Drilling into Debt: An Investigation into the Relationship Between Debt and Oil
Oil Change International, Jubilee USA Network, Institute for Public Policy Research, Milieudefensie, Amazon Watch
July 2005

Download the full report, Drilling into Debt (PDF)

Drilling into Debt is the first study to rigorously examine the relationship in between oil and debt. To do so, we have collected data on 161 countries for the period 1991-2002, and collected further data on 88 developing countries for the period 1970-2000 for use in a statistical model of debt burdens. We have supplemented that analytical exercise with additional research, in order to shed light on the policies that led to the current situation.

Our key findings are

  1. Increasing oil production leads to increasing debt. There is a strong and positive relationship between oil production and debt burdens. The more oil a country produces, regardless of oil’s share of the country’s total economy, the more debt it tends to generate.
  2. Increasing oil exports leads to increasing debt. There is a strong and positive relationship between oil export dependence and debt burdens. The more dependent on oil exports a country is, the deeper in debt it tends to be.
  3. Increasing oil exports improves the ability of developing countries to service their debts. There is a strong and positive relationship between oil exports and debt service. The global oil economy improves the ability of countries to make debt payments, while at the same time increasing their total debt.
  4. Increases in oil production predict increases in debt size. Doubling a country’s annual production of crude oil is predicted to increase the size of its total external debt as a share of GDP by 43.2 per cent. Likewise, the same change is predicted to increase a country’s debt service burden by 31 per cent. For example, the Nigerian government currently plans to increase oil production by 160% by 2010. Past trends indicate that Nigeria’s debt can thus be expected to increase by 69%, or $21 billion over the next six years.
  5. World Bank programs designed to increase Northern private investment in Southern oil production have instead drastically increased debt. Northern multilateral and bilateral “aid” for oil exporting projects in the South has exacerbated, rather than alleviated debt. Specifically, an examination of those countries where the World Bank Group conducted “Petroleum Exploration Promotion Programs” (PEPPs) reveals debt levels (debt-GDP ratios) in those countries that are 19% higher than those countries that did not undergo this form of structural adjustment.
  6. The relationship between debt & oil is most likely caused by the interplay in between three factors: a. Structural incentives for and direct investments in the oil industry by multilateral and bilateral institutions, such as the World Bank Group and export credit agencies. b. Oil fueled fiscal folly – both in the North by creditors over eager to lend to nations perceived as oil rich, and in the South by unwise fiscal policies. c. The volatility of the oil market.

A previous report, published in 2004 by the Institute for Policy Studies, demonstrates how multilateral support for oil is consistent with an agenda to diversify oil supplies for Northern consumption, and open Southern reserves to Northern corporate investment. It also noted that 82 percent of all oil extractive projects funded by the World Bank Group since 1992 are export-oriented, and primarily serve the energy needs of the North, not the South.

Countries that produce oil tend to be poorer and less productive economically than they should be, given their supposed blessings. This has been well documented over the last decade. Further research has confirmed that oil export-dependent states tend to suffer from unusually high rates of corruption, authoritarian government, government ineffectiveness, military spending, and civil war.

Coupling these previous efforts with our key findings we see a disturbing picture of a global oil economy that primarily serves the interests of Northern consumers, creditors, and governments, while running counter to the interests of poverty alleviation, development, and a stable climate in the rest of the world.