Acknowledging that it was vital Guyana got past its recent political crisis if the country had any hope of benefiting from its vast offshore oil discoveries, two individuals at the Institute of the Americas, University of California San Diego, says now the new PPP/C administration must ensure it does everything it can to avoid the grim fate of the resource curse.
“Guyana need only look to its neighbor Venezuela to see the perils of abundant oil resources. The well-known and hugely studied resource curse has confronted countries such as Venezuela for decades,” said Jeremy M. Martin, Vice President, Energy and Sustainability at the Institute of the Americas, University of California San Diego, and Intern and Graduate Student, Kathryn Hillis, writing in a recent Op-Ed. “In many cases, significant natural resources correlated with depressed development as other sectors are neglected and currency appreciates causing uncompetitive exports.”
They said it bears noting that even before the political crisis, Guyana received a host of international experts, institutions, and donors eager to dispense advice as to how to avoid the grim fate of the resource curse. But as much of the literature illuminates, many of the recommendations are easier said than done.
“For example, economic diversification and rooting out corruption are excellent and obvious ideas that many larger and more prosperous countries have failed to achieve,” Martin and Hills said.
To ensure this objective is met, they outlined what they described as five feasible, actionable ideas for the Irfaan Ali administration, as part of a ‘not-to-do’ list.
“First, avoid overinvestment in the oil and gas industry. While there should be adequate infrastructure for drilling and shipping the oil, the country should resist the urge to move downstream of the wellhead. Any refineries built would likely be deeply unprofitable,” Martin and Hills stated.
They said for context, the last new refinery in the United States was built in 1977, as refining is a high cost venture that can take many years to turn a profit. Additionally, most energy economists point to an oversaturation of global refining capacity, especially as many people are looking to decrease their use of fossil fuels. This truism has been deepened by the impact of COVID-19 on the global fuels market.
“The previous administration in Guyana hired a consultant who determined building a refinery would cost around $5 billion and not generate significant revenue to outweigh expenses. In addition to the cost issue, a refinery built before the state has enacted proper oversight and regulatory agencies could become a vehicle for corruption and crony capitalism. Look no farther than another neighbor, Brazil, as to the pratfalls of this issue,” they said.
Second, Martin and Hills said the government should avoid subsidizing gasoline. “In Latin America, an abundance of oil has led to a sense of resource nationalism, causing citizens to view gasoline as a public good rendered nearly free by government subsidies.”
There are many cautionary tales that demonstrate the folly of this logic, with the most drastic in Venezuela, but also the recent example of Ecuador, they pointed out. “These extreme subsidies are not sustainable and are nearly politically impossible to remove once they become expected by the people. Moreover, as economists around the world intone: they can be quite regressive.”
Martin and Hills said while a gasoline subsidy can, in the short term, provide a quick jolt of economic growth to a developing country, it is not worth the long-term debt. “To avoid the future need for the IMF and possible citizen uprisings, Guyana should keep gasoline at market value.”
Thirdly, and “perhaps not a typical theme to consider,” they said do not turn away dual citizens. Transitioning a largely agricultural country into the world’s newest oil nation requires significant technical expertise and talent.
“Given Guyana’s small population, this can be hard to find. Fortunately, Guyana has a large diaspora across the globe comprised of individuals with experience and ability,” they noted.
They said the government should appeal to its far-flung citizens to return home and share in the newfound opportunities. “While this seems obvious, there is a pervasive nationalistic pride that makes accepting dual citizenship difficult.”
It is currently illegal to be a member of the Guyanese parliament while holding dual citizenship. Several politicians recently had to make the choice to either step down or renounce their foreign citizenship after the High Court of Guyana reaffirmed the restrictive law.
Martin and Hills said this type of nationalism cultivates the exact nature of policy that could hinder the success of Guyana. “In order to benefit from its rich oil resources, the country needs individuals with the best education and diverse experiences working not just as engineers in oil companies, but also serving in the government.”
Insulating industry and governance from foreign influence is a path to incompetent organizations and increased risk of corruption, they pointed out.
“Fourth, do not disregard the potential to monetize associated natural gas resources. The noted offshore oil discoveries have also proven a considerable amount of what is referred to as associated natural gas, that is a byproduct of the oil being extracted,” they said.
Historically, the associated gas in offshore oil projects was not necessarily a valued commodity and other than some uses for reinjection was more often than not flared, or burned off, given that the real value was in the oil being produced.
They said major developments around the use of natural gas as a cleaner burning power generation source, as well as the importance of avoiding flaring for emission and environmental reasons point to an obvious win-win for Guyana to monetize the associated natural gas primarily for use in power generation.
“Moreover, the newfound power generation source would greatly improve a power system that is currently expensive and in need of enhanced reliability,” they said.
“Lastly, do not encourage delusions of grandeur,” Martin and Hills stated. “After ExxonMobil discovered the first massive oil field, an expectation developed of great, and fairly immediate wealth derived from the offshore discoveries. While there will be significant economic development and by extension the opportunity to attain greater wealth derived from the oil resource, the average citizen will most likely not see an immediate large-scale change in their circumstances.”
The government, they said, needs to convey this reality to the people in order to keep expectations accurate and of a realistic timeline.
“When the population is anticipating wealth that may not occur on the level or timetable perceived, the simmering displeasure with government could lead to unrest and destabilizing protests,” they said. “The reality check and need to manage expectations, while politically unpopular, will also help to ensure for the population that governance of the oil wealth is wise, long-term and not one associated with the expectation of a rapid, endless financial windfall and deluge of funds.”
Martin and Hills said hopefully, Guyana will be able to use the bevy of outside advice it is receiving to turn its resource curse into a resource blessing. “At least with these ideas there are a few items to cross off its to-do list,” they said.
Jeremy M. Martin is vice president, Energy and Sustainability at the Institute of the Americas at the University of California San Diego.
Kathryn Hillis is a second-year graduate student at the School of Global Policy and Strategy at the University of California San Diego and an intern at the Institute of the Americas.