A growing chorus of human rights and environmental activists continues to denounce petroleum development as a great modern evil. A recent report by the British group Christian Aid claims, "Pumping oil has led to greater poverty, a high likelihood of war and massive corruption—rather than bringing peace, wealth and prosperity for poor people."
But will the "oil curse," as it is often called, frustrate plans for a free, prosperous Iraq? Not if Iraqis make a simple decision: Put oil revenues directly into the hands of the citizenry.
Seeing oil as a "curse" is understandable. Roughly 30 developing countries, including the 11 members of OPEC, rely heavily on oil exports for revenue. Since the first oil crisis of the early 1970s, these countries have spent more than $4 trillion in oil revenues—with little if any lasting benefit for ordinary people. In the worst cases, in Nigeria, Angola, Myanmar and the Sudan, oil cash seems only to fuel civil wars and widespread human rights abuses.
But the problem is mismanagement, not the money itself. Most oil-exporting countries, including the members of OPEC, use an industry structure guaranteed to fail: Oil revenues are controlled by the state, and a powerful national oil company manages the industry.Third World socialism
Nationalization of the oil industry began in Mexico in 1938 and became part and parcel of the populist, anti-colonial reaction that swept the Third World during the 1970s. The intent was to replace the major international companies like ExxonMobil, Shell, BP and others with state institutions. OPEC is more than a cartel. It's a powerful statement of Third World socialism.
Like socialism in Cuba, North Korea, Vietnam and the now-defunct Soviet Union, the OPEC model has utterly failed its citizens. The reasons are familiar to anyone who has studied the old Communist systems.
First, government control over a country's economy allows politicians to build the police and military instruments of repression and to trade economic advantages for political loyalty. Both Saddam and the Soviets were masters at this game. Second, concentrating massive cash flows in the hands of politicians creates the perfect vehicle for theft and corruption.
Finally, and perhaps most importantly, no government, however honest and well-meaning, whether democratic or authoritarian, industrialized or developing, has a clue how to manage an economy. In the West, we don't rely on government to allocate capital. Entrepreneurs who know what the economy needs and can judge the risks and benefits make investment decisions in a free market.
Clearly, Iraq's potential oil income is huge. According to the Oil and Gas Journal, Iraq's oil reserves are 112.5 billion barrels, second only to Saudi Arabia's 259 billion barrels. Yet 30 years of neglect and mismanagement have left the industry in desperate need of investment capital and technology. Oil revenues are still only a trickle, and the needs for food, housing and general economic rebuilding are vast.
So what should Iraq do?
The physical security of the oil infrastructure is obviously the first step. Once the system is safe from attack, Iraqis should look to the free market for solutions. Forget the OPEC model and avoid the temptation to re-establish a national oil company, even if its shares are held by Iraqi citizens. At best, national oil companies are inefficient and lack advanced technology and know-how. The worst are bloated money-sinks that retard modernization and facilitate corruption and patronage.Profits for the people
Iraqis should seek private capital to rebuild and operate the oil industry. Does that mean giving foreigners all the revenue and control over the national patrimony? Absolutely not. The United Kingdom is a major oil producer with no national oil company. North Sea investment has come not from the British taxpayer but from ExxonMobil, Shell, BP and other private companies. Companies take the risks, but the U.K. government retains ownership of petroleum resources, controls the pace of development, sets safety and environmental standards and receives the lion's share of revenues through taxes and royalties. According to the U.S. Department of Energy, North Sea production costs are high, at around $17 per barrel, yet in 2002, the British government received $8.7 billion in oil revenue, about $9.5 per barrel.
Iraqi oil is much less expensive to produce, and, with a sound tax and royalty system, the government could capture most of the revenue. Oil exports of two million barrels per day at a price of $25 per barrel would generate about $15 billion annually. Why reinvest this money in oil development when private companies are willing to provide their own risk capital along with their technology and know-how? Iraq could make better use of the money.
Some, including U.S. Administrator L. Paul Bremer, propose using the Alaskan system, with oil revenues placed in a trust fund that pays dividends to Alaskans. A trust fund is appealing, but trusts are designed to keep children from spending their inheritance until they mature. Why should we treat the Iraqi people as children?
The best guide to economic development for poor countries are the simple yet radical ideas of Peruvian economist Hernando de Soto, president of the Institute for Liberty and Democracy in Lima. De Soto argues that the major constraint on economic growth for the Third World is denial of property rights and suppression of the entrepreneurial talents of ordinary people. If oil money truly belongs to the Iraqi people, then give it to them.
Iraqis don't need a trust fund, which will only create another opportunity for mischief and corruption. Iraq should distribute its oil revenues directly to its 25 million citizens, with each individual receiving $600 to $700 per year or $3,000 to $3,500 for a family of five. In addition to supporting basic human needs, much of this cash would be invested in small businesses, services, agriculture, housing and the other ingredients of a vibrant economy—all without political strings.
The enduring lesson of American history is that people should be trusted not only with the political life of the nation but with its economic life as well. The Iraqi people are entitled to the same trust.
Bruce M. Everett, an expert on international energy, was with ExxonMobil for 22 years, and from 1992 to 1997, was the company's Middle East manager of national gas. He now is an adjunct associate professor of international business at the Fletcher School of Law and Diplomacy at Tufts University.