Azerbaijan and Oil

Today's instance of the oil curse: Azerbaijan.

By 2010, oil production is expected to triple, to 1.3m barrels a day, and gas output to quadruple, to 28 billion cubic metres a year. The first oil was delivered through the BTC pipeline in June. A Baku-Tbilisi-Erzurum gas pipeline will open later this year. If oil prices average $50 per barrel (they are now over $70), these two will bring a massive $140 billion into Azerbaijan's state coffers over the next 20 years, claims President Ilham Aliev.

Such a gushing of money ought to be a blessing for this impoverished country. It has just 8m people, but that includes some 800,000 refugees left from the war with Armenia over Nagorno-Karabakh in the early 1990s. Yet few oil-rich countries have avoided the triple threats of corruption, competitive rent-seeking or “Dutch disease”—in which, thanks to exchange-rate appreciation, oil production crowds out other economic activity.

Once again, while it would seem this money would help out the 8 million Azerbaijanians, odds are it won't.

But wait, maybe we have learned from our mistakes and found a way to make it work this time.

A national oil fund, set up in 1999, holds some $1.6 billion. Azerbaijan has also signed up to the Extractive Industries Transparency Initiative (EITI), an anti-corruption scheme established by Britain's Tony Blair in 2002. Oil companies report payments to the oil fund, which publishes full details. An independent auditor checks the fund. “I think it has worked very well,” says David Woodward, associate president of BP Azerbaijan, the biggest foreign investor in the oil industry.

Sounds good, but something tells me the next paragraph is going to be a downer.

The problem is that, even if revenues are well-monitored, spending is not—since it is not covered by the EITI. Observers in Baku say the government is already spending too much money, too quickly and with too little oversight (needed to stop such things as the awarding of contracts to close relatives).

Curse you oil curse!

via The Economist