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Commentary

The Tyranny of Oil


     
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WASHINGTON—Recessions can be a good thing—they wring the excesses out of the economy and focus people’s attention on public policy mistakes that often are the root causes of investment bubbles. Many people thought that this particular recession would offer another kind of benefit. By bringing oil prices back to earth, it was supposed to debilitate the autocracies, from Russia to Iran to Venezuela, that depend on them.

This has not happened. Oil prices dropped 80 percent in the early stages of the recession, but had climbed back to $70 a barrel by June. Their sails have since lost a bit of wind, but the prospects, even if the recession lasts long, point to sustained high prices.

Conspiracy theories abound when it comes to crude, but the simple truth is that oil prices are driven by the market. As has been evident for some time, the supply coming out of existing production is diminishing, and the (very few) new discoveries are not expected to make up for the imbalance, especially given the insatiable demand from emerging economies.

This is bad news for those who were hoping that the likes of Vladimir Putin, Mahmoud Ahmadinejad and Hugo Chavez would see their coffers depleted anytime soon. And herein lies a cruel paradox. Part of the reason supply has not been able to keep up with skyrocketing demand is the sheer inefficiency and the rampant corruption of state-controlled oil companies; the list includes Russia (where production fell in 2008), Iran (where gasoline has been rationed since 2007) and Venezuela (where daily output has dropped by 1 million barrels), and also countries such as Mexico, where the political system is democratic but where oil is a government monopoly. The regimes that have caused shortages in the world supply of the commodity on which their dictatorships depend are now reaping the benefits of higher prices partly caused by their own incompetence.

Occasionally, as happened when the massive Tupi oil fields were found in Brazil’s Santos Basin at the end of 2007, there is speculation that production imbalances will be corrected. But—apart from the obvious fact that exploitation takes many years— the markets do not really expect Tupi and other potential discoveries to offset the decline of existing production in oil-rich tyrannies or the dwindling reserves in more palatable political environments such as North Sea oil countries.

The proposition that a sustained drop in oil revenues will topple an autocratic government is highly debatable. Indeed there are many examples of dictatorships that have survived and even strengthened themselves in the face of adverse economic fortunes. North Korea’s Kim Il-Sung turned his country’s economy, which was far more developed than that of South Korea at the end of the Korean War, into a medieval autarchy of sorts while he consolidated his totalitarian power. Cuba’s Fidel Castro was not weakened one bit after the collapse of the Soviet Union brought an end to Moscow’s subsidies and Havana launched what it called the Special Period, essentially a descent into a pre-industrial subsistence economy.

But if there is no certainty that an autocracy will be threatened by the demise of its sources of revenue, it is clearly the case that the sustainability of those sources will make things much easier for the autocrat. The reason is simple. The availability of abundant cash enables the dictator to bribe the regime’s elite, to lull a significant portion of the population into submission, and, when the hunger for power extends beyond the country’s borders, to sustain client states. The absence of cash greatly increases the need to maintain an efficient police state whose primary purpose is to spy on those who are close to power and instill paralyzing fear throughout society. All dictatorships do some of this, but they can make up for their own repressive inefficiency with cash used to buy loyalties and fund redistributive populism.

The realities of the market, and probably the expectation of inflation caused by the printing of money in the United States and the rest of the world during the current recession, virtually guarantee that oil tyrannies in the Middle East, Eurasia and Latin America will continue to enjoy big revenues. Those seeking to topple them will need to take into account this sobering fact when putting together their strategies.


Alvaro Vargas Llosa is Senior Fellow of The Center on Global Prosperity at The Independent Institute. He is a native of Peru and received his B.S.C. in international history from the London School of Economics. His Independent Institute books include Global Crossings: Immigration, Civilization, and America, Lessons From the Poor: Triumph of the Entrepreneurial Spirit, The Che Guevara Myth and the Future of Liberty, and Liberty for Latin America.

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