The Quest Chapter 5: The Petro State
Consider the following questions:
- How could exporting oil countries guard against the Reverse Midas Touch?
- What aspects of exporting oil led to this reverse?
- Does this apply to other exported produces, or is it unique to Petroleum?
Exporting VS Importing
First, just want to clarify what Exporting Oil means vs Importing Oil. These terms get confused and causes problems in understanding. This is probably a review for some, but just want to make sure these terms are clear!
Exporting Oil - Country A produces (drills from the ground) oil and sells it to Country B who buys that oil.
Country A is Exporting Oil
Country B is Importing Oil
Additional issue with exporting and importing is a Tariff. This is a regulation set up by either the exporting country or the importing country to control the flow of that specific commodity; in this course it is oil. The tariff is a barrier between the free flow of the oil set up by either government.
Venezuela is a Country that Exports Oil. OPEC (which we will get into more detail in later lessons) is the Organization of Petroleum EXPORTING Countries. So, when in doubt, remember OPEC is all about Exporting… Every country that buys from OPEC is Importing.
Crisis for Exporters
This is a country that relies on oil export profit for revenue to fund a large percentage of the government. This type of country has a nationalized oil company. The profits do not go to shareholders, but to the citizens by way of government subsidies, or welfare programs. The challenge with a Petro State in regards to the government budget; it trusts on the price of oil and the ability to sell the oil to be consistent. We know this consistency does not happen.
|Country||OPEC/non-OPEC||Approximate Breakeven Point ($/bbl)||APPROXIMATE Production (millions of barrels/day)|
The Nationalized Oil Exporting Countries have the challenge to adjust their government budgets to reflect the ever-changing price of oil. In the past, we have seen the price of oil jump from $130 price per barrel to less than $30 price per barrel. Many of these countries did their budgets at the $130 mark only to have the price of oil drop. This creates a dependence on the price of oil always increasing, never decreasing. There is continual ebb and flow of the oil wealth. So, when a country relies on this increasing profit, then the price drops, and a country goes into debt meeting the budget that is set. Another challenge with Petro State is once a country offers an increased welfare program, it is very difficult for the government to cut back or decrease, for the citizens have come to also rely on the program. This creates instability in the country, and we know how instability impacts the oil industry…. Decreased foreign investment and decreased exporting…. Thus, the price drop starts a problem that just grows into a downward spiral.
To check the current price of oil: OilPrice.com.
Reversed Midas Touch
Venezuela - a Petro State
Venezuela relies on oil to fund the government. This increases the reliance on every aspect of the oil industry not just the exporting, but all the pieces that support the industry. This made every other industry in the country be focused on the oil industry.
So, this is a loose comparison [ football in State College = Oil in Venezuela ] A closer to home example - State College, PA. Large percentage of the citizens rely on Penn State for income. When football game weekends happen, the restaurants benefit, the motels count on being full, the Uber drivers count on higher ridership and thus increased income. This is the same way that Venezuela counts on the oil industry. When a prosperous oil industry happens, the whole country benefits.
Venezuela has challenges with an inflexible economy and struggles to adapt to the changing price of oil.
The Dutch Disease is a term that explains this reliance on a dominant item.
As the oil exports increase, the value of the local currency on the world market increases with it. Yet, those exporting anything else will not have the added value of the newly exporting natural resource. Then, the rest of the economy suffers when the non-oil exporting goods' value decreases because the local currency increased on the world market.
For more economic details of “Dutch Disease” review this supplemental video. (not required to watch)
The discussion continues on the Petro State with a focus on the broad view of what governments do with all the new income from the exporting Natural Resource. Governments get used to a specific level of income from oil exports. They set budgets, create or expand welfare programs, and increase subsidies. Then the price drops, and what once was a Midas Golden Touch becomes a commitment that the government cannot fulfill. Governments are locked into this increased spending, and The Gold becomes straw.
The dependence on oil exports creates an environment of corruption, Inflation, and “Dutch Disease.” The persistent responsibility of the Petro State government.
My personal example is when I used to get a raise - YAY! seems like such a boost in my personal economy, but then 2 months into the raise, and I am more in debt than I was before. What happened?!? Learn from the Petro State, and save not spend!
Yergin, Daniel. (2012). The Quest: Energy, Security, and the Remaking of the Modern World. New York: Penguin Books