Future Shocks: The Coming Oil and Water Wars

Adaptive political institutions are critical for success in the future environment. The intersections of poor governance and environmental shocks are the hot spots of the future.

Estimating Reading Time: 7 minutes

By Jon Farley

Studies show nearly one third of all lottery winners will declare subsequent bankruptcy, and 78% of former NFL players are under financial stress within two years of retirement. These numbers are shocking, but also serve as a warning to others: large influxes of cash can fix short-term problems, but lead to long-term deficiencies. I will argue that this axiom is as true for states as it is for individuals.

Research on resource abundance shows that states are more likely to have conflict based upon resource abundance than resource scarcity. Scarcity, which will be covered later, often leads to cooperation between states, whereas abundance can lead to weak governments. There are many reasons for this abundance conflict: lack of social structures, weak taxation, uneven distribution of wealth, and competition for resource control, just to name a few. To see the effects of abundance on governance, we need look no further than Venezuela’s current political situation and pending oil crisis.

Venezuela has more oil reserves than any nation on earth. Oil revenues make up 95% of all exports, but production rates have fallen at rates similar to that of Iraq in 2003 and Russia in 1991. The difference is that Venezuela is not at war or facing a military coup. Venezuela’s declining oil output is solely based upon government corruption, decades of mismanagement, and crumbling infrastructure. The World Bank’s governance index shows a steady decline in Venezuela’s government effectiveness, reaching an astounding low of 10% this year. This is well behind the South American average of 50%, which represents countries with similar history, culture, and geography, but not as “lucky” to have the largest oil fields in the world.

OTH, multi-domain operations, emerging security environment

Oil revenues are not the only variable in play with countries like Venezuela, but there does appear to be a trend. To the right are the World Economic Forum’s 2013 figures for national dependence on oil exports. Looking closely, most of the nations on the first half of this chart could hardly be described as ‘stable.’

This instability is due to a host of factors. For instance, countries with oil-based economies tend to under-develop the foundations for good governance, often called the “resource curse” or “paradox of the plenty.” The idea is that oil-based economies have the initial appearance of prosperity, but when driven by a single market, the oil industries take priority over good governance. Additionally, this revenue becomes a target for rebels within the country and causes internal conflict due to the uneven distribution of funds. These funds replace a stable tax structure and social order, while making the majority of government income reliant on volatile global commodity markets.

There are counter arguments to this theory. As with all generalizations, outliers exist which some will use to dismiss the argument. The economic impact of oil allows for development well beyond what countries would have been capable of before. Saudi Arabia and Kuwait would not have the same status of wealth if they still relied upon tourism and pearl diving, but this stability only lasts as long as the oil rents are high. If those incomes begin to drop, the underlying cracks in the foundation will become more apparent.

Future Shocks

Estimates for peak oil demand – when oil consumption reaches a peak and then starts to fall – range from 5 to 30 years. Shell Oil company asserts that oil could peak as soon as 2021, while most companies believe that estimate may be premature. Irrespective of when it occurs, experts remain uncertain about the full impact of a decline in oil consumption, but there is no doubt it will affect these economies. The countries on the previous graph, with the highest reliance on oil rents, are the ones most vulnerable to changing markets. If a significant decline in oil prices occurs, the foundation for these underdeveloped economies will crumble, opening the door to any number of third and fourth-order effects. Certain countries, such as Saudi Arabia, are quickly diversifying their economies to reduce the risk of shocks in the future, however not all have this luxury.

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Water scarcity is quickly becoming the next global challenge, especially throughout Asia and Africa. This chart is from the World Bank report on water scarcity in the Middle East and North Africa. If we have established the trend that countries with resource abundance tend to under-develop their governments, then the death blow appears to be that many of those same countries are facing acute water scarcity in the immediate future. Resource scarcity is one of the true “wicked problems” of the upcoming decades. As Brian Head states, climate change is difficult because it is a series of problems, none of which can be solved in isolation. When nations attempt to address climate change, they are often stymied because both short and long-term calculations and benefits of intervention are highly variable and contested. Furthermore, climate change affects global, national, regional, and local areas simultaneously, so the actions and costs must be spread across numerous levels of institutions. The effects are unevenly distributed and those that are primarily driving pollution are often not the ones suffering the consequences. Finally, the effects do not stop at national boundaries, so entire regions will suffer concurrently, while other regions enjoy relative stability.

OTH, emerging security environment, multi-domain operationsResearch shows that up to four billion people face water scarcity for at least one month a year, with over three billion people facing severe water scarcity for up to a quarter of the year. This scarcity touches every continent, but is focused on a few arid regions and on large population centers. The maps to the right show the relationship between population density (above) and acute water shortages (below). The trend of hyper-urbanization around the world is stretching resources to their limits; and the convergences in these maps, primarily in southern Asia, highlight the possibility of mass migrations due to resource scarcity, which will lead to future hot spots and conflict.

Climate change will similarly create unforeseen challenges for developed nations as well. Rising sea levels will impact low-lying areas, such as Northern Europe and the American Gulf Coast. The potential of an ice-free arctic led China to declare itself a “near-arctic state,” and shifting weather patterns could have any number of effects. The only certainty is that each country will be impacted by the changing climate, either directly or indirectly. The question then becomes, how do these countries adapt to the changes and shocks in the coming world?

OTH, emerging security environment, multi-domain operationsThe Way Ahead

Unfortunately, there is no easy solution to these problems. The nation-states most capable of handling unforeseen future shocks are those with effective governance, stable political institutions, and a distribution of power. This does not mean that only democracies will adapt, but autocratic governments have shown the inability to react to emerging challenges, either through lack of divergent opinions, inflexible decision making processes, or lack of popular participation. Additionally, corruption within the state is linked to less stringent environmental policies, primarily due to interest group influence and kickbacks. To the right is a map of government corruption by country. While there is plenty of research on differing definitions of corruption and cultural norms, egregious corruption can discourage Foreign Direct Investment, business development, tax structures, and public trust. These symptoms indicated larger problems, especially for countries looking to diversify their economies due to decreasing oil prices. Political systems aside, adaptive political institutions are the key to dealing with the shocks of the future. The ability for a country to absorb shocks depends upon their ability to adapt to a changing environment, consider disparate opinions, and seek new solutions.

In the end, adaptive political institutions will be critical for success. Good governance in the most inhospitable places can still be effective, but poor governance, even in the most resource-rich areas, will always fail. Tying back to our lottery example, states who have easy sources of income, with no foundation of fiscal responsibility, exhibit poor habits and overspending. Unfortunately, this income is temporary and will soon be coupled with other shocks that the weakened institutions will not be able to handle. The intersections of poor governance and environmental shocks are the hot spots of the future.

LCDR Jon “Tike” Farley is an instructor at the Air Command and Staff College Multi-Domain Operational Strategist Program. He is an F-18 E/F Pilot with over 2,500 hours and multiple deployments to the 5th Fleet AOR, supporting operations in Iraq and Afghanistan. He is a graduate of the United States Naval Academy and Air Command and Staff College.

The views expressed are those of the author and do not necessarily reflect the official policy or position of the Department of Defense or the U.S. Government.

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