By Paul A. Friesen
A number of authoritarian regimes around the world are heavily dependent on oil revenues and institutional corruption to remain in power. However, two seemingly unconnected U.S. trends: the rise of "fracking" and the Dodd-Frank Wall Street reforms may in fact play a substantial role in creating new opportunities for political reform and sustainable economic development in these countries over the next few years.
The problem with oil is the money that non-democratic governments receive from selling drilling rights to oil companies. In countries without strong oversight mechanisms and institutions capable of keeping rulers and their inner circles in check, oil is a potential gateway to a dark stream of revenue independent of the productivity of their citizens.
Leading scholar Michael Ross concludes that sizable petroleum resources in low and middle-income countries result in increased levels of corruption in those countries, having more durable authoritarian regimes, and being more prone to violent conflict. Recent research also indicates that oil dependent countries are much less willing to cooperate with the international community and integrate into the global economy. Unfortunately, this means that citizens from oil-rich nations across the developing world more often than not find themselves living in more violent, politically insulated, corrupt, and unequal societies.
Americans have taken notice of the recent low prices at the gas pump. Low oil prices over the past few years have been driven by the unprecedented fracking revolution that has taken place in the United States and further driven down by the Organization of the Petroleum Exporting Countries' (OPEC) reaction to it. U.S. crude oil production between 2005 and 2010 hovered around 5 million barrels per day. In 2015, production peaked at about 10 million barrels, although the figure has fallen since last April due to OPEC's aggressive 'flood the market' strategy.
The low prices have caused noticeable economic and political instability such as stock market crashes, severe budget deficits, social welfare spending cuts, and economic contractions in prominent oil exporters including Saudi Arabia, Russia, Azerbaijan, Angola, and Nigeria. If oil prices remain low in the future, these countries may face increasing pressure to enact reforms from both political elites and citizens as their economies weaken.
Economists like Anders Aslund argue that the low price of oil may be one of the first signs of looming disaster for countries like Russia. Aslund compared the current oil market to that of 1981, which was integral in the disintegration of the Soviet Union a decade later. This was again made clear when in 2015, the Russian economy contracted by 3.9 percent due to low oil prices and Western sanctions over its invasion of Crimea and Eastern Ukraine. Russian government cutbacks are now affecting average citizens through the reduction of benefits and transportation stipends, as well as rising food costs leading to localized protests.
These same countries may also be greatly affected by another seemingly disconnected occurrence: the Dodd-Frank Act. While known by most as politically controversial legislation that has ushered in a new standard for Wall Street regulation, the law also includes a provision promising to establish a new era of oil revenue transparency once new rules are approved by the U.S. Securities and Exchange Commission (SEC).
Since the passing of Dodd-Frank in 2010, a small, but critical provision (Section 1504) has yet to be enacted. Section 1504 would require oil and gas companies such as Exxon-Mobil, Chevron, Valero, and Marathon to publicly report how much they pay foreign governments for access to their natural resources, including oil and gas. Despite five years of legal challenges by the American Petroleum Institute (API), an oil industry lobbying association, the SEC finally released details last December for the proposed regulations. The critical final vote to bring these regulations to life will be held in June 2016.
Oxfam International estimated that from 2010 to 2015, $1.55 trillion worth of payments made to foreign governments have not been made public due to the delay of the new regulations. If forced to disclose project level information and financial transactions with foreign governments, U.S. oil companies may lose their appetite for sourcing crude from corrupt regimes as watchdog organizations would be able to track and report on these financial dealings around the world.
Authoritarian regimes long bolstered by oil revenues may soon be forced to face new political realities if the trends of cheap oil and increased transparency in oil production contracting are sustained. While generally impervious to short term shocks, long term strains to political patronage structures and ongoing civil unrest may even lead to the breakdown of authoritarian regimes in some cases. Along with increased transparency regulations for U.S. oil companies, these factors may have far-reaching impacts for years to come as autocratic governments are increasingly pressured to pursue economic diversification, integration into the global community, and democratization.
Paul A. Friesen is a Program Assistant for Southern and East Africa at the National Democratic Institute for International Affairs, a nonprofit, nonpartisan organization working to strengthen democratic institutions worldwide. He holds a MPP with a specialization in International Development from Michigan State University and is a 2016 Sustainable Development Fellow at Young Professionals in Foreign Policy.