Monday, July 19, 2010

Avoiding the Resource Curse

I've long been fascinated by the concept of the "resource curse," whereby countries with vast natural resources often become morally/economically bankrupt kleptocracies that are beset with intense poverty while a narrow band of society grows very wealthy.  During the 1980's, when the energy companies largely relocated the industry's wealth by moving their offices from Louisiana to Houston, taking the leases but leaving behind the environmental damage, Louisiana's fate as a victim of the resource curse was sealed. 

The explosion of the Deepwater Horizon and the resulting oil spill has served to remind us all where Louisiana stands in the grand scheme. We are at the center of production but we have little control over our own fates.  But that's not to say that we, or more correctly our ancestors, were not complicit in the satanic pact.  Unfortunately, like most co-dependent relationships, we are back in big oil's arms soon after being wronged.  We have nowhere else to run.

I read a very good article this weekend in the Washington Post labeling Louisiana as America's Petrostate.  It hits the nail on the head.  Many people outside the region have trouble understanding why people in the Gulf South support offshore drilling while we simultaneously suffer its consequences.  To paraphrase Donald Rumsfeld, we have to go to war with the army we have, not the army we might want or wish to have at a later time. I think we in Louisiana wish we had a different "army" but we understand that we don't. 

I certainly hope Gov. Jindal in all of his much publicized and well-televised leadership has the guts to take a hard look at the oil and gas industry from all angles.  Much has changed from the days of Huey Long and the Win or Lose Corp., but somehow I doubt the oil industry's stranglehold on Louisiana is one of them.  We walk a fine line between economic survival from energy jobs and mineral revenue (both royalties and taxation) and suffocating the golden egg-laying goose with onerous burdens.  The good news for Louisiana is that the industry can't pick up the oil and gas and move it to another state.  The bad news is that there is no built-in incentive to help the state help itself.

I am a believer that the United States will grow its domestic energy industry significantly over the next decade, the Deepwater Horizon accident notwithstanding, but I think growth largely will be driven by gas rather than oil (no matter how many producers are "running to liquids" these days).  That gas drilling is getting closer and closer to populated areas, so one of the fundamental issues that will continue to be argued is how to balance regulation with environmental and economic health and well-being.  The industry will moan that they are being over-regulated and threaten the loss of thousands of jobs, but the truth is that North America is a very attractive place to extract resources, and the producers can't change the location of the underground resources.  But we must not forget that real prosperity only results when the interests of all of the stakeholders are taken into consideration, and that includes everyone from shareholders to land owners to citizens who bear indirect impacts. 

Oil and gas extraction is a dirty business.  It is dangerous and potentially threatening to the environment (especially if not done correctly).  But the modern world has an insatiable thirst for power and transport fuel, and the extraction of minerals generates huge wealth.  In other words, the urge to extract will continue to win. 

But how do we avoid the resource curse?  We can't go back 50, 75, 100 years and prevent canals from being dug in wetlands (in the case of Louisiana), but we can start to make corrections going forward.  We all need to recognize that like anything this is a risk-reward scenario.

First, states need to take a hard look at safety and conservation issues to address the risks.  I say state governments rather than federal government because each state has different geology, laws, taxation systems, etc. that must be taken into consideration.  Blanket regulations simply aren't appropriate.  As much as I roll my eyes at the many of the outlandish claims of environmentalists in the Marcellus Shale region, I recognize that unfortunately only this kind of activism will lead to strong environmental regulation that balances the various interests.  If the Marcellus Shale really is the largest gas resource in North America, the producers have less power to fight regulation and the lawmakers have a greater incentive to get it right.

Second, states need to be rewarded by making money from the extraction and reinvesting it in the best interest of the people of the state.  Most state have severance taxes, but not all.  Such a tax is entirely appropriate given the risk to the state, assuming it is fairly applied.  States also directly make money through the leasing of state-owned land.  But the bulk of that money should be used to improve the state for the long-term, not just get piled into the state's general fund.  If you own real estate, you should have a reserve fund to maintain and repair the building.  Same goes for natural resources. 

States should benefit from the resource removal by creating wealth for the citizens.  I'm not talking about redistribution or welfare, nor am I talking about putting the money in the stock market.  Instead, states need to invest in the people for the long-term good of the state.  Not every government can accomplish what Norway has done through its energy wealth, but a good start is to make investments that improve the lives of everyone in the state by investing in education and physical infrastructure, among other things.  An educated, empowered populace is the foundation of a thriving free market economy.

Mineral resources are by their very nature a depleting asset.  A significant portion of the proceeds from their extraction should be used to invent the future.  I realize this is unlikely at a time when states are running terrible budget deficits, but it should be the goal.

What's the first law of holes?  Once you realize you're in one, stop digging.  It's probably too late for Louisiana to fully recover from its resource curse, but hopefully we can stop digging and take action to move forward in the right direction.


Anonymous said...

Robert--you show incredible insight in your analysis. Keep it up!

Anonymous said...

I agree with your opinion and I am reminded of a line from The Golden Child "So much power and so little knowledge of how to use it" (or something close to that).

You are very talented in developing your position. I think an exploratory committee might be in order soon! Thanks again for all of your efforts in maintaining this blog.