The Story of Oil Aid…

For more than 25 years, wealthy countries have been using aid and other foreign assistance to subsidize the expansion of the international oil industry, a practice known as “Oil Aid”. International financial institutions like the World Bank, along with bilateral aid agencies and Export Credit Agencies, provide billions of dollars a year in direct financial support to help oil companies like Exxon Mobil, BP and Halliburton expand production overseas. The overwhelming majority of this money goes to projects that export the oil back to wealthy countries.

A Brief History of Oil Aid (to be updated shortly):

Governments have been supporting the expansion of the oil industry in one form or another for more than 100 years, but Oil Aid in the modern sense really only emerged following the oil shocks of the 1970s.

First in 1973/74, and then again in 1979/80, oil prices tripled or quadrupled within a matter of months. Oil producing countries in many parts of the world, such as the Middle East, were wrestling control of their oil resources away from the oil companies and the Western governments that had largely controlled the world’s oil supply up until that point. This was a major blow for wealthy oil dependent countries like the United States that were suddenly facing rising oil prices and real limits on their ability to control the world’s oil supplies.

In the early-1980s, the Reagan Administration essentially decided that the solution to the United State’s dependence on oil was to find and secure more oil. The U.S. Government, much like many other wealthy countries, analyzed the obstacles that were standing in the way of uninterrupted access to oil supplies overseas, and proceeded to develop strategies to use all the tools at their disposal to overcome these obstacles.

Among other things, the U.S., Europe, Japan and other wealthy countries decided to use their aid money to help them get access to foreign oil. It is at this time that you see the modern concept of “oil aid” being born.

There were two key components – or pillars – of “oil aid” that were sketched out at the time. First, wealthy governments began using development assistance to reverse the trend that was emerging in many parts of the world towards strong National Oil Companies. The objective was to convince governments in low and middle income countries that their state owned oil companies should focus on managing the oil sector instead of being directly involved in the production and distribution of oil. This involved convincing countries to develop legal and regulatory frameworks in the oil sector that focused on attracting and facilitating western oil companies instead of competing with them.

For its part at least, the U.S. was concerned that if this strategy would be very controversial in many countries. If the U.S. were seen to be demanding these changes it might backfire. The World Bank and other multilateral development banks, on the other hand, were in a better position to help transform the oil sectors of developing countries.

This analysis is very clearly stated in US energy policy documents related to the World Bank. For instance, a 1981 Treasury Department report on the role of the World Bank in the oil sector clearly states the following:

“Direct U.S. pressure to improve terms and conditions [for the oil sector in developing countries] is likely to be counterproductive in most countries. We are seen as interested parties and to be seen as bowing to U.S. pressure would hand a powerful issue to host country government opponents.

“Here, the ‘neutral’ stance of the Bank can play an important role. As a multilateral ‘development advisor’, [the Bank] can help Least Developed Countries revise their incentive structures to encourage investment.”

To make a long story short, the World Bank and other multilateral development banks took on this role of working to reshape the oil sectors in developing countries and they have been doing it ever since. In this sense, the story of Oil Aid is closely related to the much broader story of the rise of World Bank and International Monetary Fund structural adjustment programs in the 1980s.

The second key component of “Oil Aid” is the idea of using development assistance to directly finance the operations of western oil companies in countries around the world. This is the idea of using loans, grants, partial risk guarantees and other financial mechanisms to channel money to oil companies. If you were to include all of the various forms of bilateral assistance as well as the international financial institutions, such as multilateral development banks and export credit agencies, wealthy countries have channeled billions of dollars a year to oil companies over the past few decades and continue to do so today.

Oil Change International is working with organizations around the world to End Oil Aid and promote a just transition away from oil dependence. We believe that:

Governments should have better things to do with scarce foreign assistance than to subsidize oil companies! Wealthy countries should focus their energy-related assistance on activities that reduce poverty, promote healthy ecosystems and foster meaningful democracy. Oil Aid is not about helping poor people or promoting sustainable and just societies, it is about diversifying and increasing oil production in order to feed over-consumption in wealthy countries. In fact, Oil Aid and the oil addiction that it feeds can often exacerbate poverty by fueling conflict, repression, economic volatility and debt, and undermining local communities and the ecosystems upon which they depend.

Governments can’t actively subsidize oil companies and effectively fight climate change at the same time! Oil accounts for almost 40 percent of the modern energy used in the world today and it is among the leading sources of greenhouse gases. There is an urgent need to transition away from our dependence on oil if we hope to avoid dangerous climate change. The first and most obvious step in this process is to stop using public money to finance oil companies. Oil Aid takes the world in the wrong direction. Governments should be fighting climate change and energy poverty, not subsidizing oil.

The oil industry is the most profitable and well-established industry in the world, they don’t need more subsidies! Oil companies have already benefited from more than 100 years of government support, they have accumulated trillions of dollars worth of infrastructure and capital, and they continue to earn hundreds of billions of dollars a year year. The oil industry already has a massive advantage over competing sources of energy. Governments should be working to level the playing field and encourage clean energy instead of protecting the interests of oil companies.