The paradox of plenty strikes again

 
Allister Heath
IT is the paradox of plenty: countries that are amply endowed with natural resources, such as oil or diamonds, tend to suffer from extreme misgovernment, poverty and misery. Iran and Libya are cases in point. Countries that start off with little or no natural endowments – such as Hong Kong – and are forced to exploit their human capital to pay their way tend to enjoy far better outcomes. The resource curse is one of the most depressing realities of the modern world, and one which we have witnessed yet again in North Africa and the Middle East in recent days. Tragically, there is no simple way of solving it. Those who blame imperialism are kidding themselves.

The problem for the rest of the world is that it continues to rely on these undemocratic and despotic regimes for much of its energy. In part, this is because of a not-in-my-backyard attitude to oil exploration closer to home, unthinking environmentalism and excessive risk-aversion: the crackdown on oil exploration after the Gulf of Mexico catastrophe means that it will be even harder for America to wean itself from imported oil. The same is true of restrictions on drilling in Antarctica. As prices rise, shale oil will hopefully become more viable. In the longer-term, the best way forward would be to embrace nuclear energy in a big way – there is just no way that renewables will ever provide enough cheap energy. But even then we would first have to invent proper electric cars with decent batteries – and find reliable suppliers of uranium and plutonium.

Meanwhile, oil prices keep on going up. In a striking research note, Nomura warned that the price could hit $220 a barrel if the entirety of Libya and Algeria’s supply were to be knocked out. We are not there yet. But it does seem as if around half of Libya’s exports have now been halted, possibly with worse to come as the country succumbs to all-out civil war. Some of the country’s fractious tribes may decide to cut off the remaining pipelines or seize energy facilities.

A rocketing oil price is obviously the major threat facing the world economy right now, as I wrote in this space yesterday. The key is Saudi Arabia. Unlike the psychopathic Muammar Gaddafi, the Saudi regime is trying to use carrots rather than sticks to pacify its population. King Abdullah returned to his country yesterday after a three-month medical absence and announced a massive programme of handouts to bribe the population into submission. It remains to be seen whether this will work.

The good news is that the old economic models which claimed that every $10 rise in the price of oil would cut global growth by 0.5 per cent have been proved to be obsolete. They were right in the 1970s but not today. The Dutch Statistics Bureau’s December World Trade Monitor, the best measure of worldwide production, exports and imports, is strikingly upbeat. It suggests that global economic momentum re-accelerated in the fourth quarter of 2010.

There is just one, major economy that is slowing down right now, and that is China. So for the time being at least, the world can cope with dearer oil. But if prices go on rising, and Nomura’s doomsday scenario comes true, growth will eventually start to be chocked off.

The current times sometimes resemble the stagflationary 1970s, especially in the UK. The last thing we need is another full-blown oil crisis.

allister.heath@cityam.com
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