For those in the business of exploiting natural resources, transportation costs can exceed extraction costs by order of magnitude. The oil-extracting regions of Western Siberia, for example, were separated from Russia's industrial centers and from Western consumers by thousands of miles. Characteristic of Russia's type of colonization, these internal distances amplified intra-country inequalities. Since oil extraction did not require much labor, the wealth it generated did not accrue to the Russian people. The state spent or saved the profits, leaving the population to rely on subsistence incomes.
Norway and the United States were not petrostates, but Russia and Venezuela were. While these latter two countries were vastly different, both combined oil with authoritarianism, using socialism to deceive their peoples and proceeds from the oil trade to feed them. Devastated by the oil curse and mismanagement, socialist Venezuela slid into chaos. The Soviet Union, a country created by a party of the Utopian left, turned into the far-right Putinist Russia.
Connecting two political realities, the Russian state and oil, Harvard scholar Marshall Goldman dubbed Russia a petrostate in 2008.4 The meaning of this concept shifted from the sultanates to those countries that had both oil and a large population. They were clearly divided into two groups: some exported most of their oil, others burned it domestically. Exporting petrostates functioned like the old mercantilist empires: more barrels per capita meant a higher income for the state, while the people remained poor. In contrast, those countries that extracted but did not export their oil secured their growth by boosting consumption domestically. Like the United States and Australia, Russia had a large population, but in exporting most of its energy it used oil and gas revenues in the same way as Saudi
Arabia or Qatar. It was not the amount of carbon extracted but the country's dependence on oil exports that turned it into a petrostate. The oil curse played a particularly vicious role in Russian domestic affairs precisely because it had a large and well-educated population that benefited little from the oil and gas revenues (see Chapter 6). In the early 1990s, neoliberal economists from Harvard described Russia as an Upper Volta with rockets. In fact, it was more like a Qatar with people.
As long as capitalism has existed, monopoly has been its highest manifestation and worst nemesis. Every petrostate was a double monopoly, because each combined a monopoly on violence with a monopoly on energy. The former was a traditional attribute of the state; the latter emerged through the nationalization of oil production after World War II, and in Russia through the consolidation of Putin's power in the early 2000s. With OPEC+ (where the plus sign stands for Russia), a triple monopoly emerged: controlling 55 percent of global output and almost all proven reserves, this expanded cartel had the power to set global prices. But no monopoly is perfect. Thankfully for the world, the members of this cartel had opposing interests and allegiances, differences that Russia's war on Ukraine only exacerbated.5
Every economist knows that if the products of labor are monopolized then their quality will decrease and their price increase. Whether we're talking about Mercedes and BMW, Microsoft and Apple or Harvard and Yale, we do not allow them to merge because we think that competition improves their outputs. However, we do not apply this belief to primary commodities, and twentieth-century states were happy to see them monopolized. This happened because raw materials were not the products of labor. Extraction did not fit the seemingly universal laws that political economy had formulated for production.
In extraction, there was no economy of scale: if you enlarge your shoe or car factory every unit will be cheaper, but if you expand your corn or oil field every unit will be more expensive (classical economists called it the law of diminishing returns). There was no relation between extraction costs and exchange value. There was no connection between productivity and human capital or property rights - these were critical for production but neutral for extraction. Finally, there was no relation between taxation and representation: the main income of resource-bound countries came from customs duties and royalties rather than from taxes. The deepest foundation of modern economics, the labor theory of value, did not work in the resource-bound states. It was a whim of nature rather than human labor that made these states, and their leaders, richer or poorer.
Your curse is someone else's blessing
Different natural resources have different political features, or, as Bruno Latour put it, tell different stories.6 Political scientist Michael Ross enumerated four features of oil rent:7 It was large, so the governments of petrostates were twice as big as that of their neighbors. It was direct, so treasuries depended on the state-owned oil fields rather than on taxes. It was unstable, because global oil prices were beyond the control of any single state. Coming from nature and bypassing people, it was opaque. These features made oil rent an optimal means for enriching a state-sponsored elite. Since its main source of income, oil extraction, was not labor intensive, the petrostate did not depend on its population. Hiding its fabulous wealth, the petrostate produced lofty promises and embarked on military adventures. The early twenty-first-century statistics showed that a country's export of oil and gas hindered its democratic development, destroyed other sources of national income, and depressed human capital. Economic growth in the exporting petrostates went hand in hand with the incompetence of the ruling elite, who consolidated their power in order to amass even more wealth.
Imagine two states that trade with one another. Their relations could be beneficial for both insofar as they create new value together through trade and labor. But it also could be a zero-sum game, or these two states could destroy the value they had created. Let's take another step. Our two ideal-type countries are as different as they could be: one relies almost entirely on natural resources, the other on the labor of its people. Both have comparative advantages which develop and sharpen while they are trading (for proving this point, Paul Krugman was awarded the Nobel Prize in economics8). Now, the labor-dependent state acts as it should according to Adam Smith or Paul Krugman: it protects property rights, breaks monopolies, encourages technical progress, delivers education to its citizens, provides public services and collects taxes. This state has a robust economy, a brimming treasury and a happy people.
With the resource-dependent state things are different. It owns a rare and valuable natural resource - say, sugar cane, diamonds, oil or rare metals. Possessed of such treasure, this state must protect it from rivals and secure the long lines of transportation to its consumers. Its resource is expensive precisely because it is rare, difficult to reach and risky to protect. Maximum profits can be achieved through the formation of a monopoly, or maybe a cartel, which has the pricing power and is allied to powerful state agencies. Only a combination of rising prices, decreasing risks and increasing sales will secure the desired growth.
The loop goes through the state, which lends the extractive monopoly its protective power. An oiligarch either cheats, bribes or buys out the state. If he is a Rockefeller he underprices his rivals and acquires their oil fields, creating a monopoly which leaves only the state as his rival; at this point, he either wins or loses, and even if he loses he may win again later. But if he is a Putin he starts from the opposite end: using the power of the state, he confiscates one field after another and coalesces them into a monopoly that takes on the appearance of having become the state itself. Historically, this top-down strategy proved to be the more successful. You trade a resource which is central to the state, and the state provides you with all its power to secure your trade. Is it not only fair that you become the state?