Oil Makes Countries Go Nuts: How to Prevent More Crimeas

The United States and its Group of Seven allies are contemplating imposing sanctions on Russia to punish it for invading Ukraine and de facto annexing the Crimean peninsula. It’s a tricky situation.

Russia, along with Saudi Arabia, is one of the world’s largest oil exporters, pumping an estimated 13% of the world’s oil production. Russia also imports some $500 billion of goods and services. There is a danger of disrupting international oil markets, punishing U.S. and European companies and undermining a fragile recovery in the world economy.

But they should also contemplate a larger question that has bedeviled the civilized world over the past four decades--what to do about oil producing nations.

Oil exporters have traditionally been troubled countries, responsible for more than their share of global instability. During the 1980s, two OPEC members, Iran and Iraq, fought a bloody war. In the 1990s, various other OPEC members were in the news, too. Algeria was convulsed by the civil war, Iraq invaded Kuwait and had to be expelled by a U.S.-led coalition, Indonesia suffered severe political and economic damage from the 1997 “Asian flu” crisis.

But in 1999, oil prices began to rise, eventually hitting records. You’d expect oil producers, earning petrodollars hand over fist, to become stable and peaceful, but exactly the opposite has been the case.

The terrorist attacks on September 11, 2001 were masterminded and carried out by Saudis; Iraq’s Saddam Hussein, even though he was not developing weapons of mass destruction, went on fomenting trouble around the Middle East; Sudan carried out genocidal policies in its southern regions. Perhaps to prove that turbulent oil producers were not concentrated in the Middle East, Venezuela’s Hugo Chavez spent his petrodollars on various dubious causes abroad while also building socialism and ruining the economy at home. Ecuador, another Latin American OPEC member, also voted for a populist and socialist, electing Rafael Correa president.

During the Arab Spring two years ago, the country that went through the worst turmoil was OPEC member Libya. Meanwhile, Iran has kept the world on edge, threatening to acquire nuclear weapons.

Russia’s Recent Past

And then there is Russia. During the 1990s, Russia was poor, but it tried to build democratic institutions and restructure its economy. It had no censorship, and its private television channels and newspapers conducted a lively political debate.

For the first time ever it had no political prisoners or exiles. After the 1998 ruble devaluation, Soviet-era industry was on the mend. Russia was going through the same reform process that eventually took Poland, Hungary and other Eastern European countries into NATO and the European Union.

And then oil prices began to climb. Russian export earnings rocketed and now make up one-third of the country’s GDP. Consumer goods that Russians only used to dream of during the shortage-plagued Soviet era were suddenly available and affordable. The banking system was revitalized. The Russian central bank holds a half-trillion dollars of reserves, supporting the ruble.

True, oil revenues were not distributed equally. In Vladimir Putin’s kleptocracy, politically connected businessmen became fabulously wealthy. Corrupt bureaucrats were able to parlay their jobs into sizable fortunes, sending their kids to study and live abroad and buying up real estate in London, Paris and Miami. Putin himself is reportedly a billionaire many times over.

In short, Russian leaders have done remarkably well since their country shed its Soviet past and become integrated into the global economic system, and yet official rhetoric in Russia has been rabidly anti-American, pining for the days of the USSR.

Now, with the land grab in Crimea--a depressed region of extremely poor Ukraine--Soviet revanchism finally spilled abroad. Inexplicably, Russian elites have decided to jeopardize their own fortunes, undermine the economy and risk a military confrontation between nuclear superpowers.

There is no question that it is oil that makes countries go nuts--or rather, exclusive reliance on oil exports. The United States, Canada, Great Britain and Norway also have oil, but they have not allowed their industrial base to wither.

It works in reverse. As long as Mexico relied on oil exports, it was ruled by the corrupt Revolutionary Institutional Party. Multiparty democracy and greater openness came when oil revenues started to fall and the country joined NAFTA in the early 1990s.

Oil production in Indonesia has been declining and the country withdrew from OPEC in 2008. But it got rid of military rulers and has become one of the fastest growing emerging economies.

The Obama Administration has been planning to cut US military spending, but as tensions with Russia grow this is highly unlikely. However, it is obvious that in order to encourage political stability--and reduce military spending on a lasting basis--the world needs to cut its dependence on oil and to make sure that oil prices fall and stay down.

Money spent today on the development of alternative energy sources and energy conservation would be repaid in the future in the form of much lower worldwide military spending and fewer international conflicts.

Moreover, concerns about global warming, which have reduced oil production and exploration worldwide, should be tempered. After all, it is a question mark whether the planet will heat up sufficiently to perish. Meanwhile, we might all be blown up in a nuclear holocaust engineered by some petrodollar-crazed dictator.

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