Sucked into a Black Hole

By JOSHUA KURLANTZICK

At night, the streets of Phnom Penh reveal the country's vast wealth gap. In front of shopping centers selling luxury cosmetics, whole families sleep on patches of sidewalk; beggars missing limbs, a legacy of civil war, crowd outside upscale restaurants where a tiny élite downs French entrées and chic cocktails. But many average Cambodians hope this poverty will vanish, thanks to an apparent miracle: the country has discovered oil. Off Cambodia's southern coast, explorers have found as much as 500 million barrels, potentially providing over $1 billion annually to the country.

Cambodia is hardly unique. As oil prices hit record levels, multinationals are hunting for black gold in ever more unlikely places, and many Southeast Asian nations now are eagerly exploring new fields. Yet few seem to realize that rather than miracles, oil often brings misery, including the massive graft witnessed in some petroleum-rich African and Middle Eastern states.

Ten years ago, with a barrel of oil dipping to about $10, there was little interest in Southeast Asian petroleum, other than established deposits in Indonesia and Brunei. But now, global instability and rising demand from India and China have spiked oil prices to over $80 per barrel, and governments are nationalizing major fields from Russia to Venezuela. At the same time, as offshore technology improves, oil firms can hunt in deeper, tougher waters, like the Timor Gap between Australia and East Timor. So the region has exploded with oil fever. Vietnam plans to explore in seven offshore blocks, Malaysia this summer launched the deepwater Kikeh field, and Indonesia expects production from its vast Cepu oil field to start next year. East Timor could earn at least $10 billion from the Gap, and Burma has discovered offshore fields that could contain 2.5 trillion cubic feet (70.8 billion cubic meters) of gas.

But oil can lead to the "resource curse" — a government-connected élite profits, most people still suffer, and the economy winds up dependent on petroleum and facing inflation from rising oil revenues. Nigeria, for example, ranks in the top 10 of world oil exporters, yet 60% of Nigerians live below the poverty line, and the country's Economic and Financial Crimes Commission has said that the government has stolen or wasted some $400 billion, a fair share of which presumably came from oil.

Many Asian countries could go Nigeria's way so far as oil is concerned. Cambodia, which is still recovering from the Khmer Rouge era, ranks near the bottom of Transparency International's Corruption Perceptions Index, and does not possess the institutions to monitor how the government uses its new oil riches. East Timor's economy will have almost no other foundations — studies estimate over 90% of government revenues eventually will come from oil. Before its latest brutal crackdown on peaceful protestors, Burma's military regime already demonstrated such little concern for its people that it reportedly spent among the lowest on health care per person of any government on the planet. Hiding out in its new jungle capital Naypyidaw, the junta has not even suggested that oil money will benefit its people. While many oil companies support the Extractive Industries Transparency Initiative, which pushes countries to explain how they spend petroleum money, Chinese oil giants, dominant in Burma, refuse to sign up. Even Brunei, a country that at least used decades of petroleum wealth to provide free health care, is not immune. Suckled on oil, Bruneians demonstrate minimal entrepreneurship, leaving the country with almost no industry when oil runs out, possibly within 20 years.

Some Southeast Asian governments seem to want to learn from the mistakes committed by other countries. East Timor has created a national petroleum fund to save revenues for future generations. Dili has also enlisted advisers from Norway, one of the best examples of putting black gold to good use, to manage its oil money. But noble intentions are not enough. East Timor NGOs worry that their country's oil laws are so vague that they open the door to mismanagement and skimming. A damning World Bank–Indonesia joint study earlier this year showed Indonesia was struggling to spend state funds on decent development projects.

Cambodia could be the biggest worry. Prime Minister Hun Sen has pledged to steer oil revenues toward poverty reduction, but his government has offered no clear plans of how it will ensure riches are spent wisely. The promise of wealth has already sparked a property boom in Phnom Penh, a possible early sign of inflation. In the future, no doubt, Cambodia's capital will boast even more classy French bistros. But it just might have more beggars, too.

With reporting by Joshua Kurlantzick is a visiting scholar at the Carnegie Endowment for International Peace and the author of Charm Offensive: How China's Soft Power is Transforming the World