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Well-Managed Oil and Gas Development

Economic resources such as oil and gas are expected to generate wealth. However, in some cases, countries endowed with these resources suffer from a ‘resource curse’1. For that reason, these resources bring conflicts and instability instead of peace and development. A large body of empirical research has found out that there is an inverse relationship between economic development and resource abundance2. Moreover, the interests of governments and those of a contracted company differ3. A foreign company is more interested in profits than the welfare of a country’s citizen. Therefore, the difficulties of managing oil and gas revenues efficiently have increased focus on governance of the petroleum sector4. This essay tries to explain why well managed oil and gas development depends upon strong governance as much as strong contracts.

In 2001, a study established that per capita incomes of resource-abundant countries grew three times slower than those of resource-poor countries5. This study also showed that there is a negative relationship between natural resources based exports and GDP growth. Oil and gas resources belong to the government. The two mineral resources are, therefore, state owned. Revenues from oil and gas accrue to a government that owns them.For that reason, greater government intervention in their exploitation and management is of utmost importance.

Oil and gas resources are governed in a number of ways. To start with, it must be clear on how policies related to the oil and gas industry are to be implemented6. Therefore, to avert the ‘oil and gas curse’ a government must embark on sound policy decisions. A government should, hence, strive to make the right policy for the right reason. Roles and responsibilities must also be set to avoid duplication of duties.

Sustainable development of the oil and gas industries is another way of governing these resources. In this regard, development of gas and oil resources should be done slowly7. This gives the government and its citizen time to adjust to increased income flows. Moreover, a sudden surge or boom in economic development is more difficult to handle than a slow one.

Diversifying the economy is another solution to the problems related to oil and gas resources8. Diversification reduces the importance of gas and oil to the economy of a country. This diverts attention from this sector to other competitive industries that do not attract conflicts. UAE’s growth is currently associated more with diversification than its rich reserves of gas and oil. Countries rich in oil and gas reserves must also adopt a macro economic policy that tries to neutralize the impact of large flow of revenues. For that reason, using too much revenue or borrowing heavily must be avoided. In addition, spending can be controlled by the establishment of an oil and gas stabilization fund9. This fund controls spending and ensures that a country experiences a stable and moderate growth. Countries such as Malaysia have benefited from such a fund.

Political reforms are indispensible for a country that has large reserves of oil and gas. The source of major conflicts is inequality and lack of democracy. All the citizens must have a say in the exploitation of oil and gas reserves and the sharing of revenues generated. According to Aslaksen, there is evidence that oil and gas resources are associated with corruption10. Since oil and gas revenues belong to the government, decision making is left at the hands of a few. Consequently, these resources are mismanaged. Corruption becomes the order of the day as there is a rapid increase in the amount of money in circulation. Corruption thrives in environments where consensus is not tolerated. For that reason, democracy contains corruption11. To clean up corruption in the oil industry, all stakeholders must agree on the common standards of morality.

The fortunes of some countries tend to decline with the discovery of oil and gas. However, some countries have been able to avoid the ills associated with an abundance of economic resources. These countries have a system that balances gas and oil exploitation and good governance. Therefore, bringing the most competent multi-national to explore and manage oil and gas is not enough. With good governance, conflicts related to oil and gas are minimized. On top, a country reaps the full benefits of oil and gas revenues.

References

Aslaksen, S, Corruption and oil: Evidence from panel data, 2010. Web.

Hamilton-Hart, N, “Anti-corruption strategies in Indonesia” Bulletin of Indonesian Economic studies, Vol. 37, No. 1, 2001, pp. 65–82. Web.

Lahn, G, et al., Report on good governance of the national petroleum sector, 2007. Web.

Likosky, M, Contracting and regulatory issues in the oil and gas and metallic minerals industries, 2009. Web.

Stevens, P, Resource impact-curse or blessing: A literature survey? 2003. Web.

Footnotes

  1. Stevens, P, Resource impact-curse or blessing: A literature survey? 2003. Web.
  2. Stevens, Resource impact-curse or blessing
  3. Likosky, M. Contracting and regulatory issues in the oil and gas and metallic minerals industries, 2009. Web.
  4. Lahn, G, et al., Report on good governance of the national petroleum sector, 2007. Web.
  5. Stevens, Resource impact-curse or blessing
  6. Lahn, et al., Report on good governance of the national petroleum sector
  7. Stevens, Resource impact-curse or blessing
  8. Stevens, Resource impact-curse or blessing
  9. Stevens, Resource impact-curse or blessing
  10. Aslaksen, S, Corruption and oil: Evidence from panel data,, 2010. Web.
  11. Hamilton-Hart, N, “Anti-corruption strategies in Indonesia” Bulletin of Indonesian Economic studies, Vol. 37, No. 1, 2001, pp. 65–82. Web.

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