Oil does not guarantee wealth: Guyana threatens "Dutch disease"

Guyana, the small country in the northeast of South America, hopes for great wealth after an oil discovery five years ago. But the conditions are worse than it seems at first glance. The oil price on the world market is in the basement, the country is sinking into political chaos and obviously Guyana has been ripped off by his contract partners. The "Dutch disease" threatens, Latin American expert Federico Foders tells in an interview with ntv.de.

ntv.de: What kind of country is Guyana? And what do people currently live on?

Federico Foders: It is a very small country in the northeast of South America. Guyana was once a British colony that became independent in 1966. The British had chosen the colony to grow sugar cane. After independence, other products were added, and there was a small diversification of the economy. Today the country continues to live largely from agriculture, but also from mining. Bauxite is mined there, which is the raw material for the production of aluminum. And now there is oil.

When and where was it found?

The last big find was in 2015, about 200 kilometers off the coast. Oil has been extracted from Guyana since the 1940s, but only in very small quantities. Due to the large find five years ago, it now looks like Guyana could get very rich very quickly.

Why are the Guyanese so optimistic?

The oil field is very large, and the oil is of very high quality. Oils are classified according to their sulfur content. Light oils have very little sulfur and can be processed very well in refineries. As long as there is a good price for light oils on the world market, there is a great opportunity for Guyana.

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How much oil could be extracted?

An estimated 750,000 barrels a day once the infrastructure fits. That would be about a barrel of oil a day per inhabitant. Then you could fund $ 30 to $ 35 billion by 2030, which is obviously a lot. Guyana's gross domestic product is $ 4 billion. If you compare this with this potential, then of course it's gigantic.

The International Monetary Fund issued a forecast earlier this year that Guyana's gross domestic product could rise by over 50 percent this year.

But then Corona came and didn't just drop the price of oil. However, a stable oil price was a prerequisite for the estimate, as was the rapid build-up of the infrastructure required for the extraction.

Who produces the oil?

Exxon Mobil tracked down the oil five years ago. Since then, the company has formed a consortium with Hess Corporation, another US oil company, and the Chinese state-owned oil company.

And what are the conditions for Guyana?

Guyana's stake in the consortium's profit is said to be 52 percent. That is not much, a share between 65 and 80 percent would be common in the industry. Exxon Mobil is said to have avoided speaking of a large find in 2015. That said, Exxon Mobil left the Guyanese government pretty dark in the negotiations about the potential of the oil discovery. No independent consultants were called in either. It's something you should always do. And unfortunately the contract details have never been published.

Learned something again

The interview with Federico Foders was created for our podcast "Again what was learned". The issue "Guyana – Oil Wealth or Resource Curse?" can be found in the ntv app, Audio Now, Apple Podcasts and Spotify. You can use the RSS feed for all other podcast apps. Copy the feed URL and add "Learn again" to your podcast subscriptions.

So transparency is a foreign word in Guyana?

Yes. And that creates a completely different problem: corruption. This is an ongoing issue throughout South America and Guyana is no exception. About seven percent of the population are very, very poor. They are practically excluded from the job market, from the education system and from many other social processes. That means there are big differences in income and wealth. Corruption is often a lubricant so that a society can still function.

Ultimately, however, this also means that the rich get richer and the poor have to see where they stay. In many oil countries such as Nigeria, Equatorial Guinea and Angola, the population has not benefited from the oil money at all. The so-called resource curse has struck again and again.

Exactly, that is also called "Dutch illness". There was a huge natural gas discovery in the Netherlands in the 1960s. However, this has become a curse for the Netherlands because there has been a real appreciation of the national currency, which has been devastating for the other sectors of the economy. You have neglected many other things that are also important in an economy. It was fortunate that there were large companies like Philips that continued to do their research and were not greatly disturbed, but large parts of the Dutch economy were no longer competitive. It was all focused on natural gas. This so-called "Dutch disease" has also hit many countries in Africa and Latin America because they have concentrated too much on one raw material.

The newly elected President Mohamed Irfaan Ali wants to provide more transparency, better manage the money and, in the long run, improve the standard of living of the population. Can it succeed?

There are several models that show that it works. The Arab countries in the Gulf immediately promised every citizen a state pension, so that everyone was involved in the new oil wealth. Brazil has also tried – at least in the past – to distribute wealth from certain sectors and to bring it to the last villages.

But Ali cannot yet deliver on his promises. David Granger officially continues to run Guyana because he does not want to acknowledge his defeat.

The problem here is that the political struggle in Guyana due to an external effect, the oil discovery. And now both major parties and civil society are fighting over what can be expected as wealth. Unfortunately, I cannot make a good forecast because, overall, we can assume that oil consumption in the global economy will decrease over the next 10 to 20 years.

Kevin Schulte spoke to Federico Foders

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