Craig Eisele on …..

May 1, 2012

What the IMF should say and think about the global oil industry

Filed under: Uncategorized — Mr. Craig @ 3:45 am

In over 50 countries, local production in the oil extractive industries plays a major role in politics and the economy.

This is the first in a two part series on how the International Monetary Fund should interact with the global oil industry.Get Part 2 Here: or copy and paste  http://wp.me/p2DA6-Sp to your browser address bar.

Berlin, Germany – The US and Israel are threatening to bomb Iran, and, even without and before that, petrol prices are nudging back towards the historic highs of 2008. Brent already stands at $125 per barrel, and we know from the last commodity boom that it can’t go much higher before a lot of poor people get hurt – because we now understandthe linkage between high fuel prices and high food prices that afflicted hundreds of millions of people around the world in the middle of the last decade. 

In such times, even if you follow the cut and thrust of energy politics, you might think news of a public consultation this month by the International Monetary Fund (IMF) on how they should advise governments around the world to tax oil and natural resource economies is a little marginal. It might have a certain novelty value. After all, when does the IMF, bastion of technocracy, ask anybody for advice about anything? But ultimately beside the point. Dull, even. 

While many long-time major oil producers have long managed everything about their industries, thanks to the wave of nationalisations that ended the stranglehold of the Seven Sisters in the 1970s, many more marginal and new producers are not so sure of themselves. And in fact, their number is growing.But the devil is in this detail. The neo-liberal Washington Consensus has enjoyed unchallenged supremacy these last 20 years which means the IMF and its sister organisation, the World Bank, have enjoyed a virtual monopoly on advice to governments about public finance, fiscal probity, and a whole lot else.

Borrowing programmes

As the world gets used to the end of Easy Oil and the industry has to search wider and deeper, some 15 to 20 countries in the global South are just coming “online” now, countries the oil world has never heard of – Ghana, Uganda, Mozambique, Timor, Liberia, Colombia, Vietnam and Cambodia to name just a few. There are now over 50 countries where local production in the extractive industries plays a significant role in politics and the economy. 

For these countries, the orthodoxy created by the IMF and the World Bank is best practice. A version of their better selves. What the ministers and civil servants of these countries should do with the first flush of new revenue flows, and the changing geopolitical dynamics they bring, to be proper and correct, is to stand tall and tell their grandchildren what they did at the office.

Even if they are not obliged by actual borrowing programmes to obey the Bank and the Fund – and this will vary greatly from country to country – Bretton Woods’ advice carries some kind of moral force. This stuff matters. The economic future of hundreds of millions of people in middle and lower-middle income countries depends on it. In Africa, extractive industries already generate six times as much inward money flows as aid, and yet bad management and corruption still plague these sectors.  

If you know how to read between the lines, implicit in the IMF consultation papers is an acknowledgement that all has not necessarily gone well up until now. That’s good. 

One paper suggests traditional methodologies for handling oil wealth “need to be amended” because they have been focused on trying to create permanent income from petrodollars – turning every producer into a Norway, in other words, or a pre-1990 Kuwait. Whereas, if you’re DRC or Chad or Liberia, it may turn out you’d be better off putting your oil money into schools and highways back home than donning a mental pin-striped suit and investing in clever index-tracking funds on world markets.

Now that sovereign wealth funds are a thing, everyone wants to have one. But as Oxford academic and leading economist Paul Collier maintains, the opportunity cost of playing the market looks pretty different if a third of your population can’t read and thousands of newborns die every year because they lack access to basic amenities. 

A second paper suggests, radically for the IMF, that some oil and mining companies may be under-taxed and that some countries could benefit from taxing resource rents more. Yes, really! Integral to this is a recognition that rent is different to normal profit. These discussion papers make the case, from the IMF’s point of view of strict capitalist rectitude, that extractive industries are different to the factory that makes widgets or service industries.

Rent disputes

ExxonMobil is different from the Body Shop or Ikea, or even McDonalds, because they generate rent above and beyond profit as normally defined – such as Exxon’s $45 billion profits in 2008 ($1,400 a second), the largest profit ever recorded by a company. 

The conclusion the IMF then draws from this is the safe economist’s one, falling strictly within the paradigm and mandate of a technical expert seeking to stay within capitalist orthodoxy. Because of the peculiar nature of rents, oil, gas and mining industries can be taxed differently without creating market distortions. Nigeria could shake Shell down for a higher “take”, or Ghana Tullow, and all would still be right in the free market firmament. This neutrality to a new wave of contract negotiations and rent disputes now happening around the world on the part of the IMF is new, and appropriate. It may also have something to do with the new director Christine Lagarde. This is the very heart of it.  

But welcome as it is, it misses a still bigger point. Once you recognise rent as the essence of the global oil and the mining industries, you must recognise that everything about them is as much political, and geo-political, as it is economic. That is how historically mismanagement of those industries has led to such massive corruption and conflict. Nobody ever went to war over car manufacturing or internet service provision. When it comes to bananas or silicon chips, or intellectual copyright, the term “trade war” is, thankfully, a metaphor. 

Maybe the IMF feels it can’t follow the consequences of its own point because it would exceed its mandate. But it should. Because if the architects of the fiscal and monetary policies of Nigeria or Brazil or two score other countries are not, in fact, isolated from the political economies they operate in, it stands to reason that any technocratic mechanism is only as good as the political will that enforces it. With oil, business is politics and politics is business, whatever anyone says. Technocratic solutions can only pick up where broader political questions have been settled. 

Nigeria, after all, has all the apparatus of good governance – sovereign wealth fund, “consumption smoothing” policies, EITI compliance – at the same time, being hopelessly corrupt. Billions of dollars of loan guarantees from the World Bank ensured good governance in Chad’s oil industry until the first oil flowed down a pipeline to the Atlantic Ocean. And we now face the prospect of famine across the Sahel at a time when at least two of the governments in the region, Mauritania and Niger, are experiencing mini-oil booms and have the money, in theory, to handle the emergency.  

In the next article, we’ll look at what the IMF should think and say about the global oil industry and how it should be taxed if it recognises its truly political nature.

 

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