OPEC as Omen

Jahangir Amuzegar

From Foreign Affairs, November/December 1998

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Summary:  The next great oil boom is on: four former Soviet republics on the Caspian Sea are sitting atop an economic bonanza. But they should remember the fate of OPEC, whose members squandered their 1970s windfall. Where did all the money go? The state took on too dominant an economic role and wasted the wealth at home in a rash of boondoggle projects and military buildups. All OPEC members came down with "quick-money fever." They became addicted to supposedly limitless oil revenues even as boom turned to bust. The Caspian states, too, risk going from riches to rags if they do not resist the temptations of petromania.

Jahangir Amuzegar, an international economic consultant, was a Finance Minister of Iran under the Shah. He is the author of Managing the Oil Wealth, which will be published next year.

A WARNING TO THE CASPIAN

With the breakup of the Soviet Union in 1991, four new states emerged on the edges of the Caspian Sea, endowed with oil and gas reserves estimated to be worth between $2.5 trillion and $3 trillion at today's prices. The full extent of the subterranean energy resources of these countries -- Azerbaijan, Kazakstan, Turkmenistan, and Uzbekistan -- is still unknown, but by all accounts their mineral wealth is the largest find in three decades. Still, the nascent republics' current energy production is relatively minuscule. They are thus eagerly soliciting foreign capital and modern technology to exploit their reserves and are believed to need some $50-70 billion of foreign investment during the coming decades.

The economic boom that will inevitably follow such an enormous bonanza promises to mimic, in many respects, the plight of the members of the Organization of Petroleum Exporting Countries in the mid-1970s and after. OPEC's journey from riches to rags is powerful proof of the perils of a tempting but temporary energy boom. The Caspian states would do well to learn from their predecessors' failures.

THE NEW REPUBLICS

There are notable historical and institutional differences between the OPEC and the Caspian Sea players, but the newcomers seem to be on a path to financial and industrial development similar to that of their OPEC counterparts. Ritzy hotels, modern office towers, fancy Western restaurants, expensive designer boutiques, Mercedes fleets, and eye-catching villas are already mushrooming in Baku, Almaty, and Ashkhabad, just as they did in Lagos, Caracas, Tehran, and Kuwait City after the sudden oil price rise in 1974.

The Caspian beginners have much in common. Although ethnically heterogeneous, all four have Muslim majorities, albeit with varying measures of religiosity. Politically, all four countries are led by strong, autocratic ex-communists who rule with an iron hand. Without democratic and free-market fixtures like the rule of law, civil society, an independent judiciary, a free press, effective tax codes, and fiscal accountability, all four are among the least privatized and reformed economies of the former Soviet empire and thus prone to misdirection and mismanagement. From the highly personal nature of the republics' rule emanate potential political instability, vulnerability to unsavory bureaucratic scams, and protracted economic weakness. Finally, the landlocked Caspian states all lack direct access to consumer markets in Europe and the Far East. All need pipelines to transport their energy to the rest of the world. The pipelines inherited from the Soviet era are woefully inadequate to the task of carrying the potentially available supplies. But the construction of new pipelines has been fraught with deadlocks, disputes, and power plays among the United States, China, Russia, Turkey, and Iran. The region remains prone to territorial conflicts, ethnic rivalries, and civil wars.

The differences among the four are equally striking. Geographically, Kazakstan is by far the largest with 2.7 million square kilometers and Azerbaijan the smallest with only 87,000. Uzbekistan, with 23 million inhabitants, has the largest population, while Turkmenistan has the smallest, at 4.5 ...

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