MINERALS? I SHITS 'EM (PART II)

I blogged last night about the age-old conspiracy theory of how Greece’s endless reserves of natural resources have been hidden from the sainted People in order to keep Greece under the thumb of evil powers. And of how the Government now appears to be taking cues from these tall tales of life-changing resource reserves in order to dole out more of other people’s money to its favourite rent seekers.

Me, I hope we never find oil in my lifetime. And to save everyone a bit of extra money, I hope we never go drilling in the first place.

Why wouldn’t anyone want oil, or gold or the very rare and expensive element LOL-ium, which literally jumps out of the ground in Greece? As one commentator put it:

Let’s not take a one-sided view – natural resources are a public good that NO-ONE has said no to… on the off chance that it ends up leading them astray. Whoever feels weak can sit this one out. Professors should stick to their schools, analysts should stick to their forums, layabouts should stick to their cafés. And those of us with a passion for creation should man the battlements.

[I note this person was not writing from the Sudan and seems to have a lot of time on their hands. Methinks they do not create very much up there on the battlements.]

Since before the widely-cited paper by Sachs and Warner back in 1995, economists have known that growth was, on average, slower among resource-intensive nations. This effect was sensationally dubbed the ‘resource curse’ or ‘oil curse’ and was found to manifest itself in many unpleasant ways (reviewed here). Among other things, people argue that natural resource reserves fuel conflict and civil strife, drive corruption (including a lack of transparency in the private sector), and kill investment.

Not everyone agrees, of course; fans of the ‘big push’ school say that the discovery of natural resources can create rents which give rise to investment and development. Proponents of oil exploration claim that as long as a country’s institutions are sound to begin with and the economy is diversified, oil abundance can be good. In particular, they explain that oil dependence is the problem, not oil abundance. However, this begs the question of how long institutions can remain sound following oil discovery, and whether oil abundance can be kept from turning into oil dependency.

A very instructive and well-studied natural experiment in São Tomé and Príncipe revealed that corruption jumped substantially following the discovery of offshore oil reserves in 1997-9, and established the mechanism through which this came to be. Basically, rent-seekers went absolutely apeshit, savagely elbowing their way into power in time for the oil bonanza. This led to widespread vote-buying as well as widespread peddling of state jobs and access to elite education. I am particularly keen on this paper because its approach for measuring corruption is the same as the one I propose here. Generally speaking, having factional or personalised politics to begin with can get an oil-rich country off to a very bad start. Sound familiar?

In fact, I would argue that Greece has already had its own institution-corroding oil bonanza: it’s called EU membership. See here and here for my past commentary but also see here and here for how much EU funds acted like a resource bonanza, slowly replacing our export base.

The premise of this new Greek oil push is that it can pay off our national debt. That sounds like hopes of oil dependency, not abundance, to me – swapping our addiction to debt for an addiction to oil. In fact, if we are to avoid the resource curse, the literature suggests that it is important to save rather than spend the actual revenues. This is what countries like Norway do, putting revenues into a fund so that they do not directly feed into aggregate demand, or indeed the government budget. Chances of this catching on in Greece? ZERO. One could argue that paying down debt would also be saving of sorts but I doubt it will fuel investment in any meaningful way.

One of the most intriguing studies claims that there is no oil curse as such, and that oil reserves can help push countries out of the Malthusian trap by boosting fertility (through migration) and thus, in the presence of externalities, economic growth.


First, if the authors of this study are right, Greece can only reap the benefits of oil discovery through mass immigration. Something tells me that, unlike the corporate types at Energean, the nationalist nutcases behind our ‘big push’ aren’t ready to welcome millions of immigrants in the name of oil, especially considering the fact that they will mostly be Turks settling on islands near Greece’s border with Turkey.

Even then, however, all is not as it seems. Flip to pg 24 of the study and you will find that it is basically oil price booms that account for most of the positive effects of oil discovery. Or turn to pg. 32 to find that, after accounting for extreme outliers with unreliable data (basically the UAE), the negative correlation between per capital GDP and oil comes right through – it just doesn’t hit home until two or three decades post discovery, when there’s FA anyone can do about it.


All of this leads me to add one more scenario to the five I discussed last time. It is possible that past Greek Governments, in their boundless wisdom, had chosen not to engage in oil prospecting precisely in order to avoid the oil curse. Our current Government believes that, with the quality of our institutions now controlled by our creditors and thus exogenous, it may be an excellent time to embrace the resource bonanza without fear of the resource curse.

Somehow I doubt this is what they are thinking.

MINERALS? I SHITS 'EM (PART I)

While idly going through channels the other night, I stumbled across a well known show popular with conspiracy theorists, sporting a screaming headline along the lines of GREECE HAS OIL, GOLD, URANIUM AND LOL-IUM BUT OUR GOVERNMENTS HAVE CONCEALED IT FROM US!




This is one of many recent shows following this premise, sporting the usual line-up of has-beens from the worlds of politics, science, journalism and, inevitably, international relations. I am no expert in oil or energy markets of any sorts and will not pretend to be one. I am, however, a big believer in the corrosive power of conspiracy folklore and there is a great deal in this new trend of economic escapism that worries me. It is as though some Greek commentators, when faced with the pre-IMF dilemma of ‘Germany or Albania?’ chose ‘Nigeria’ instead. Or as one commentator put it,

When you’re having the time of your life and suddenly the lights go on and you’re told the party is over, what do you do? Someone pipes up and says: ‘why not go to the bar next to my place and keep this up?’ And the crowd goes ‘Yeeeah!’

The story of Greek oil begins after the 1973 oil crisis, when the Greek government encouraged through concessions the prospecting for oil in Greece, culminating in the discovery of the Prinos oilfield off the coast of Thasos (a geological profile and history of exploration is available here). Things got very hairy in 1987 when Greece threatened Turkey with war in case prospecting was undertaken within a part of the Aegean sea that Turkey disputed, but which Greece believed to be indisputably Greek. This dispute forever poisoned the chalice of Greek oil prospecting as potential prospectors would have to restrict themselves to territories entirely beyond question, where they invariably failed to find much oil.


[A Greek perspective on the 1987 story can be found here; and a contemporary American perspective can be found here.  Please contribute a Turkish perspective if you can; most appear to be in Turkish, which I can’t read. For now I note from the very interesting note by @Ahmet that the same bonanza-rific circle-jerk has been going on in Turkey. Many thanks!]

The latest craze was started in 2007 when newly-founded Aegean Energy (now apparently Energean Oil & Gas) took over the dying previous operator, Kavala Oil and started to pour $200m into the operation (full background here if you scroll down to the middle of the page; original source behind paywall here). Energean has now revived hopes of serious oil yields from Prinos and the newly completed Epsilon well. Even our own Government has joined in, claiming that Greece could produce a total of 40m barrels per year. In fact, it proposes that a state company entrusted with the exploitation of these resources be formed right away, even though it admits that the existing research into Greece’s potential for oil production is ‘fragmented, discontinuous and incomplete’. The rationale is that lacking such an agency costs us valuable income and that we’re the only EU country not to have one.
 
Unfortunately for the cause of sanity in economics and foreign affairs, the name of the promising Epsilon well plays straight into the hands of a bizarre eschatological conspiracy theory indigenous to Greece, which looks forward to the decisive intervention in the near future of the Epsilon Team, variously defined as a spacefaring group of Greek übermenschen or a collection of earth-bound industrialists and scientists with a Greek nationalist agenda. Take a few minutes to digest this before continuing.

Right.

Worse still, the kernels of truth in the mythos of Greece’s supposedly vast oil reserves have given rise to an enormous literature of conspiracy theories about how we Greeks are sitting on mountains of natural resources but our successive Governments, despite a record of raiding every other piggy bank in sight like some cocaine-addicted Houdini, somehow kept their hands off these because they were told to by their foreign / satanic / reptilian / Jewish masters. [For the uninitiated: The reason being that this vast wealth could have kept Greece out of debt and therefore ensured our continued independence.]

How ironic, then, for the conspiracy theorists, that one of the people most invested in Greek oil pipe dreams, the Chairman and Managing Director of Energean, one Mathios Rigas, was a Chase Manhattan Banker in the 1990s – the same bank Tro-ma-ktiko insists was busy masterminding the loss of Greek sovereignty during that time.

Worse, the timing of the Greek Government’s consultation into the creation of a new agency for the exploitation of our mineral wealth (it was directly preceded by a barrage of oil myth TV shows) suggests that one of the following is true:

1.  The Greek Government is responding to this latest version of a conspiracy theory that has been making the rounds for decades because they are desperate for money and are willing to try anything.

2. The Greek Government is making a show of responding to this latest version of the conspiracy theory because they want to be seen to be doing something in the national interest for a change and knows that any kind of 'good news' could provide a psychological boost. It does not actually intend to follow through with the consultation.

3. Rent-seekers are using a well-established conspiracy theory which neither they nor the Government believe in (but which the people generally do believe) in order to create jobs and subsidies for themselves.

4. Rent-seekers are trying to seed within government a well-established conspiracy theory in order to create jobs and subsidies for themselves.

5. Greek and Turkish diplomats have hit upon a formula for joint exploitation of oil reserves which could make oil exploration profitable once again but need to over-sell the benefits of oil to their respective peoples in order to avoid a nationalist backlash.

Whichever is the case, our history suggests that Greece has only ever looked to oil either as speculators, as in 1973, or in desperation, as today. It is also clear that the higher we raise the stakes of oil exploration the more we will inflame the open sore that is the sea border dispute.

A small review of the economics of the oil curse will follow in due course. I strongly urge any Greek readers to respond to the consultation and kill the new quango before it hatches.