Challenges and opportunities of oil, gas, and mining

Lecturer: Jeffrey Sachs

Thought-provoking questions:

  1. Why do oil, gas, and mining play such an important role in sustainable development?
  2. What are the unique challenges that oil, gas, and mining present in the context of sustainable development?Jeffrey Sachs, Director, Earth Institute and Sustainable Development Solutions Network

In this chapter we’re going to talk about specific challenges of the mining and extractive industry sector. When you have a large mining sector or a large hydrocarbons sector or coal sector, it really shapes the nature of the economy, and it leads to particular challenges and distinctive kinds of economic performance. Of course in general it’s on the whole good to have mineral resources or coal, oil, or gas resources as major inputs to the economy, major inputs to economic development to countries that are bereft of these resources, have major challenges of producing other goods that they can export in order to be able to import these vital commodities. But having a lot of these resources also really does shape the economy and paradoxically can lead to massive problems as well.

So what are the distinctive challenges associated with the extractive sector? First, extractive resources, coal, oil and gas, which will be my focus in this chapter, are finite. They are depleting. You run out of them. So, many countries live high on the hog for a while, they’re living very, very well until the resources start to disappear because they’ve been mined out, they’ve been extracted, and economies sometimes go into a tailspin.

First lesson with finite resources is the need for an inter-temporal strategy. In other words, a strategy that looks across time, that says, today I have the resources, but I know twenty, thirty, forty years in the future, I’m going to have depleted these resources. I have to smooth the consumption that I get from the income from these resources so it’s not all used up at once and then collapse.

Now many countries don’t live that way, but the smart ones do. One of the exemplars of thinking ahead with the finite nature of these resources has been Norway, which has accumulated massive amounts of wealth from its gas sales and exports, knowing that when the gas runs out it’s going to have accumulated financial wealth that can be used in the future.

There’s a second very important challenge, it’s called a curse indeed, that comes with natural resources. I’ve been involved in the study of the “resource curse,” as it’s called for around twenty years. Because way back

then, colleagues and I noted that many of the resource rich countries, despite their wealth, were actually doing quite poorly. It’s a paradox. It should be a benefit, but it can be a curse. We looked into it.

There are two big reasons associated with this resource curse. One is called the Dutch disease, that the wealth that comes from these resources and the consumption that results from that wealth leads to a demand for lots of domestic, non-traded goods and pulls resources away from other internationally traded goods that otherwise would be competitive for example, the manufacturing or the agriculture sector.

So a heavy big mining sector, though it gives wealth and consumption, can draw resources away from technologically dynamic sectors, such as manufacturing. But there’s another part of the resource curse that surely is at play and that’s politics, not economics, because when you have a highly valued resource, an oil reserve, could be a diamond mine, it could be some other very valuable mineral resource, that’s a kind of natural rent.

In other words, in a way, income for free. And when you have that kind of rent, it seems like this great fountain of wealth, of course it leads to dreams of wealth and it can lead to internal conflict. Politics becomes a scramble. Who controls the oil, controls the wealth. Even countries fall into civil war over fighting for these very valuable resources, or international war. It’s no accident that the imperial powers, the U.K., France, and others focused a lot of their attention on the Middle East in the 20th Century, cause that’s where the oil is. It’s no accident that the United States has repeatedly, seemingly endlessly been at war in the Middle East, because in its interpretation, it’s keeping the oil lines open. In others’ interpretation, it’s grabbing for oil that belongs to somebody else.

But this is a curse. It can lead paradoxically to devastation, even of economies, the kind of Midas touch that goes seriously awry.

There’s a third dimension of the extractive sector that should be noted and that’s what it can do to inequalities of income and social exclusion. Have an indigenous group living in some part of nature discover oil or gas or diamonds under that indigenous population’s area and watch what happens. In country after country, throughout history: whoa! Swept aside. Conquered, pushed away. That’s our resource. So these mineral resources, because they’re so valuable, create inequalities, injustices that we have to keep our eye open in the 21st Century. It’s indefensible what’s happened so often in the past and until today in the mineral sector, and it’s a reason why the mineral sector is often the site of so much conflict.

A fourth decisive challenge of the mining and extractive sector more generally is the environmental challenge. Mining almost intrinsically means moving lots of earth, often deforestation, use of many industrial chemical processes that are highly toxic and highly polluting. Often regions are devastated by companies that don’t take care of the environment in which they’re operating.

Think of Shell and the Niger Delta. Shell operated for decades and decades and decades in the Niger Delta. It’s a polluted mess with massive amounts of cancer and poor health of the population. And Nigeria wasn’t able to defend itself in the face of this kind of environmental destruction. But of course that story is repeated in many parts of the world with deforestation, pollution, poisoning, destruction of habitat. And then when it comes to coal, oil, and gas, we know we have another very, very big environmental problem and that is that intrinsically when carbon-based fossil fuels are burned, they release carbon dioxide into the atmosphere.

And bad luck from the chemistry. Carbon dioxide is a greenhouse gas. It means that while it lets in the solar radiation, it traps the outgoing infrared radiation from the earth and warms the planet. We have now raised the concentration of carbon dioxide in the atmosphere so much that we are dangerously warming the planet and disrupting the climate.

Well, the fossil fuel industries, the coal, oil, and gas industries need to take note. They need to be part of a sustainable world economy. And that means that when you add all of this up, the resource curse, the governance challenges, the social exclusion that can come, the depleting resources leaving the future bereft of resources if one doesn’t take care, and the environmental challenges.

All together, it means that the extractive sector is really at the heart of the sustainable development challenge. Sustainable development means a holistic approach to our society, which takes into account not only the desire for economic development, but also social inclusion and environmental sustainability.

We believe that the mining sector and the fossil fuel energy industry need to become leaders of sustainable development to operate themselves sustainably and in recognition of responsible management to ensure that the ways that they operate and the patterns of their production and use of their products fits within a world in which economic development is accompanied by social justice, fair treatment, and environmental sustainability.

We’ll return in another chapter to the meaning of the climate challenge for the energy sector.