And
in extreme cases, when a government remains in power only because of oil money,
no fiscal adjustment will be possible unless forced by a crisis.
For decades now, economists
and environmentalists have been looking, with interest, at when the use of oil
is expected to peak. The former have been asking: Will that occurrence be
driven by the market (demand) or by supply? While the latter have been asking:
What level will emissions reach before this peak is reached? Anyway, the reason
I have picked my pen is not to answer the above questions but rather to resuscitate
the debate about oil, in Uganda’s context.
Conventionally, oil is defined
as a fossil fuel that has been formed from a large amount of plant and animal
remains such as algae and zooplankton that go under the decomposition process
for million years. Oil is therefore a commodity, in a sense that it is a result
of a process and can be offered to the market, of course in exchange for
money.
But oil is not a mere
commodity; it is a commodity of power, a commodity of political influence, and
a commodity of strategic value to most powerful nations in the world. Indeed
talking about oil today, in isolation of politics or geopolitics, would be ‘verbal
blasphemy’.
The Paradox of Plenty
Oil is also a paradox
commodity; it brings wealth but also poverty—something coming from the growing
literature on the ‘paradox of plenty’ which has established important causal
claims linking oil abundance and dependence to corruption, authoritarianism,
economic decline and violent conflict.
Indeed if we think of any oil-dependent
country (like Nigeria), we find corruption, authoritarianism, economic decline
and violent conflict lurking underneath. This is on the account of what most
development economists call the “resource curse”
To risk boring my students
of development economics, a resource curse breeds the ‘unholy trinity’: 1) Rentierism
(rentier states, corruption, overconsumption etc.); 2) Dutch Disease (tendency
to ignore vital sectors of the economy such as Agriculture whenever oil is
discovered), and 3) Weak institutions (bad governments i.e. leaders refuse to
leave power). The oil resource curse symptoms, which are increasingly becoming
evident in Uganda, in her LBO (Life Before Oil), seem to suggest that Uganda is
likely to inevitably contribute to the resource curse theory.
The counter narratives: Who
is really right?
For a while, academics, and
economists in particular, have been accused of failing to make right
predictions—something that ‘barbarians’ (government officials) find confidence
in to vehemently shy away from academic advice. Whenever we hear them
(government officials) speak, we are tempted to think that oil is coming out of
the ground, the following week, month or at least a year but in vain. Those who
stand on the perimeter wall of government—academics, civil society, name it,
hold a different narrative that Uganda is yet to get ready for oil production.
And indeed in recent times,
economists who have attempted to predict future demand and prices for oil have
had, arguably, a marginally better success than those who foretell the advent
of earthquakes or the second coming of the Messiah (Jesus), needless to say. The
1973 James Akins’ prediction, dubbed “The Oil Crisis: This time the wolf is here”, offers a good example.
Even when I risk being
branded a “pessimist”; the pronunciation by the Minister of Energy and
Minerals, the Hon. Irene Moloni, that Uganda will start oil production in 2023
is, in my view, sheer compounding government’s sins of lies.
Hon. Irene Mulon, Minister
for Energy and Mineral Development
For starters, Uganda has
walked a very elusive journey of oil exploration. Oil in Uganda has a history
that goes back to the late 19th century, when local communities discovered oil
seepages in the Albertine region which was documented by Emin Pasha in 1877 and
explorer F. Lugard in 1890, the latter being quick to declare ownership of
them. It is until 2006 that discoveries of commercially viable oil reserves were
made which raised hopes of a timely boost to economic growth in Uganda—describing
her as Africa’s ‘hottest inland exploration frontier’ by the Oil
Industry Press
How much oil?
Economists have routinely
warned of the pitfalls of windfall revenue from oil resource, and negative
experiences of young ‘petro-states’ provide cautionary examples. Current estimates, for example,
put
the Uganda’s oil potential at around 6.5 billion barrels of recoverable
reserves with anticipation, by some geologists, that Uganda’s Albertine Graben
may hold more than 6 billion barrels, placing her among the foremost African
oil producers.
This implies that if oil production
was to start today, and goes ahead without hitches, Uganda’s budget would
receive a major windfall of revenues– potentially doubling her revenue base
within six to ten years. However, oil production is full of hitches and
difficult to predict. Given the volatility of oil prices, for example, it is
difficult to estimate Uganda’s likely revenues from oil.
Nigeria’s Oil Experience
On Tuesday 12th,
2019, the US Embassy Uganda, in collaboration with Makerere University Business
School organized a dialogue on “Potential
socio-economic & Political Impacts of the Oil Sector and Mitigation
Strategies: Lessons from Nigeria” where I met Dr. Cyril Obi, a program
director for the African Peacebuilding Network (APN). Cyril’s speech mainly
affirmed one thing to me: that Nigeria’s problem, and Africa’s problem in
general is not money but how to spend the money. Let me put this in context.
Nigeria has a large and
ethnically diverse population of over 180 million, with projections of the
country having 433 million people by 2050, behind only India and China. Implying
that Nigerians are nearly five times more than Ugandans in number.
Nigeria has a Gross Domestic
Product (GDP), which essentially measures the total monetary value of goods and
services produced in a country per year, of about $397.30billion, over $370
billion more than Uganda’s. Nigeria has projected oil reserves of 28-35 billion
barrels and 160 scf (standard cubic feet) of natural gas. This implies Nigeria
has over 29 billion barrels of oil reserves more than Uganda.
Nigeria made the first
commercial oil discovery in 1956, and production started in 1957. For over half
a century on, Nigeria has raked over $800 billion in oil rents, yet, poverty continue
to ravage over 60% of her population: over 108 million Nigerians live below the
$2 per day.
Nigeria, however, has the
richest man on the African continent, Aliko Dangote, with a projected net worth
of about $10.3 billion, according to the Forbes Magazine. Dangote is,
therefore, worth nearly half of Uganda, with all her buildings, merchandise,
agricultural output, livestock, name it.
The Africa’s richest man is
also set to own the largest oil refinery on the continent by end of 2020. Its
completion will make five domestic oil refineries in Nigeria, of which four are
owned by Nigerian National Petroleum Corporation (NNPC). All the four
refineries currently produce below their installed capacity at the range of 15%
- 25%. The inefficiencies of these domestic refineries imply that Nigeria is a
net importer of refined oil products of about 750,000 barrels per day despite
her large oil reserves.
The Nigerian
Disease
In brief, Nigeria is the
current unofficial Chairman of “resource-cursed countries”—a position that
Spain held in the 16th century (when she discovered gold and silver
deposits). The Democratic Republic of Congo (DRC) is Nigeria’s vice whereas the
likes of Angola, South Sudan and Equatorial Guinea are committee members.
Spain was replaced by
Holland in 1960s, with the discovery of large natural gas deposits in the North
Sea which led to what analysts refer to as the “Dutch disease”. Nigeria is the
recent to overthrow Holland from the throne wealth and poverty.
Oil production in Nigeria
has been characterized by things that really typify a cursed nation. For
example, “Criminal enterprise” has been the major activity in Nigeria’s oil
sector. Criminal enterprise literally has taken two major forms in Nigeria:
First, an organized group of
people that unconventionally drill refined oil products from the pipelines. This
group is, often times, either helped by Nigeria’s security personnel or
coincidentally whenever they come to drill from the pipelines, the security
personnel has gone for lunch break.
Second, a group of people
that own “bush refineries”. This group steals considerable amount of crude oil
and either refine it from their bush refineries or sell it in raw form. There
has not been deliberate efforts by Nigerian government to curb these activities
largely because they are controlled by a few elites and government officials.
Secondly, in some parts of
the Niger Delta, gas flaring has happened for over 14 years, which has resulted
to air pollution reaching astronomical levels.
Poor institutions: the “Ugandan
Disease”
The experience of Nigeria
really poses a disturbing question: What is the fate of states who depend on
revenue from natural resources without making the best policy decisions?
Policies that can achieve distributive justice of the enormous oil revenue
streams.
In economics sense,
distribution justice concerns the ‘fair’, ‘just’ or ‘equitable’ distribution of
benefits and burdens. It requires, for example, that decisions affect everyone
equally and that resources are shared equally.
However, the pursuit of
distributive justice or economic equity is a topic that does not sit easily
with most economists and policy makers; it is often undermined by the political
inequality needed to enforce it. Economists now concur that robust and strong
institutions, which are free from political influence, are critical in pursuit
of economic equity and broadly economic development.
Strong institutions, which
can be formally in form of laws, constitutions, property rights, and contracts
should provide transparency and accountability in the management government
resources and ultimately check those who possess great power from enriching
themselves more often by corruption.
Renowned development
economics authors, Daron Acemoglu and James Robinson, brand such intuitions as
“inclusive institutions”, in their book “Why
Nations Fail”—a book that I have effortless recommended my students of
development economics.
Sadly, talking about “good
institutions” in Uganda is an abomination, at least in the view of most
Ugandans, with some arguing that Uganda’s institutions are ‘Musevenised”. Institutions
in Uganda appear to be synonymous with corruption.
Politics suffocating the oil
sector
For example, recent efforts
to streamline the legal framework governing the oil sector continue to expose
the role of Uganda’s technocrats to be confused, and overshadowed or subverted
by the involvement of political actors. To my knowledge, politics has shaped
most of the processes through which the laws governing the oil and gas sector
have been passed and as a result some of the laws have been passed without
sufficient checks and balances.
In May, 2010, a draft
Petroleum (Exploration, Development, Production, and Value Addition) Bill was
published for public review and comment. Uganda’s Civil Society Coalition on
Oil (CSCO) noted that the Bill lacked sufficient checks and balances on
ministerial control, and may lead to corruption. Shortly after, MPs passed the
Bill, in its current form, as there was no consultation to incorporate public
views done.
On April 4th, 2013, the
ruling NRM party expelled four Members of Parliament for indiscipline, accusing
two of them of belonging to the Parliamentary Forum on Oil and Gas (PFOG), a
pressure group of legislators advocating for greater transparency in the oil
and gas sector, which the party said was “opposed to the NRM position on oil”
On June 27th, 2013,
President Museveni also assented to the Petroleum (Refining, Conversion,
Transmission and Midstream Storage) Bill, making it an Act of Parliament. The
Law gave way for the construction of the first crude oil refinery in Uganda in
Kabaale Buseruka but construction is yet to start.
In my view, some of these
actions were out of excitement and too much expectations. Unfortunately, the
development of the oil sector has proceeded slowly—much more slowly than people
outside and within the government expected. Museveni is now the captain of ODC
–“oil-disappointed-club”. “…you asked me
for an airport, I went to London and borrowed $350 million. Now you are saying
you don’t want to invest even after I delivered the list of things you asked of
me!” the disappointed Museveni said recently at Uganda-Tanzania Business Forum,
in Dar es Salaam.
Therefore, the oil industry
in Uganda, though still at infancy, has started with faltering steps in terms
of institutional and policy formulation process. Many Ugandans ask: what is
really going on in the oil sector? Will Ugandans benefit from the oil revenue?
Eat the Cow or the Calf?
These are questions of distributive
justice which concern not only the way in which oil revenues will be distributed
across members of the same generation, but also between members of different generations. A more encompassing
evaluation of the justice of the oil resource must consider the “intra” and “inter”
generational aspect.
Achieving distributive
justice will require us to manage some important issues. These include: 1) how much
oil revenue to save for future generations. We shouldn’t consume all the money
at once; 2) how to achieve economic stability in the face of uncertain and
widely fluctuating oil revenues and avoid "boom-bust" cycles; and 3) how
to ensure that spending is of high quality, whether in the form of large
investment projects, public consumption, or subsidies.
The prescriptions for
tackling these issues are straightforward but often confront the reality of
opaque and highly politicized fiscal systems/institutions. Such systems, often
times, lack the checks and balances needed to ensure that resources are well
employed and to provide the fiscal flexibility needed to adjust spending in
line with changes in resources. And in extreme cases, when a government remains
in power only because of oil money, no fiscal adjustment will be possible
unless forced by a crisis.
It is Leif Wenar, who in his
recent book “Blood Oil: Tyrants, Violence, and Rules that run the World”, argued
that in order to ethically evaluate the choices and attitudes concerning the
supply chain of all kinds of goods and products, we must direct our attention
to the institutions that enable the extraction and use of raw resources. I will
pick my pens soon to explain how strong institutions helped the likes of
Norway, Canada, Botswana to escape the resource and what lessons Uganda needs
to draw from their experience.
Darious
Mugabe is a Researcher at Economic Hub Uganda and teaches Economics at renowned
Makerere University Business School (MUBS)
