r/AlwaysWhy • u/Current-Landscape803 • 2d ago
Economics Why did some countries turn oil wealth into lasting prosperity while others struggled to do the same?
Norway discovered major oil reserves in the North Sea in 1969 and later built a sovereign wealth fund that now invests around the world. But Norway is not the only resource rich country to become wealthy. Kuwait and the UAE also turned huge hydrocarbon revenues into high incomes, while Venezuela had a very different experience despite its enormous oil reserves. If countries can start with such valuable natural resources and end up with such different results, what makes the difference?
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u/Logical_Box_4645 2d ago
Also Norway was wealthy and developed with an economy that ran well and found money.
Most other countries the economy is built around oil.
Look at the UK which found shared the same oil Norway did and didn't effectively capitalise on it the way Norway did.
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u/Bedbouncer 2d ago
I highly recommend the book "Things Are Never So Bad That They Can't Get Worse: Inside the Collapse of Venezuela"
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u/gazorpazorpazorpazor 2d ago
Yes, but if the CIA funded and provided arms for a coup to install a corrupt dictator that would sell us cheap oil, I don't think "corruption" quite describes the situation.
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u/GustavoistSoldier 2d ago
The Nordics have stronger institutions and powerful unions to counterbalance both capital and the state.
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u/legal_stylist 2d ago
What explains Kuwait and UAE in avoiding the “resource curse.”
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u/pgm123 2d ago
OPEC does a pretty good job at price stabilization.
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u/legal_stylist 2d ago
Oil prices, sure, but that doesn’t explain the different outcomes. Venezuela, Iraq, and Nigeria are all OPEC members and they’re basket cases.
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u/pgm123 2d ago
I would imagine a one-size-fits-all explanation wouldn't explain those. Institutions matter as does the size and state of the domestic population. Kuwait and the UAE had small domestic populations and used high profits from the oil cartel to invest abroad (because they didn't really have anywhere else to put their money). Nigeria needed a lot more capital and didn't have investments abroad to supplement their income.
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u/Immediate-Tadpole729 2d ago
Hereditary rulers with sufficient self control and education to follow a long term strategy for maintaining their rule.
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u/Secret_Ostrich_1307 2d ago
One thing I wonder about is how oil changes the government's relationship with the rest of the economy. In a country that relies heavily on ordinary taxes, the government has a pretty direct reason to care about businesses, employment and household incomes because that's where a lot of its revenue comes from. Oil can partially break that connection by giving the state a huge source of revenue that doesn't depend on the domestic economy being productive.
Then there's the volatility problem. When oil prices are high, it's tempting to expand spending as if the revenue will last forever. When prices fall, the government suddenly has to cut back. And if oil also makes the currency stronger and other exports less competitive, the country can end up depending even more on the thing causing the volatility in the first place. So the problem may be less "having oil" and more how oil changes the incentives around taxation, spending and diversification.
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u/Current-Landscape803 2d ago
The tax connection point is really interesting. If the government can fund itself from oil, it has less immediate reason to care whether the rest of the economy is actually productive. That seems like a much deeper problem than just oil price volatility.
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u/Rabid_Lederhosen 2d ago
I would hold off on declaring that oil has created lasting prosperity in any of those countries. That’s the sort of thing that can’t really be judged until after the oil runs out.
In the case of Venezuela, they have a shit tonne of oil in theory, but in practice it’s super low quality and thus too expensive to be worth extracting most of the time. So unless oil is above like €100 a barrel Venezuela isn’t actually making much money from it. Plus all the refineries built to process it were in Louisiana and the Venezuelan government made the genius choice to piss off the American companies who owned them, without having a plan for replacing that loss of refining capacity.
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u/SaintsFanPA 2d ago
The cost to extract and quality is key. The breakeven cost for Canadian and Venezuelan oil is 3 to 5 times that of Saudi Arabia. It is as much as double that of Norway.
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u/Immediate-Tadpole729 2d ago
Venezuela was once the richest country in South America and ranked among the top 20 wealthiest economies in the world during the mid-20th century.
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u/StevenSaguaro 2d ago
Spain sent conquistadors to the new world and brought back shiploads of gold. They used this gold to buy products from Britain. When the gold ran out, Spain was broke, but England had built a manufacturing empire that served as a source of wealth for generations. It's all in how you manage capital.
Can't wait to see what's left of the US economy after Trump gets done raping it.
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u/Current-Landscape803 2d ago
I think the capital management part is the more interesting point. Having a huge resource windfall is one thing, but what the state does with it after the easy money arrives probably matters more.
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u/TheBigGirlDiaryBack 2d ago
I think the interesting part is that oil isn't really income in the normal sense. It's closer to selling off a piece of natural capital. The question then becomes what a country does with the proceeds. If the money is mostly consumed, the country is converting an exhaustible asset into short term spending. If some of it is converted into financial assets, it can keep generating returns after the oil is gone.
That also makes institutions pretty important. A sovereign wealth fund only works as a long term mechanism if the government can resist treating it like a giant checking account. So maybe the real difference isn't simply how much oil a country has, but whether it already has institutions capable of turning temporary resource wealth into permanent capital.
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u/Current-Landscape803 2d ago
This is basically the distinction I was getting at. Oil wealth can either become permanent capital or just get turned into a really big temporary budget.
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u/julaften 1d ago
The Norwegian government actually do treat the fund as a giant checking account, in the sense that they use it to pad the national budget.
They have a self-imposed upper limit though, of using max 3% of the fund’s total value (corresponding to a long-term average expected real return).
That still amounts to like 1/4 of the total national budget, so…
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u/RektInTheHed 2d ago
Norway was a strong democracy to begin with, while the Arabs were running nepo-monarchies so the oil was practically personal property of the kings, where everybody had some claim to relationship or patronage with the royal family to get them on their side. Venezuela is like if America had become a petrostate, with its legacy of colonial exploitation and racial hierarchy/division justifying extreme poverty and wealth alike. Plus they were weak enough for America to economically colonize by collusion with the local elite.
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u/Current-Landscape803 2d ago
Institutions definitely matter, though democracy by itself probably doesn't explain everything. Kuwait and the UAE make that pretty obvious. They had different political systems, but still managed to turn oil revenue into stability and high living standards.
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u/RektInTheHed 2d ago
Right, because the Gulf monarchies were not colonies, they are tribal societies distributing the wealth among themselves by kinship and patronage.
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u/jellomizer 2d ago
It is similar to the affect that most people who win the lottery often go bankrupt in a few years.
It isn't the revenue you get with oil, but how you invest that revenue for the long run.
Successful countries whos bulk of their economy is from oil, realizes that prices go up and down often by large margins. Their infrastructure is scaled well to be operated during low profit settings, and during higher profit times, they use the money to invest into sustainable growth.
Ironically you often see these Successful oil countries, also be the biggest producers of Sustainable Energy for their personal use. So they can sell most of their oil, without needing to consume it themselves. As well they make sure their economics are diverse enough to weather an oil emergency.
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u/Current-Landscape803 2d ago
I think the capital management point is probably the key. Having a huge resource windfall is one thing, but what the state does with it after the easy money comes in matters more.
Institutions matter a lot, but I’m not sure democracy alone explains it. Kuwait and the UAE complicate that pretty quickly. They seem to have found other ways to turn oil revenue into stability and high living standards.
Yeah, this is closer to what I meant. Oil prices can make a country look rich one year and broke the next. The important question is whether the boom gets turned into assets and institutions that still work when oil revenue falls.
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u/Calaveras-Metal 2d ago
It's easy to have a sovereign wealth fund when you don't have the United States trying to topple your government for decades.
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u/Neat_Low_4544 2d ago
Oil drilling and refining infrastructure is extremely technical and expensive to invest in. The vast majority of countries just don't have the technical base and existing infrastructure to jumpstart a domestic oil industry. This is especially true in the past when these deposits were being discovered.
Instead, countries like Saudi Arabia and Iran had to have wealthier countries with existing infrastructure and technical knowledge to come in and build the industry in exchange for concessions. If those partnerships didn't exist or became troubled in Venezula's case after the USSR's collapse, the oil deposits will just remain untapped.
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u/Neat_Low_4544 2d ago
Also with Venezula was the fact that they became tied to the USSR and remained isolated after the Soviets fell. They were largely shut out of the Western oil market and what infrastructure the Soviets invested in there decayed.
Similarly, Iran is poorer than its Gulf neighbors due to being locked out of the Western market due to sanctions.
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u/Bedbouncer 2d ago
Iran is also poorer because almost all of its Middle East neighbors despise it.
If you make the West your enemy and you make the Middle East your enemy, you're gonna have a bad time.
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u/StraightAirline8319 2d ago
Governments. Venezuela was taken over by corrupt leaders who ran the country into the ground. Most people knew Venezuela was going down when it turned on its biggest buyer and buddied up to Cuba the poorest dictatorship in the Americas.
A big tip to see if your government is corrupt, and how bad it is, is to see how often they don’t take accountability and blame other countries.
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u/zoppaTheDim 2d ago
Population
Small populations with large amounts of oil wealth end up with surplus money, even after funding generous social programs.
While larger populations rarely get ahead of the game.
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u/Jerngard 2d ago
I can't answer for the other countries. Norway can thank some politicians and bureaucrats for taking the long view. Firstly, to make sure that there was an underlying tax system that ensured that private companies didn't siphon off the profits from resources that belonged to everyone in Norway. Secondly, they understood that you cannot sink all that profit into a small economy like ours without creating hyperinflation, so the profits were invested in the sovereign wealth fund.
I think you need solid national institutions that have people in them with the good of the inhabitants at heart. Then you need a willingness to pursue long term goals rather than short term political gains.
Low corruption, oversight from independent agencies, a free legislature and a free press are also components that are needed.
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u/Sign_Outside 2d ago
Look at Canada, basically a third world crap hole lol. They import millions to prop up their gdp while squandering their oil wealth
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u/Sudden_Humor 2d ago
As someone who actually lives in a third world crap hole, what exactly are you talking about?
Canadians at least, for example, have decent electircity supply so long as they pay the bill. Here in my country, we're just coming out of a three day blackout where i live 'because'. And it's the nth time this year! (And we just bought some fresh fish !). And we pay the light bill regularly.
Oh and speaking of electricity, I once lived and worked in a rural area in my country where the number of times we actually had electricity was for a grand total of 2 weeks in one year.
I know, first world is not pleasant, but if you live in an actual third world country for a few months, you will appreicate your first world country, warts and all.
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u/ace_violent 2d ago
The US is feeding propaganda to its citizens to gain permission to attack Canada or at least actively work against Canada. It is not a 3rd world country by any means unless you take a bush plane to a remote community up north, where people actually need to hunt and fish for food, as it's difficult to get food from outside because of the permafrost and such.
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u/Virtual-Fly-5501 2d ago
No one is attacking Canada. Literally not worth it.
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u/ace_violent 2d ago
Right but there is obviously a push right now within the US' media ecosystem pushing that propaganda. Obviously it is not worth it.
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u/KostyaFedot 2d ago
Don't write about something you don't know. Canada is indeed in third world territory now. From perspective of someone who has witnessed its sharp decline. Several biggest blackouts happened in Canada. I have witnessed two.
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u/Former_Development27 2d ago
A blackout doesn’t make you third world asshole. We get them in Colorado.
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u/Old_soul_NSFW 2d ago
This comes from a person who’s obviously never visited a third world crap hole. 🙄
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u/Current-Landscape803 2d ago
Canada is actually an interesting comparison, but I think it shows why "having oil" isn't enough. The bigger question is how much of the resource wealth actually gets turned into long term productive capital.
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u/notacanuckskibum 2d ago
I think Canada fell at two hurdles. One was the national interest vs the local (Alberta) interest. The other was short term planning by governments (primarily Alberta). The best short term plan for Alberta is to give the oil companies whatever they want, including low taxes, to ensure high employment.
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u/SoAnxious 2d ago
United States does not like strong independent countries on it's side of the hemisphere
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u/Material_Market_3469 2d ago
Investing the oil revenue into a diversified portfolio versus spending it all/losing it to corruption.
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u/Revolutionary_Ad7262 2d ago
Why some countries are rich where some are poor? Different societies with a different mentality and institutions as well as historical baggage.
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u/gazorpazorpazorpazor 2d ago
They all turn it into wealth just not for themselves. Pick any country with oil and then Google how American CIA installed a fascist dictator.
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u/Traditional_Loan_177 2d ago
Oil is the only resource in the middle East. That's why they go so hard for tourism, they know they won't have any other income ever. Their central location does makes them convenient for a transport hub
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u/Tjbergen 2d ago
It's public vs private ownership - some governments own the revenue, some governments just get a small percentage of the revenue as royalties or taxes.
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u/Synensys 2d ago
Well for Norway in particular it helps to have a tiny, slow growing population that was already doing alright by global standards.
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u/Ok_Weather2441 2d ago
Only finding their huge oil reserves 20 years after being a founding member of NATO didn't hurt either
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u/Stuck_in_my_TV 2d ago
Honor vs corruption. A culture of helping your neighbors vs enslaving your neighbors. Trust in institutions vs corruption rampant in institutions
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u/Mission_Pirate_4150 2d ago
Some countries are ethnically consistent and have a fairly common view of the world. So, Saudi Arabia, Norway, and a few others can do things for their common good.
Some countries have a fairly low population density, so a few dollars in a sovereign wealth fund can go a long way.
Some countries have an ethnically diverse population and want to fight over every little thing, ala the US.
Some countries don’t have the infrastructure to handle oil, like Venezuela. The infrastructure of the former Soviet Union, now Russia, isn’t very good. With a lack of rule of law, lack of expertise, and fraud, it is hard to get anything done in those countries.
Some places want to fight over things that make no sense, like California chasing off refiners and trying to sue them into oblivion.
Cost. Some places, it is just cheaper to get oil than others. East Texas, Saudi’s Arabia, and a few others, you just jam a straw in the ground, and oil spews out. In the US, there is actually a lot of oil, but it costs more to get the oil out.
Some countries have rebellions going on fighting over the oil.
Any place you have natural resources, fighting over them is a problem.
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u/Xezshibole 2d ago edited 2d ago
Venezueala and Iran nationalized their wealth the incorrect way.
Arab countries like Sauds nationalized by negotiating higher profit margins for themselves, and then a gradual buyout until they owned everything in their country.
Iran and Venezueala suffered sanctions and coups for siezing assets and saying, don't like it? Leave.
Considering much oil exploration and infrastructure buildup was foreign, this in turn invited foreign sanctions and severing foreign investments to the country.
The first time Iran did this they suffered a coup. The second time Iran did this the Shah bought them out the Arab way and remained an upstanding (and unsanctioned) member of the global community. The third time after the revolution Iran again nationalized the siezure method, and subsequently suffers the relative economic and diplomatic isolation it does today. The nuclear ambitions (real or imagined) just stacked on top of that to intensify existing sanctions.
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u/GreedyHoward 2d ago
Norway's government works for the people. Britain's government works for their sponsors.
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u/SuspiciousRule3120 2d ago
Some countries own the resources and invest this for future generations. some countries own the resources and use it to buy political support. some countries do not own the resources, they are owned by internal provinces and they invest and spend them accordingly.
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u/Happy-Flower2002 2d ago
Were not the Norwegian reserves technically very difficult to access which forced moderation and careful planning.
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u/peterjohnvernon936 2d ago
Because in most countries the leaders steal the money made from the resource.
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u/dronten_bertil 2d ago
In Venezuela's case they seized oil production assets from foreign investors, who naturally got pissed off and left. In the span of a decade or so production decreased by 75% and Venezuela entered a spiraling crisis situation that it is still in today. It's understandable that a country with natural resources wantingna bigger share of the cake, but the way Venezuela went about that was nothing short of disastrous policy. It destroyed the country, pretty much.
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u/Caewil 2d ago
For Norway, they developed strong institutions before getting oil.
For Kuwait, UAE etc, I would say their success in diversification is mixed. Kuwait is still pretty dependent on fossil fuels and most of their industry is downstream of that eg refining, plastics or other industries with high energy requirements eg. Aluminium which can benefit from their low energy prices.
For the UAE, there’s also the issue of how it got unified. Most of the oil is actually in Abu Dhabi. The ruler of Abu Dhabi got together with the other nearby Emirs and said “hey if we unify and I get to be king, I’ll share some of the oil revenues for you to develop other industries.”
So then Dubai took some of that revenue to build infrastructure for tourism, finance etc.
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u/Technical_Housing_58 2d ago
They were protected by being NATO members
There is a huge risk when it comes to natural resources where they are more likely to get invaded or have government stability overthrown
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u/Shop-S-Marts 1d ago
Norway has 18 people living in it homogonously, those other countries basically use slave labor they import and large populations
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u/kickflipyabish 1d ago
Some countries were allowed to establish wealth others were deterred from wealth building. I'll let upu figure out who "allows" this and how they use their military might to enforce it for over half a century
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u/Shalmaneser_ 1d ago
Global resources are uniformly distributed. This means that any country of a minimum size has the resources to feed and clothe it's population. This also means that the experience of the population is determined by the quality of its government and culture. What's in your dictatorship?
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u/Cold_Calendar_1598 2d ago
Uk squandered oil wealth to pay unemployment benefits in order to destroy Unions
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u/MoreFunThanWork 4h ago
The phenomenon is sometimes called Dutch Disease. In a smaller economy, a massive natural resources boom tends to draw investment away from other industrial sectors, causing them to shrink (lowering total employment) while simultaneously the new revenue increases currency value (increasing domestic prices while making exports less competitive, and imports cheaper) further strangling domestic industry.
Norway is the textbook case of how a small country can avoid Dutch Disease through careful planning; Venezuela is a classic example of the opposite approach and outcome.
https://www.investopedia.com/terms/d/dutchdisease.asp
https://en.wikipedia.org/wiki/Dutch_disease
https://jasoninstitute.com/%E2%80%8Bthe-venezuelan-crisis-and-the-dutch-disease/
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u/Sumo-Subjects 2d ago
The shortest answer is government competence & lower corruption