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Guyana Strikes Oil

Guyana's President David Arthur Granger waves as he arrives at Punta Cana airport on January 24, 2017, to attend the fifth summit of the Community of Latin American and Caribbean States (CELAC), held at the Barcelo Bavaro Convention Center in Bavaro, Dominican Republic. (Getty)

What the Windfall Means for the Country—and the Region

Guyana's President David Arthur Granger waves as he arrives at Punta Cana airport on January 24, 2017, to attend the fifth summit of the Community of Latin American and Caribbean States (CELAC), held at the Barcelo Bavaro Convention Center in Bavaro, Dominican Republic. (Getty)
Guyana’s President David Arthur Granger waves as he arrives at Punta Cana airport on January 24, 2017, to attend the fifth summit of the Community of Latin American and Caribbean States (CELAC), held at the Barcelo Bavaro Convention Center in Bavaro, Dominican Republic. (Getty)

* The tiny South American country discovered a massive amount of oil in its territorial waters
* Oil wealth in and of itself won’t destroy Guyana.. Mismanaging the money certainly will

*By Raúl Gallegos

Nearly 40 years ago, tragedy struck Guyana when a religious zealot with major charisma, Reverend Jim Jones, convinced nearly 1,000 of his followers to hole up in their socialist commune and commit mass suicide by drinking cyanide-laced Kool-Aid. The “Jonestown” massacre earned top billing in the news. On its cover, Time magazine ran a photo of dead bodies strewn next to a vat filled with the poisoned drink.

Guyana now faces another threat of self-destruction but on a much larger scale. The tiny South American country of roughly 800,000 people recently discovered a massive amount of oil in its territorial waters. (Venezuela also claims that territory.) The U.S. energy giant ExxonMobil, which made the discovery, suggests the existence of anywhere between 800 million and 1.4 billion barrels of high-quality crude, worth at least $44 billion at current prices, or 15 times the country’s total GDP. That’s an awful lot of cash for a country whose capital city still has dirt roads.

Of course, oil wealth in and of itself won’t destroy Guyana. But mismanaging the money certainly will. If Guyana fails to take appropriate steps, its politicians could end up blowing the largest fortune in the country’s history. In the process, they might turn Guyana into an even bigger basket case than is its neighbor, Venezuela.

Fortunately, the government of President David Granger appears intent on avoiding such a debacle. Granger, a retired military man, took over in 2015 after a 23-year chokehold of the leftist People’s Progressive Party. His administration is setting up new laws to shape the budding oil sector into a top oil producer; these include a local content law that forces oil companies to hire locals, a new oil regulatory agency, taxation legislation, and the creation of an infrastructure and savings fund, too. Meanwhile, he has promised oil companies a welcoming business environment that respects private property, and he has sought advice from resource-rich Canada and Norway on how to set up a sovereign wealth fund to save the oil riches that should begin to flow in 2020. The country also plans to join the Extractive Industries Transparency Initiative, a set of global standards, to ensure accountability and address graft. In other words, the Granger administration is saying all the right things.

Prince Harry leaves Eugene F. Correia International Airport on the final morning of an official visit to the Caribbean on December 4, 2016 in Georgetown, Guyana. (Getty)
Prince Harry leaves Eugene F. Correia International Airport on the final morning of an official visit to the Caribbean on December 4, 2016 in Georgetown, Guyana. (Getty)

But history shows that vast amounts of cash make people do dumb things. Around the world, too many are drinking the populist Kool-Aid, convinced that demagogues with power and a checkbook can solve society’s problems, and Guyana is not immune. Guyana’s former President Bharrat Jagdeo, the leader of the leftist populist People’s Progressive Party, is eyeing a return to office in 2020, no doubt salivating over Guyana’s newfound riches. The letters to the editor of the local newspaper, Stabroek News, a major institution in Guyana, recently featured opinions by locals on what to do with the money when it flows. One suggested borrowing money against future oil flows so that the government can spend it as soon as possible. For a poor nation with weak institutions, a culture of graft, and a tendency toward ethnic strife, such plans spell trouble.

Complicating matters, a major diplomatic showdown over the oil is in the works. Venezuela has long claimed nearly 40 percent of Guyana’s territory—land and sea—as its own, and most of that territory is flush with crude. The United Nations has given the countries one more year to agree on a solution before it hands the mess over to the International Court of Justice. (The court is expected to side with Guyana.) Plus, the oil find is a crown jewel for Exxon, and the company will likely do all it can to defend it. Although the United States’ relationship with Venezuela has deteriorated, the United States has cultivated close ties with Guyana. That will likely continue under the Trump administration, with Rex Tillerson, Exxon’s former boss, now heading the Department of State. Of course, it would be tragic for Guyana to win this dispute only to become the new Venezuela by wasting its oil bounty.
Guyana can still walk back from the ledge. The country should look to the U.S. state of Alaska, which not only saves oil money for future generations in a fund but also hands out a yearly oil dividend check to its citizens from its annual returns. The mechanism has been widely credited with helping Alaska avoid the type of communal suicide that typically accompanies politicians’ mismanaging resource wealth. Giving money directly to individuals leaves less cash in the hands of politicians and encourages citizens to hold leaders accountable for how oil wealth is managed. The alternative could condemn Guyana to a world where politicians rule and citizens obey.

Critics of the dividend check argue that people get little cash, especially when populations are large. They also point out that the mechanism does not fully eliminate corruption. Guyana’s population is small, however, and the poor could benefit from the dividend. And any problems with identity fraud to claim checks would likely be more manageable than controlling runaway spending by politicians would be.

Next door, Venezuelans have rolled their eyes at the proposal, but most recent newspaper headlines attest to Venezuela’s penchant for self-destruction at the hands of homegrown populism.

Guyana can avoid this fate. The Granger government should pursue the right safeguards to prevent its oil fund from becoming a petty cash reserve for the president. Guyana should also have stringent rules for how the fund’s capital is invested and spent, limiting its use to infrastructure, education, and the like. Failure to do this will turn Guyana into a tragedy that not only will make headlines but also will ruin the lives of future generations.

*Raúl Gallegos, head of the Andean political analysis unit for consulting firm Control Risks, is the author of Crude Nation: How Oil Riches Ruined Venezuela (Potomac Books 2016). (This article was originally published on ForeignAffairs).

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