Rentier states and costly petrochemical investments

Many oil producing states rely upon revenues associated with that resource to finance themselves, particularly when it comes to social spending. This sits awkwardly beside the fact that the era of cheap and easy oil is ending. As such, states seeking to maintain output will face some very tricky choices. To prevent a collapse in exports, they will need to invest much more (making the oil industry less of a support to state coffers). They may also need to reduce or eliminate the degree to which they subsidize petroleum products like gasoline for the local population.

None of this is the kind of thing that keeps governments secure. Indeed, a government that pursues the economically prudent course of investing in long-term capacity might find itself threatened by others who would rather skip the investment to keep things rolling nicely in the present. All that adds another worrisome dimension to the nexus of energy security and global politics. It is especially hard to see how states like Saudi Arabia – where the entire social, political, and economic system depends on money from oil exports – will adapt to a world where maintaining their output becomes more and more costly and challenging.

Author: Milan

In the spring of 2005, I graduated from the University of British Columbia with a degree in International Relations and a general focus in the area of environmental politics. In the fall of 2005, I began reading for an M.Phil in IR at Wadham College, Oxford. Outside school, I am very interested in photography, writing, and the outdoors. I am writing this blog to keep in touch with friends and family around the world, provide a more personal view of graduate student life in Oxford, and pass on some lessons I've learned here.

12 thoughts on “Rentier states and costly petrochemical investments”

  1. It is especially hard to see how states like Saudi Arabia – where the entire social, political, and economic system depends on money from oil exports – will adapt to a world where maintaining their output becomes more and more costly and challenging.

    It certainly is. I wonder how many decades away this is.

  2. “The lack of coherence among the opposition has provided Chavez with time. Since assuming power, his strategy over the past decade has been to harness the power of oil. The moment Venezuela discovered oil in 1918, the Venezuelan state became inseparable from the Venezuelan energy sector. Pouring all of the country’s capital into energy development caused other industry and agriculture to stagnate, leaving Venezuela with only one real source of income and a single point of economic and political control. To put it bluntly, he who controls the oil controls the country. For a decade, that has been Chavez, who used oil revenues to fund the populist policies that allowed him to secure support from the country’s majority poor population.

    But the fruits of the oil industry are diminishing as a result of Chavez’s policies of nationalization and enforced loyalty over competence in employees at Petroleos de Venezuela, S.A. (PDVSA), the country’s state-owned petroleum company. With growth declining, food often scarce and debt skyrocketing alongside inflation, Venezuela has entered a period of serious economic decline. If projections about the country’s deteriorating electricity sector bear fruit, this economic decline could well be coupled with a complete collapse of the electric system, which would make maintaining support among the poor especially difficult for Chavez. There are also signs that all may not be well in Chavez’s inner circle, first and foremost among them the recent resignation of Venezuelan Vice President Ramon Carrizales.”

  3. Yemen
    A lonely master of a divided house
    Can Yemen’s president, Ali Abdullah Saleh, survive against such odds?

    Apr 22nd 2010 | ADEN AND SANA’A | From The Economist print edition

    Mr Saleh needs the goodwill of the Awlakis not only to secure his main if diminishing income from oil, but to dampen a burgeoning secessionist movement in the south. To many in Yemen, this is the country’s biggest security threat. The south, which was an independent state from 1967 (when Britain ended 128 years of rule over what it called the Aden Protectorate) to 1990, holds barely a fifth of Yemen’s people but two-thirds of its land and most of the oil and gas that provide the central government with three-quarters of its income.

    But there is no guarantee that such an idea would work, even if the southerners agreed. For the president faces yet another growing challenge. The patronage system he has built, which relies on buying off tribes and political opponents while maintaining a loyal caste of underemployed bureaucrats, policemen and army officers, is greased entirely by oil money. Yemen has never been a big producer. Output peaked in 2002 and may peter out in a decade. As an Arab sociologist puts it, in a tribal society you do not buy loyalty, you only rent it.

  4. Carlos Andrés Pérez

    Carlos Andrés Pérez, president of Venezuela in both boom and bust, died on December 25th, aged 88

    EVER since 1922, when the first gusher at Maracaibo roared up with the noise of “a thousand freight trains”, the history and destiny of Venezuela has been tied fast to oil. “Black gold” has brought highways, schools, shipyards, hydroelectric plants and the skyscrapers of Caracas. It has also brought economic collapse, political repression and thoroughgoing corruption. Not for nothing is it also known in Venezuela as the excrement of the devil.

    Carlos Andrés Pérez, born the very year the gusher erupted, knew all about both sides of oil. He led Venezuela through both the boom years of 1974-79, when prices had quadrupled after the Arab oil embargo, and, in a second term, through the bust of 1989-93, when they had dived so steeply that Venezuela ended up borrowing $4.5 billion from the IMF. In the late 1970s his long-time mistress, Cecilia Matos, would appear in a necklace from which hung a small, gold, oil derrick. The necklace fell out of favour, though she did not; wife and mistress still battled over Mr Pérez as he lay in his coffin, elegant as ever in suit and white silk tie.

  5. The regime tightens its belt and its fist

    Isolation, international sanctions and the removal of subsidies all herald rocky times ahead for Iran’s redoubtable and durable president

    THE president of Iran is a powerful communicator. When Mahmoud Ahmadinejad spoke live to the nation last month, he managed to combine seductive reasoning, patriotic appeals and more than a hint of menace. For once, though, he left even his most fervent supporters unmoved, for he was announcing the beginning of the end of subsidies on which millions of them depend. These measures are the gamble of his presidency—and may be the most important economic reform in the Islamic Republic’s three-decade history.

    From top ayatollahs to the IMF, everyone agrees that spending $100 billion each year to pin down petrol, gas and electricity prices, besides the cost of staples such as flour and cooking oil, is a bad way to dispose of Iran’s hydrocarbon revenues, accounting for more than 10% of GDP and encouraging waste on an epic scale. The symptoms of the malaise are legion: tea kettles simmer all day; the streets clog with recreational drivers out for a spin; lights glare because no one can be bothered to turn them off. “We can do it because we have oil,” Iranians used to tell incredulous visitors. Oh, happy days.

    By the day after his speech Mr Ahmadinejad’s axe had cut a merciless swathe. The price of petrol had gone up by 75% and that of diesel by more than 2000%. Electricity and water bills are expected to soar. The price of some types of bread has quadrupled—and many an upheaval in Iran’s history started with a bread riot. No wonder the streets of the capital, Tehran, were heavily policed after the president’s speech, as people scrambled for the last drops of subsidised petrol.

  6. Yet even though things look bad now, a default probably does not loom in the near future. If oil stays at $100 a barrel, the Capital Economics report calculates, Venezuela’s export revenues should just cover its foreign-exchange requirements—$11 billion of debt service, $28 billion of capital flight, and $100 billion of imports—over the next two years. And even if petroleum prices drop, the central bank has $22.5 billion in cash and gold, and another $7.5 billion in further unspecified illiquid assets.

    Moreover, since 2005 the government has squirrelled away $39 billion in a separate, unaudited fund called Fonden. Although analysts do not know how much of this has been spent, some part has probably been saved. There are rumours that the president is hoarding hard currency to prepare for 2012, when he faces a difficult re-election battle that will cost him money. The recent spike in oil prices caused by unrest in the Middle East will surely give Mr Chávez some extra breathing room. And at a pinch, he could probably turn to his friends in Beijing for a new loan.

  7. Mr Chávez subsidises Cuba to the tune of around $3.5 billion a year, by sending it an estimated 115,000 barrels of oil a day (around two-thirds of its consumption). Cuba pays in kind, in the form of 40,000 doctors, intelligence and security experts and other workers stationed in Venezuela. In addition, Mr Chávez is putting up money for infrastructure projects on the island, such as the expansion of an oil refinery at Cienfuegos. Venezuela is also Cuba’s top trading partner.

    Venezuelan aid has been the biggest single factor in helping the communist island emerge from the catastrophic slump that followed the demise of its previous sponsor, the Soviet Union, in 1991. Adult Cubans remember the early 1990s as a traumatic time of food and fuel shortages. Might such penury return?

  8. This newspaper has long argued that chavismo is an atavistic blind alley for Latin America. By contrast, Brazil has sought to develop a modern Latin American social democracy that marries a globalised capitalist economy with vigorous government efforts to attack deep-rooted inequalities. But there are limits to this approach too. The scale and scope of government in Brazil continue to grow in ways that may not necessarily benefit the poor. Fiscal largesse in Lula’s final years contributed to economic overheating. Mr Humala should note that Dilma Rousseff, Lula’s pragmatic successor, now wants private investors to operate airports and ports, as well as roads.

    In Venezuela, chavismo may live on, with or without its creator: a dozen years of spraying oil money in the general direction of poorer Venezuelans buys the abiding loyalty of some, even if it has all but destroyed the economy. But the tide of Latin American history has turned against Mr Chávez.

  9. Azerbaijan
    How to spend it
    A small country grows drunk on oil wealth

    As one state employee explains, everyone gets two salaries: an official one and unofficial one, in an envelope. The government keeps a record of all unofficial payments. “The crime is not stealing,” he says. “It is stealing and not reporting it.” The government could easily turn bribery into taxes. But as Khadija Ismail, an investigative journalist, argues, while envelopes make people grateful, taxes turn them into demanding citizens.

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