IMF-Egyptian Debt Negotiations: Number 3, Vol. 26 Book

_Untapped_ by John Ghazvinian is a riveting in-depth look at the rising importance of African oil. In recent years formerly poor countries, of little importance in the global economy, were suddenly awash in oil money (one, Equatorial Guinea used to be of so little importance to the U.S. that the American embassy had been closed; now it was about to reopen). The U.S. was soon expected to get as much as 25% of its imported oil from sub-Saharan Africa and China was becoming increasingly reliant on African crude. Ghazvinian traveled through twelve African countries to discover the reasons behind the boom and what this means for Africa and the world.

So why is African oil booming? Some experts believe that at best Africa only has 10% of the world's proven oil resources, so why the many billions of dollars spent on investment there? Much African oil (particularly offshore oil in the Gulf of Guinea, the 90-degree bend in the west coast of Africa) is of high quality, crude that is "light" (viscous) and "sweet" (low in sulfur), making it cheaper to refine than Middle Eastern crude. Not only is it cheaper to refine, it is less environmental costly to refine.

African crude is also easier and cheaper to transport. Most of Africa is surrounded by water, which cuts transport-related risks and costs; indeed offshore oil from the Gulf of Guinea is already well-positioned for quick and safe transport to major markets. Little need for any expensive, politically-difficult to negotiate, and vulnerable pipelines such as what are needed to bring Caspian crude to market. In the few cases were pipelines are needed they often only have to run through only one or maybe two countries.

Another reason for the attractiveness of Africa is that African nations generally present a more favorable contractual environment for oil companies to operate in. Unlike in Middle Eastern nations where state-owned oil companies often have a monopoly on oil exploration, production, and distribution, most sub-Saharan African nations operate on production-sharing agreements (or PSAs), an arrangement in which foreign oil companies are awarded licenses, assume all up-front costs for exploration and production, and share the revenues with the nation in question only after initial costs have been recouped.

Yet another reason is that with the exception of Nigeria (though others may soon join), sub-Saharan African nations were not members of OPEC (and thus not subject to their strict limits on oil output).

The "most attractive of all the attributes of Africa's oil boom" has been that most new oil discoveries have been made in deepwater reserves, many miles from populated land (or indeed land at all), meaning that they are pretty much isolated from the dangers of civil war, insurrection, sabotage, or banditry (an increasing problem for oil production from the Niger Delta in Nigeria, which the author covers in depth, revealing such innovative crimes as "illegal bunkering," "local bunkering," and "trucking").

A dominant theme of the book is just what this oil will mean for Africa. Many scholars and humanitarian activists view the oil boom not as blessing but rather a curse. Dubbed the "paradox of plenty" or the "resource curse," time and again throughout the world where oil has been discovered in a developing country that country has seen its standard of living decline and its people suffer in comparison to its non-oil endowed neighbors (their economies generally growing four times faster than oil-generating countries).

Though at first an "oil curse" seems counterintuitive, the author presented a well-argued case for its existence. Though the discovery of oil can bring about political and military conflict (such as exacerbating ethnic tensions in the Niger Delta), by and large the problem of oil is one of economic degradation. Ghazvinian cited an example from economics labeled the "Dutch disease," a term coined by the _Economist_ in 1977 to describe the collapse of the Dutch manufacturing sector after the discovery of Dutch natural gas in the 1960s. Basically, when a country starts to export a valuable natural commodity to the international market, it finds itself flooded in foreign currency. This glut artificially inflates the value of that nation's own currency, making imported products suddenly cheaper (which are also often perceived to be of better quality). Local producers (in Africa often this means local farmers) find that fewer people buy their products, so they abandon rural areas to flock to cities, creating a mass urban migration that devastates a country's traditional farms and small cottage industries. Of course, with this collapse, those in the city becoming increasingly reliant on imported foreign goods, something that is unfortunately out of reach to the new urban arrivals; a country that was once a net exporter of food often becomes a net importer of food. If and when the oil runs out, a nation's currency quickly depreciates, meaning its people are no longer able to buy now-expensive foreign imports and there is now no longer any local industry to speak of to fall back on.

An additional danger for oil producers is the development of a "rentier state." Rentier states are countries in which most if not all of the state's income comes from some form of economic rent (in this case a percentage of oil revenues). Such nations develop governments that in essence act like wealthy landlords, content to sit back and collect income from foreign corporations, divorcing the government and its management of the economy from the daily needs and activities of the people. Politicians no longer have any reasons to encourage industry and the government is no longer reliant on the economic productivity of its citizens but rather itself becomes instead a source of wealth. The state becomes an "allocation state," in which the government is seen as a big "sugar daddy," a source of free money. Where citizens pay taxes, they care about corruption and cronyism, while in a rentier state they view public funds as something open to all (often the elites, who make billions disappear).