INTRODUCTION

In the twentieth century there are numerous examples of natural resources that have been squandered in the interest of creating private wealth.  In the twenty-first century  a well planned, coordinated global strategy is needed to avoid repetition of these misfortunes.  Clear, comprehensible efforts that include all segments of the population will result in a positive profit allocation.  Oil is not just a local currency, but is a powerful foreign exchange.  It is our hope that the newly independent states of the Caspian Sea region will not repeat the national crises that led to Indonesian degradation, genocide of the Ogoni in Nigeria, or  infrastructure disintegration in Libya. 

Although prominent in today’s international news, a year ago the Caspian Sea region was considered one of the most remote areas of the world.  Now it is viewed next to Kuwait as a  potential source of oil and natural gas, with an estimated reserve of 200 billion barrels of oil and 7.89 trillion cubic meters of natural gas. This is equal to all the oil reserves in Iraq, and the combined natural gas reserves of the United States and Mexico, with an estimated value of 4 trillion dollars.  While great riches are possible, they come at a price.  Resource-rich Azerbaijan must rely on its neighbors for export.  Such wealth can create high cash flow and handsome rewards for investors.  Short term experiences with a market economy often reveal greed and corruption, leading to the enrichment of a few.  Ensuring the equal distribution of wealth and greater freedom of choice requires an active civil society in a stable democracy. Can the newly independent states, whose twentieth century experience has been non democratic create this type of environment ? 

Furthermore, this region’s energy resources are closely affected by a number of outside influences.  Russia’s relation to former Soviet Republics, Iran’s relations with the west (especially the U.S.), international politics, the economy in Turkey, and China’s needs and resources are a few examples of third party interests in Caspian oil and gas reserves development.  For inexperienced new states, these considerations provide a set of complex challenges. 

Controversy over Caspian oil is not new.  In the latter nineteenth and early parts of the twentieth century, oil barons like the Nobel brothers and companies such as the Royal Dutch Shell shipped Caspian oil. The oil was transported in the world’s first operational oil tankers, developed by the Nobel brothers.  During both world wars, Germany’s inability to fuel its war efforts with Caucasian oil played a significant role in her defeat.  And the period following the wars was marked by fierce competition between oil companies, ethnic conflict, and corruption-conditions not unlike those found today. 
 

EXPECTATIONS

DECISIONS ABOUT PIPELINES

In establishing routes, an analysis of cost is necessary and costs vary.  A route from Azerbaijan to Turkey might run around $3 billion; a pipeline from Azerbaijan to the Gulf would cost about the same. A northern route from Azerbaijan to Russia by way of the Black Sea could cost about $1 billion.  The most costly route would go through Kazakstan to China, at a projected total cost of $6 billion.  For China, this might not be economically rewarding, but would be strategically important.  Amounts like these cannot come from within an impoverished, rebuilding region; they must be invested by oil companies and international investors.  Therefore, decisions will likely be strongly influenced by oil consortia.  This will happen within the sphere of political realities. 

REGIONAL ECONOMIC PICTURE

Unfortunately, a look at economic and regional histories show that petrodollars have not always been used constructively.  The international history of petroleum development demonstrates that the effects of oil exports can be unexpectedly negative for the economy and society of oil producing countries.  Indeed, according to Noreng (1981): 

...the development of a domestic petroleum industry appears to create serious structural problems in the economy.  The main characteristic is a general loss of industrial competitiveness, with a potential for a gradual de-industrialization of the countries concerned.  The process is essentially due to two sets of factors: a general cost pressure in the economy caused by the domestic use of oil revenues; and a rising exchange rate, due to financial surpluses (i.e., revenues that are not use domestically) as well as due to deliberate policy. Thus, whether oil revenues are used in the domestic economy or are exported, they represent a problem for traditional industry when they reach a certain magnitude.(page 32) 

Currently, a term little known in the region, "Dutch disease," may soon become well know throughout the Caspian region.  Indeed, the effect of natural gas exports on the Dutch economy is a classic example of the negative overall effect of energy exports on a national economy.  In the first effect of cash flows associated with oil development, national currencies become very strong in relation to the U.S. dollar.  Imports then become cheaper while local products become more expensive because they cannot compete with imported goods.  In addition, non-oil exports become expensive and non competitive in international markets. The result is that most branches of the national economy outside of oil exploration and its transportation quickly deteriorate--hence the "Dutch disease." Interestingly, during the oil embargo imposed on Iran after the nationalization of Anglo-Iranian Oil Company (AIOC) in 1951, the Iranian economy did not perform too badly due to rising non-oil exports.  This period was even called "the period of industrial recovery". (Elm,1992, p.272) 

While for the well-developed economy of the Netherlands, the effect was not fatal, Caspian countries may be in serious jeopardy.  Currently, most of region’s industries are at a standstill, working equipment is outdated, and products are not competitive on the world market.  "Dutch disease" may further aggravate this situation, since modernization of industries outside the oil sector could be considered an unattractive enterprise because most required goods can more easily be purchased abroad.  A strong government commitment is needed to invest petrodollars in industries and such an investment does not always yield a quick return.  At the same time, there is increasing social pressure to improve living standards and enable a higher quality of life. 

 This process may cause an economy to become closely tied to the cyclical oil sector and thus highly susceptible to changes in world oil prices, since the "oil market is a commodity market and, as such, has always gone through cyclical booms and busts" (Wilson, 1987, p 2).  Any significant drop in oil prices leads to a sharp drop in government revenues and to foreign borrowing from foreign lenders (often using expensive commercial credit).  In the early 1980s, the Venezuelan government’s policy was to limit inflation attributable to "Dutch disease."  However, this policy eventually limited economic growth, causing this large oil exporter to become the world’s largest debtor in per-capita terms (Randall, 1987, pp. 187, 189).  As foreign debt grows, an increasingly larger proportion of the petrodollars will be spent on repayment. 
 
Overall, oil production may facilitate other changes in the structure of the national economies in the Caspian region, and make employment a crucial problem. This situation may become even more pronounced when oil related incomes begins to decline in 30-50 years. OPEC countries are a good example. Ossify (1995) argues that while OPEC countries succeeded in raising their peoples standards of living, they: 
 
...still remain undeveloped and share most of the characteristics of other underdeveloped countries. These countries still continue to depend on oil for  their exports with no sign of diversification of their export base. Further, they have achieved little domestically to eliminate shortage of skilled labor and industrial technology. As a result, these countries depend heavily on the imports of goods and services... Thus, expansion in the oil sector has not been fully exploited in stimulating industrial growth" (p.135). 
 
Therefore, the governments in this oil-rich region must pursue policies that will turn a cash explosion into a steady revenue stream, that will last  long after the oil fields’ depletion.  Since there is no shortage of oil today, and it is unclear how oil prices will change in the coming years, it would make sense to delay extraction of oil from some of the oil-fields. The rate of return on invested petrodollars may be less than what could be achieved by leaving the oil and gas in the ground for now and extracting it after oil prices increase considerably (Ellman, 1981, p.155). 
 
Overall, the discovery of oil rarely means immediate prosperity or long term prosperity for the people who live in an oil-producing country. This paradoxical statement reflects the reality for the majority of the world population living on oil producing land, since their legal systems proclaim all natural resources as state property.  If oil is found on someone’s land in this type of system, the landowner is forced to vacate his property in exchange for compensation that does not cover the losses associated with relocation--loss of harvest, moving expenses, etc. Only in countries with land property rights that are strictly enforced, will discovery of oil turn a farmer into a millionaire overnight. 
 
 Indeed, in Nigeria, for example, the Land Use Decree of 1978 mandates state ownership of all land; and foreign oil companies need only the required permits from the state government to begin drilling. As a result, a Nigerian farmer may find an oil company working in his field, as well as a notice that his land has been taken away. The amount of compensation for a lost harvest, fishing grounds, damaged houses, etc., is determined by the oil companies and the amounts are ridiculously low: for example, only $16.80 was paid for a hectare of rice, which is far below the actual market value (Danler and Brunner, 1996, p.19). In the Caspian region, governments have exclusive rights to natural resources, so people will only receive their share of the oil wealth indirectly through the government. Thus, large amounts of petrodollars in government coffers are not necessarily translated into prosperity for the general population. 
 
The expectations for energy development in Nigeria after independence some 30 years ago were very positive. Surprisingly, while Nigeria made billions in oil profits, living standards failed to improve and by conventional measures, consistently showed a net negative decline. At present, the overwhelming majority of the Nigerian population is desperately poor, the Nigerian economy is in ruins, the political regime is dictatorial and extremely corrupt, basic infrastructure is non-existent and crime is rampant. The Wall Street Journal, commenting on an oil extraction area in Ogoniland in Nigeria, reports that: 
 
(Shell’s presence)...coupled with decades of the Nigerian military government’s own neglect, has damaged a vulnerable local community. Now, the tension is so high that Shell has had to shut down its operations in the area. Moreover, protests, even peaceful by unarmed peasants, have been violently suppressed by the military, which often intervenes at Shell’s  request...(While) Shell has extracted some $30 billion worth of oil (since 1958)...even by Africa’s harsh yardstick, the Ogoni remain desperately poor; most live in palm-roofed mud huts and dig for yams with bamboo sticks... Of Shell’s 5,000 employees in Nigeria only 85 are Ogoni. Although there are 96 wells, two refineries, a petrochemical complex and a fertilizer plant in the area, the sole hospital is an unfinished concrete husk, and the governmental school unable to pay teachers are rarely open... (Wall Street Journal, May 6,1994, p.1). 
 
In addition, in the Nigeria Country Report on Human Rights Practices for 1996, the U.S. State Department indicates that the Nigerian economy has grown at little or no margin above the population growth rate, and even this growth is deceptive since much of it is only occurring in the petroleum sector. At the same time, factory capacity utilization remained in the 30% range; endemic corruption further hindered economic functioning; and the country’s human rights record remains dismal. 
 
The previous discussion about Nigeria serves to highlight the importance of having public policies in the Caspian region designed to determine how petrodollars are to be distributed and used. While a responsible government will distribute these funds for the benefit of society, a corrupt government will follow the Nigerian example, and most of the oil export proceeds will be stolen. Positive examples of oil producing countries include Norway, which has effective social services and employment programs, and to some extent Gulf countries. Americans living in Alaska receive more than $1,000 per year from the Alaska Permanent Fund, which distributes proceeds from the Alaskan oil fields ($1,296 in 1997). 
 
Of great importance, and contrary to accepted wisdom, is the fact that energy development projects do not create many jobs; energy is a technology intensive, and not a labor intensive, branch of the economy. After the initial construction period is over, few workers are needed to maintain oil rigs and pipeline pumping stations. According to Zedillo (1981), "it has to be recognized that oil extraction, beyond satisfying the domestic demand for energy, is basically a source of foreign exchange. No one can seriously think that the oil industry in itself can have a significant effect on the level of employment" (p. 238). 
 
Even these limited employment opportunities are often closed to the local population, since most of the well-paid qualified engineers and workers are brought in from the company's home country.  This is especially true where locals lack training in  advanced technology. Those who are hired are mostly used in lower paid administrative or blue-collar positions. The Caspian region has a definite advantage in comparison with other oil-producing countries, since most of the population is literate, and have at least a high-school education.  Oil companies can and should make every effort to employ talented and skilled locals. 
 
Azerbaijan has a special advantage; a significant number of native oil engineers and professionals. This makes Azerbaijan closer to the example of Qatar, which has some distinctive characteristics in relation to other Gulf countries with smaller and more educated population in the pre-oil boom period.(R. El  Mallakh, 1979. p.9). Another advantage is its strategic location, which affords possible investments related to transportation and communication.  As demonstrated in the  Indonesian example, strategic location combined with other mineral and agricultural resources may be crucial to the economic success of oil-producing countries (.Barnes, 1995, p.142). For Azerbaijan, this may mean that multinational oil companies will have more incentives to hire locals since doing so decreases their operational costs. 

Importantly, multinationals do not as a rule process oil in the country of exploration because they wish to avoid construction costs and environmental damage claims. Also local economies have very small energy and petroleum markets so the real markets for Caspian oil are far away in the West, or in Southeast Asia. Oil companies are more concerned with how to take the crude oil out to seaports than with the development of oil-processing facilities. While there is hope that oil development projects will create jobs in the oil-processing and petrochemical industry, this hope may be unfounded if governmental requirements are not designed and implemented to ensure local participation. 

Another source of jobs associated with the oil industry is the services sector, including hotels, communications, and transportation. Still, the numbers employed in these areas will not be large enough, especially in relatively big countries. Oil producing countries with smaller populations (Azerbaijan, Turkmenistan) are in a much better position than bigger nations (Kazakstan, Uzbekistan), which already are experiencing serious unemployment. 

POLITICAL ASPECTS

Another side effect may be the exacerbation of existing social and ethnic conflicts, due to disparities in standards of living between oil-producing enclaves and capital cities (financial centers) and other regions. A relative deprivation phenomenon is a powerful source of group mobilization, especially when petrodollars distribution is felt to be unfair and the system is perceived to be engulfed in corruption.  Such is the case in the Movement for Survival of Ogoni in Nigeria (MOSOP). 
 
Furthermore, oil profits create few incentives for an authoritarian government to conduct economic and political reforms. Indeed, a sudden flow of hard currency may help soften social problems initially; however it will provide for a well-paid and equipped police force to suppress political opponents.  Corrupt governments then can control people with no changes to old, outdated structures. This does not solve social problems in the long run and could lead to fundamentalist revolts like those in Iranian or Algeria.  Moreover, Peter Jones (1988) argues that, 

The lesson of the Iranian revolution was that the Shah was the principal 'client' of the United States [he was supported, but when] he was faced with internal, fundamentalist force the United States was either unwilling or unable to support him and he was brushed aside with relative ease (p.282). 
 
According to Grayson (1980), regimes in Venezuela and Ecuador "raised more expectations than they satisfied because of mismanagement, corruption, and the inability of their economies to absorb major injections of spending without inflation, waste and a sharp rise in imports...In both Ecuador and Venezuela, oil seems to have produced as many problems as it solved" (p124-5). Currently, Venezuela imports about 85% of its consumer goods. Mexico’s example demonstrates that: 

..the black gold may tempt the elites to buy short-term support through some conspicuous social expenditures and the awarding of congressional seats to opposition parties while avoiding the sacrifices required by genuine reforms. Unless major changes are made in the next few years, the country could exhaust its most  accessible reserves without achieving the populist goals of the Mexican Revolution. Moreover, a country, whose leaders occasionally blame their problems on "U.S. imperialism" or the machinations of transnational firms will be denied a convenient scapegoat" (Grayson, 1980, p 234) 

IMPORTANCE OF REGIONAL COOPERATION

Stronger armies are a burden in peaceful times. Commanders claim  that military victory can resolve social conflicts, and encourage governments to seek a military solution or to employ one in the event of conflict. Military expenditures may also lead to a regional arms race that could devastate the regional economy and destabilize the region. The Middle East, a bonanza market for oil sales, is a highly unstable region: arms purchases from developed countries represented 25% of the world arms market in 1985, whereas those from the Middle East amounted to 35%, with 20% of the region’s Gross Domestic Product going to weapons purchases  (Mernissi,1996, p 257). 

Regional cooperation, on the other hand, may increase trust and permit the development of diplomatic mechanisms for dealing with potential crises, thereby reducing potential violence. Important, too, is coordination of the export marketing of petroleum-related products. In Gulf and Middle East countries with similar petroleum resources, construction of petrochemical complexes resulted in an oversupply of products on the market, which seriously hindered prices and profitability. Caspian oil-producing countries should coordinate their activities in this area for their mutual benefit. 
 

CONCLUSION

As we have seen, countries that encounter oil and turn the accident of location into national wealth have mature democratic governments, strong environmental regulations, and self-contained control of oil extraction and processing.  For the Caspian region, these three characteristics are still in the future.  Therefore, since current demand for oil is not high, time is on their side.  Slower oil development and faster rebuilding of infrastructure could significantly help to make the equation, "petrodollars=prosperity" a reality. Norway’s lessons should be carefully compared to those of Venezuela and Nigeria. 

The key is patience.  So many options are being presented, with large dollar signs attached; evaluating who, when, how much, and, most critically, by which route, will require deep and careful thought. 

In Iraq Saddam Husssein wasted most of his oil proceeds on armaments and military build-up. By way of contrast; Norway distributed oil proceeds to citizens by paying for medical and educational expenses, keeping unemployment low, and investing heavily in capital programs, infrastructure, and social projects.  It is evident that how petrodollars are used in the Caspian will be a crucial test that will determine the regions’s future for years to come, and influence stability. 

We have seen much evidence of the consequences of instant wealth.  We are acutely aware of the need for greater democratization, and we are also cognizant of how closely current conditions mirror those of past failures for the Caspian oil industry.  What do we suggest ?  The leaders of the Caucasian and Central Asian new states must break with the past, demand human and environmental investment before decimating their land and ignoring people.  It can not be business as usual: the oil must stay in a local workforce and develop infrastructure that supports continued growth in a sound environment.  Western governments can help by supporting democratization, particularly private land ownership and the right of eminent domain; the fair market value of land must be guaranteed to each farmer or fisherman. The opportunity to ensure these exchanges and policies exists. Plentiful oil ensures that the region has time to move wisely and slowly and follow the Norwegian model. 
 

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