Late last month, a drillship anchored off Lebanon’s coast started exploring for oil and gas raising hopes for a more prosperous economy, which currently is hanging by a thread off a cliff’s edge.
Lebanon has one of the highest debt to GDP ratios in the world, which stands at $87 billion, which is equivalent to more than 150% of its GDP. Struggling under this crippling weight of debt, Lebanon is facing a severe liquidity crunch which has cascading effects. It has drastically slashed imports which has sparked-off sky rocketing price hikes, fuelling inflation and heavily depreciating the Lebanese pound. Its economy and financial system is on the brink of collapse.
As a result, the Lebanese government is weighing its options whether it should pay up or default on its $1.2 billion Eurobond debt commitment which will be maturing next month.
Although Lebanon has never defaulted on its debt payments, defaulting could take a heavy toll on its banking system and economy, which until the 2007-2009 financial crisis, was considered one of its most profitable and reputable sectors.
Lebanese dreams of prosperity
In this backdrop, Lebanon’s first oil exploration fosters the dreams of a nation for economic prosperity.
Inaugurating the country’s first offshore exploratory drilling for oil and gas, Lebanese president Michel Aoun, called it a “historic day”. “Today is a happy day for us and for all Lebanese, and we hope the dream we’ve all imagined is realized today. It is a historic day,” said Aoun. Information Minister Manal Abdel Samad was also quick to capitalise on the aspirations of the people, saying oil and gas explorations would start within 48 hours.
Anticipation has been high in the country for oil and gas explorations to start, with many hoping of a major hydrocarbon discovery which could help alleviate the country’s crushing debt.
In a statement French oil major Total said, its vessel, the Tungsten Explorer, is likely to start drilling in its first exploration well situated around 30 kilometers (16 nautical miles) offshore from Beirut. “Total is pleased to start exploration operations on block 4, which is the first deep water exploration well in Lebanon,” said Total’s Lebanon chief Ricardo Darre in a statement.
In a tweet, Lebanon’s Energy Minister Raymond Ghajar said, the ship had anchored in block 4.
“The exploration well aims at exploring targets located more than 2,500 meters below the sea bed,” said Total while adding that drilling would last two months, and start at 1.5 kilometers (0.9 miles) below sea level.
According to experts, it would take several years before Lebanon could start extracting and reap the benefits of an oil-economy, should any be found.
In 2017, Lebanon had approved the licenses for an international consortium led by France’s Total, Russia’s Novatek and Italy’s ENI, to explore offshore oil and gas for two of ten blocks in the Mediterranean Sea, including one that is partially claimed by Israel.
While drilling at block 4 was initially scheduled to start in December 2019, explorations at block 9 scheduled for several months later, but with Israel claiming that it belonged to them, the move has faced delays. In a statement, Total clarified that it was aware of the border dispute, and that it affects only 8% of block 9; it would drill away from that area.
The United States has been mediating between Lebanon and Israel over the nearly 860 square kilometers (330 square miles) of the Mediterranean Sea claimed by both countries.
Access to natural resources equate to economic growth?
Is there a direct correlation between an oil-export driven economy and long term economic growth? According to a research paper which examines such a correlation for Algeria for the period of 1979 to 2013, empirical analysis points to a positive impact on the economy, however empirical evidences also suggests of a negative relationship between oil revenue volatility and economic growth, for Algeria.
According to the findings of this research paper, oil revenues have been both a blessing and a curse, for Algeria. High volatility in oil prices have negatively offset the benefits of this natural wealth. Solely relying on oil revenues to offset Lebanon’s debt, without diversifying its economy, would make them a curse. Such has been the case in Venezuela.
The quality of Lebanon’s institutions must improve before the economy can reap the benefits of this natural wealth and offset the negative volatility effects of oil revenue.
Yet another case in point is Africa.
Oil rich Africa, cursed continent
According to John Ghazvinian, author of Untapped: The Scramble for Africa’s Oil, African oil draws major interest from big oil companies. Although Africa does not have deposits as huge as Russia or the Middle East, its oil reserves are very promising because it is relatively easy to access and largely unexploited. The oil’s high quality also makes it relatively inexpensive to refine.
“Since 1990 alone, the petroleum industry has invested more than $20 billion in exploration and production activity in Africa,” wrote Ghazvinian, a visiting fellow at the University of Pennsylvania. “A further $50 billion will be spent between now and the end of the decade, the largest investment in the continent’s history.”
And yet, these massive injunction of investments by oil drillers in Africa have not benefited the common African. These oil revenues have not tricked down to the common man. An economic paradox known as the “Resource Curse,” can explain this apparent no-brainer.
“Between 1970 and 1993, countries without oil saw their economies grow four times faster than those of countries with oil,” notes Ghazvinian notes, while adding that oil exports tend to inflate the value of a country’s currency, making its other exports uncompetitive. Thanks to the booming petroleum businesses, workers flock to the sector thus draining the growth potential of the country’s other sectors, which effectively makes the country oil-export driven and import dependent.
“Your country becomes import-dependent,” says Ghazvinian while adding “That decimates a country’s agriculture and traditional industries.”
Economists also call this as “the Dutch Disease”. In the 1960s, following the discovery of natural gas in the Netherlands, it was observed that the Dutch manufacturing sector withered while the gas industry grew by leaps and bounds.
Easy oil money, not only pollutes the earth but also tends to corrupt politicians. They typically end up competing to fill their own coffers with oil-backed money while looking the other way to invest in the long-term prosperity of the country.
“The governments aren’t dependent on income taxes and therefore don’t have to do what the citizens want,” says Ghazvinian. “The state isn’t an engineer of economic growth, but a gravy train. None of the money gets down to the people.”
For a country like Nigeria, which has the world’s tenth largest oil reserve and where the oil industry has operated for decades, oil money has yet to reach the common man.
“People in the Niger Delta live almost as if it’s the Stone Age,” says Ghazvinian. “They live in stick huts on little islands in the mangrove swamps. Many of the villages are accessible only by boat. Nearby, you will have these multibillion oil facilities, with executives being dropped in by helicopter.”
Very little of the wealth generated by oil trickles back into the country. Even job opportunities are lacking since very few companies employ the locals, points out Ghazvinian. As a result, Nigeria faces chaos. “A thousand people a year are killed in small-scale guerrilla warfare in the delta,” says Ghazvinian. “Boys will drill holes in the pipelines at night and suck out the oil: 100,000 to 200,000 barrels a day were disappearing like this at one point. The money is siphoned off to arm the guerrilla groups.”
The situation is not significantly different in other African oil-producing countries. Equatorial Guinea is “a family business masquerading as a country,” says Ghazvinian. “It’s one of the most closed societies on earth.”
Wealthy Venezuela, really?
Venezuela is yet another prime example of what happens if a government over relies on revenues from a single natural resource.
Venezuela’s socialist government has become so confident of its status as an oil powerhouse that it lost track of its food production. The lack of private ownership and with the government expropriating farms and other such industries fuelled a massive shortfall in food production.
As a result crop farmers were not able to acquire pesticides from now-government owned chemical companies, animal farmers weren’t able to acquire feed from crop farmers. Nationalising businesses resulted in business owners stopping food production, and with the government focussed on its oil revenues, food production in the country went for a toss.
Volatility in the oil market propelled Venezuela’s GDP per capita to nearly 13, 750 USD in 2014; a year later it fell by 7% due to a sharp dip in oil prices. Venezuela’s oil dependent economy was the perfect example of the resource curse.
Economic dysfunction and the need for structural reforms
Oil and gas explorations typically take years to find. Before we rejoice at any potential discovery, it is strategically crucial that Lebanon rids itself of economic dysfunction. Of late, the country’s financial situation looks grim: a banking, currency and debt crisis fuelled public anger and disgust with the country’s current lot of politicians with the people calling for a revolution to change the entrenched sectarian order.
Lebanon’s confessional system, wherein “he powers of the state and positions in government are divided up as spoils amongst the country’s dominant religious groups, is one of the primary reasons why even the successful offshore oil and gas exploration will not save the country from its current predicament.
Without structural reforms, revenues from fossil fuel will have negligible impact on Lebanon’s economy.
As long as the corrupt are allowed to get away with the deeds in Lebanon, as long as the corrupt do not face strong judicial action, including imposition of economic costs and jail terms, public anger is likely to remain, regardless of discovery and mining of oil and gas reserves.