Oil revenues and Azerbaijan

A Conversation with Dr. Jeffrey Frankel
Professor, Harvard University
Visiting Professor, Baku Summer Energy School

July 7, 2010
Baku, Azerbaijan

Azerbaijan in the World:  Azerbaijan receives a substantial income from oil, and experts project that in a few years, its earnings will rise substantially when off-shore gas fields come on line.  How should Baku use this money most wisely?

Prof. Jeffrey Frankel:  The first thing Azerbaijanis must be aware of is the unfortunate experiences of other countries in such circumstances.  Most of them spend the money quickly on high visibility projects with few long-term positive consequences.  That has happened many times, sometimes even in the presence of the best of intentions.  Indeed, it is so common that a term has arisen to describe it: the natural resource curse.  Sometimes this happens because governments assume that the money will always be coming in and thus fail to save enough for when the oil runs out or prices fall: unfortunately, even the countries that say they are going to save the oil revenue end up not doing it, because it is so tempting just to spend.  And sometimes it happens because governments try to monopolize the earnings rather than include individual citizens and private markets as players.  

AIW:  Do you expect oil prices to remain high?

Prof. Frankel:  Given demand from China and other Asian economies where the recession of 2008-09 is already over, prices are likely to go up as demand increases while supplies fail to expand at the same rate. 

AIW:  Given your years of experience in the White House, do you think we should extract as much oil as possible and sell it, or should we extract it more slowly so that future generations will be able to benefit?

Prof. Frankel:  That is an excellent question.  Doing it slowly is a way of saving for the future.  Some countries make the mistake of extracting it too fast and damage the environment in the meantime.  After they have used it up, they don't have the economy; they don't have the environment; they have lost everything.  Here is one example, although it doesn’t involve oil.  The island of Nauru in the South Pacific used to have the highest income per capita in the world because much of the island consisted of phosphate deposits.  By over-mining these deposits, the people of Nauru ruined their island, and, worse, they did not save enough.  As a result, they are poor again.  You don't want to repeat that.

AIW:  Now that you are giving lectures on the resource curse at the Baku Summer Energy School, what is your overall impression of the school and Azerbaijan Diplomatic Academy organizing the event?

Prof. Frankel:  I have been very pleased to be here.  Many people make the mistake of thinking that education and research and development are important only in the manufacturing sector and that these things are not needed in the energy and raw materials sectors.  But in fact, technical progress is important there as well.  Consequently, I am both glad to see and impressed by the research and training taking place at the Azerbaijan Diplomatic Academy.  I hope ADA will play a role in helping Azerbaijan think about the future.