AN INVESTIGATION DRILLING INTO THE RELATIONSHIP BETWEEN DEBT INTO DEBT AND OIL DRILLING INTO DEBT An Investigation into the Relationship Between Debt and Oil Written and researched by: Stephen Kretzmann and Irfan Nooruddin Drilling into Debt {Acknowledgements} i Acknowledgements We are grateful to Michael L. Ross for detailed comments on Campaign, a co-founder of the human rights and environ- earlier drafts and for valuable suggestions concerning the mental organization Project Underground and has served as analysis. The technical analysis conducted in this report is in the environmental advisor to the Movement for the Survival fact a confirmation and expansion of an initial analysis con- of the Ogoni People in Nigeria. At the Institute for Policy ducted in October 2004 by Michael Ross for Steve Studies, he recently helped to coordinate a global civil socie- Kretzmann. In addition, this report builds on a political ty effort to engage in the World Bank’s Extractive Industries analysis first advanced by IPS and the Sustainable Energy Review, which recommended an end to Bank support for coal and Economy Network, in the 2004 report, Tug of War. and oil projects. Kretzmann has authored numerous articles and reports and is a regular media commentator on issues of Numerous people commented on, and improved, various corporate accountability, transparency, the global oil indus- versions of this report, including: Dave DeRosa, Ian Gary, try, environmental and human rights. He is currently found- Steve Herz, Jelena Kmezic, Kevin Koenig, Howard Reed, ing a new organization – Oil Change International. Simon Retallack, Nikki Reisch, Andy Rowell, Heidi R. Sherman, Lorne Stockman, Jim Vallette, and Neil Watkins. Irfan Nooruddin is presently Assistant Professor of Political At Ohio State, Irfan thanks Michael P. Litzinger for valuable Science at The Ohio State University. He earned a PhD in research assistance. Special thanks to Design Action Political Science from The University of Michigan, Ann Arbor, Collective, for a great job, as always. and a BA in Economics and International Studies at Ohio Wesleyan University. A citizen of India, Irfan is primarily We are particularly grateful to Simon Retallack at the interested in the impact of political institutions on economic Institute for Public Policy Research, Simon Taylor at Global development and government policy towards education and Witness, Atossa Soltani of Amazon Watch, Donald Pols of health care. His research on the impact of party competition Milieu Defensie, the Climate Initiatives Fund, and the Charles Stewart Mott Foundation for their support during this project. on public goods provision in India (with Pradeep K. Chhibber) and the determinants of success of economic sanctions has About the authors appeared in Comparative Political Studies and International Stephen Kretzmann has worked on energy issues and the Interactions respectively. He is presently completing a study global oil industry for the last fifteen years. He has been a about the effect of IMF structural adjustment programs on Director of Greenpeace USA’s Atmosphere and Energy government education policy (with Joel W. Simmons). Drilling into Debt {Table of Contents} 01 Table of Contents Acknowledgements ..................................................................................................................................i About the Authors ....................................................................................................................................i Executive Summary ....................................................................................................................................3 Oil’s Role in Creating the Debt crisis ..........................................................................................................6 Not to Heal but to Rub Salt........................................................................................................................11 Quantifying the Correlation......................................................................................................................14 The Other End of the Pipe: Oil’s Role in Fueling Coming Crises in Climate and Debt ........................................................................20 CASE STUDIES: Nigeria ..................................................................................................................................................23 Ecuador ................................................................................................................................................26 Congo-brazzaville..................................................................................................................................30 Glossary of Terms ................................................................................................................................34 Technical Appendix ..............................................................................................................................36 References ..............................................................................................................................................40 End-Notes ................................................................................................................................................44 Drilling into Debt 02 Oil Change International campaigns to tions. Its work, the questions its research expose the true costs of oil and facilitate poses and the methods it uses are driven by the coming transition towards clean ener- the belief that the journey to a good society gy. We are dedicated to identifying and is one that places social justice, democratic overcoming political barriers to that transi- participation and economic and environ- tion. Visit us at www.priceofoil.org for mental sustainability at its core. more information. Jubilee USA Network is the US arm of the The Institute for Public Policy Research international movement working for (ippr) is the UK's leading progressive impoverished country debt cancellation and think tank and was established in 1988. Its role is to bridge the political divide right relationships between nations. Jubilee between the social democratic and liberal USA is a network of more 70 religious traditions, the intellectual divide between denominations, environmental organiza- academia and the policy making establish- tions, community groups, research insti- ment and the cultural divide between gov- tutes, and solidarity organizations. ernment and civil society. It is first and foremost a research institute, aiming to Additional research and support provided provide innovative and credible policy solu- by Amazon Watch and Milieu Defensie. 03 D R I l L I N G I N T O D E B T > E Executive Summary x e c Prime Minister Tony Blair is planning to discuss climate and development in Africa at the G8 u t Summit in Scotland. The external debt of developing countries is already very much on the i v table. In addition the G8 Finance Ministers have also indicated that they want to talk about oil, e specifically oil prices. If the G8 nations, and the world, want to seriously tackle climate change, S poverty, and debt, its time to look deeply at the common thread between all of them: oil. u m This investigation focuses on debt and oil, and exposes the very real relationship between them. m In short, this research documents an energy strategy for the G8 which is fundamentally at a odds with a development strategy for the rest of the world. r y In their June 11 communiqué, the G8 Finance Ministers not only announced debt relief for 18 countries, they also stressed their commitment to the “elimination of impediments to private investment” in Africa. Oil and minerals are traditionally at least 60% of foreign direct invest- ment in Africa – and much higher in certain countries. West Africa is widely regarded as one of the priority areas for investment by the oil industry, and oil production from the region is universally projected to rise. As this paper shows, the G8 commitment to growth via private investment, and specifically the oil industry, is cause for concern. Drilling into Debt is the first study to rigorously examine the relationship in between oil and debt. To do so, we have collected data on 161 countries for the period 1991-2002, and collect- ed further data on 88 developing countries for the period 1970-2000 for use in a statistical model of debt burdens. We have supplemented that analytical exercise with additional Drilling into Debt 04 research, in order to shed light on the policies that led to the levels (debt-GDP ratios) in those countries that are 19% current situation. higher than those countries that did not undergo this form of structural adjustment. Our key findings are 6. The relationship between debt & oil is most likely 1. Increasing oil production leads to increasing debt. There caused by the interplay in between three factors: is a strong and positive relationship between oil produc- a. Structural incentives for and direct investments in tion and debt burdens. The more oil a country produces, the oil industry by multilateral and bilateral institu- regardless of oil’s share of the country’s total economy, tions, such as the World Bank Group and export the more debt it tends to generate. credit agencies. 2. Increasing oil exports leads to increasing debt. There is b. Oil fueled fiscal folly – both in the North by creditors a strong and positive relationship between oil export over