What do Bolivia, Iran, Russia and Venezuela have in common? To some they are examples of less than perfect political systems. More importantly, they happen to be in the grip of “resource nationalism”. This is fast becoming a serious constraint to the growth potential of many economies, if not emerging as an outright threat to free markets. India should be worried.
These resources include hydrocarbons and minerals primarily. Shorn of rhetoric, this means governments can simply seize these resources or deny private companies the right to explore and develop them. A look at the quantities of oil and gas under the sway of such governments shows how difficult the situation is becoming. By the end of 2006, Iran, Russia and Venezuela controlled almost a quarter of the world’s proven crude oil reserves. In the case of natural gas, Iran and Russia alone account for almost 42% of proven reserves.
At the moment there’s no single explanation as to why these countries seize these resources from private players. After all, if higher revenues from oil and gas were the motive, higher taxes would solve the problem without resulting in inefficiencies creeping in due to state control. But in many cases there are other, political, objectives that require state control. For example, in Russia the supply of hydrocarbons is part of its foreign policy. It has used this as a tool to attain political objectives in Ukraine, Georgia and even western Europe. In Hugo Chavez’s Venezuela, oil revenues serve to fuel populist programmes. But their success also requires that he controls oilfields to give a socialist colour to what he does. This mixing of motives defies one single explanation for why these countries take such steps.
What does this herald? For one, it stokes higher fuel prices. Oil dealers factor in the effect of expected disruptions in the supply of oil due to such factors as a risk premium. This has shown a steady rise. When it comes to getting access to oilfields, countries such as India will not only need more money, but also make changes in foreign policy to please these resource-rich countries. India now has to learn to pay a “political premium” to gain access to these resources.
What should be India’s response to “resource nationalism”? Write to us at email@example.com