venezuelan oil minister, was all too aware of the mixed blessing of oil riches, calling oil the "devil's excrement" in one famous book.

"Ten years, 20 years from now you will see," Perez Alfonso said in the 1970s; "Oil will bring us ruin." Right on schedule, Venezuela's myth of oil prosperity finally burst in the last decade of the 20th century.

...Terry Lynn Karl, professor of politics at Stanford University and author of "Paradox of Plenty: Oil Booms and Petro-States", is not encouraged. "The warning for the Iraqi people and the United States is this: it is a very dangerous myth that oil will make you rich," she says. "Oil-exporting nations are some of the most conflict-ridden, economically troubled and authoritarian countries in the world, and this is directly related to their central export. Because petroleum is so highly capital intensive and so extraordinarily profitable, no other resource tends to concentrate power and money into the hands of the few like oil does."

In the case of Iraq, experts say the oil money could actually be an obstacle to developing a democratic system.

"Oil is a big source of wealth and temptation for the ruling class. It gives them the ability to ignore people's opinion," says Raghuram Rajan, professor of finance at the University of Chicago. "Oil doesn't help if you are trying to get democracy working in a country. Oil helped finance Saddam's gold taps, racehorses and yachts, while most Iraqis lived in squalor. Such dramatic contrasts can be seen in many other oil-rich areas too. The majority of Venezuelans live below the poverty line despite decades of oil wealth.“

"Oil-exporting governments keep themselves in power by doing, essentially, two things. One, they disproportionately funnel benefits to the section of the population that supports them, and two, they build a security and military apparatus to quash dissent from the people who are not seeing any of these benefits," says Ms Karl. ...