1. NS4960 Spring Term 2018 Michael Ross, Blood Barrels
Federal Reserve Bank of Chicago, Strong Dollar Weak Dollar

2. Michael Ross: Blood Barrels I
Wants to explain why conflict developing country oil producers.
Not just oil – conflict often associated with diamonds and other minerals
These countries often have a hard time sustaining growth for long periods of time
Many have been plagued with:
High levels of debt,
High unemployment
Sluggish or declining economies
Half of members of OPEC were poorer in 2005 than they had been in 1975
Countries that had seemed on verge of great promise, Algeria, Nigeria, Iraq, and Iran were unable to capitalize on oil

3. Michael Ross: Blood Barrels II
Some causes of instability and poor performance
Dutch Disease – tendency for exchange rate to become overvalued
Discourages diversification
Hurts non-oil export industries
Sudden glut of revenues
Few countries have fiscal discipline to invest windfalls prudently
Many White Elephants
Governance problems
Tends to be increase in corruption
Tendency for more authoritarian governments

4. Michael Ross: Blood Barrels III
Biggest danger associated with oil – armed conflict
Among developing countries, oil producers twice as likely to suffer internal rebellion
Oil wealth can trigger conflict in three ways
1. Can cause economic instability which leads to political instability
When people lose jobs become more frustrated by government and easier to recruit into rebel armies
Most oil producers have periods of booms and busts – during busts, government has harder time financially combatting rebel or separatist groups

5. Michael Ross: Blood Barrels IV
2. Oil wealth often helps support insurgencies
Raising money is relatively easy – steel oil and sell it on black market
Get foreign financing on promise of friendly deals once in power
Extort money from companies in remote areas
3. Oil wealth encourages separatism
Oil and gas often produced in enclaves that provide considerable revenue for central government, but few jobs for locals
Locals feel not getting fair share – want autonomy

6. Threats to Oil Companies

7. Michael Ross: Blood Barrels V
Possible ways to combat problems – no single way to bring peace to oil producing states
1. Cut off funding for insurgents who profit from oil trade
Refusing to buy oil that is sold by insurgents
2. Encourage governments of resource-rich states to be more transparent
Lack of transparency facilitates corruption and reduces public confidence in state
3. Help oil states better manage the flow of their oil revenues – companies should bear more of risk of volatile prices
Not mentioned by Ross – direct payment to population – sharing of oil wealth directly

8. U.S. Oil Imports: Venezuela
Venezuela: Falling Production
EIA, Political Risks Foocus Attention on Supply of venezuelan Oil to the United States, January 22, 2013