A Path to Prosperity for Oil-Rich Guyana

A Path to Prosperity for Oil-Rich Guyana

. 8 min read

Guyana is sitting on a jackpot of liquid gold.

In 2015, the oil giant Exxon Mobil discovered 11 billion barrels of oil off the coast of the small Latin American country. The discovery promises to change Guyana forever, catapulting the country and its people to new heights of power and wealth. Oil already generates US$1 billion in revenues annually for the government and will produce an estimated US$7.5 billion by 2040. By these forecasts, Guyana—the impoverished, rainforest-covered country of just 800,000 people—will become the fourth largest offshore oil producer in the world.

But there are doubts. Questions abound over whether Guyana is prepared to manage this influx of wealth. Some critics contend that Guyana lacks the legal framework and expertise to regulate the oil bonanza, and many similar developing countries—such as neighboring Venezuela—have also struck vast oil deposits, only to be left poorer and more politically unstable than before.

This uncertainty can be segmented into three main concerns. First, can Guyana’s democracy and economy survive the oil boom? Second, can Guyana survive the effect of oil money on its ethnically divided population? Third, given the coastal country’s vulnerability to climate change, is it responsible to drill for more oil?

Tiny Country, Tremendous Oil

Abundant natural resources can spark huge economic growth. However, in many developing countries, mining these valuable resources paradoxically leaves the countries worse off, with weaker economies and democracies. Economists call this phenomenon the resource curse, and it afflicts many countries throughout Latin America and beyond. Guyana’s oil discovery makes the potential for a resource curse a serious concern for the country as oil floods in.

Why does this curse happen? First, burgeoning resource revenues can weaken a country’s economy in what economists call the Dutch disease. This phenomenon occurs because resource revenues increase the value of a country’s currency, rendering foreign currencies less valuable in that country. That makes non-oil exports from the country less competitive in global markets. A foreign investor’s dollar will go further to buy exports from non-oil sectors in a less wealthy, resource-poor country than in a richer, resource-rich country. Dutch disease also refers to another danger. As petrostates focus their economies on exporting a single resource, labor drains into the oil industry—and away from other sectors. This concentration of labor leaves the economy vulnerable. When resources inevitably run dry or lose value, the country has few other industries to depend on. The economy crumbles.

Guyana need not look far to see this curse at play. Petroleum has long accounted for more than 75 percent of Venezuela’s total exports. When oil prices plummeted in the 1980s and 2014, the economy was sent spiraling. By some estimates, hyperinflation reached more than 65,000 percent in 2019. Given the Venezuelan economy’s dependence on oil, if the government ever used up its oil, the economy would crater.

The second reason is that oil revenues often erode good government. Many developing countries lack the legal infrastructure to oversee the management of their vast new oil funds. With little oversight, government officials can skim off the top. Funding the government through oil revenues also decreases its reliance on taxes, weakening the link between taxpayers and the government. That emboldens politicians to forego voter concerns for selfish embezzlement.

Resource-rich Angola serves as an illustrative example. For two decades, Isabel dos Santos, the head of the state-owned oil company, Sonagol, siphoned oil funds into her own accounts. On Nov. 16, 2017, she drained Sonagol’s account from US$57 million to US$309. Corruption of this scale has left the country's economy in tatters and nearly 50 percent of its population living on less than US$2 a day.

It appears Guyana’s government is already struggling to avoid these two hazards that amount to the resource curse. The country is labeled a “flawed democracy” by the Economist Intelligence Unit, only a few points above a “hybrid regime” like El Salvador (whose leader is notoriously anti-democratic). Guyana’s Corruption Perceptions Index (CPI) rating is relatively low: 41 points, lower than the global average of 43. Starting with a weak democracy and significant corruption does not bode well for the future of Guyana’s governmental institutions.

Some also say the deal that the country struck with Exxon heavily favors the oil giant, guaranteeing a 50-50 split of oil revenues—lower than the average 75 percent that most governments receive. Exxon says it took a risk working in a country with little energy infrastructure, but not everyone is convinced. The deal was signed after Exxon had confirmed the existence of the oil. It also affords Exxon an expansive lease area: 10,350 square miles, nine times larger than Exxon’s average. The dubiety of this deal suggests Guyana’s government may be ill-equipped to effectively manage the oil influx. The shoddy deal itself could also spell future troubles for Guyana to exploit its oil reserves. It grants Exxon tremendous control, meaning that Guyana may not capitalize enough on its natural endowment to engender the change it imagines.

Enduring Ethnic Tensions

Even if Guyana can preserve its economy and democracy, there remains another critical question: Can the country endure even as oil funds inflame Guyana’s ethnic tensions?

Guyanese politics are deeply divided along ethnic lines. Afro-Guyanese (descendants of African slaves) support A Partnership for National Unity (APNU), while Indo-Guyanese (descendants of Indian indentured workers) back the People's Progressive Party (PPP). In 2020, the PPP assumed power five months after a disputed general election. The PPP only won by two seats, but with control of the government, the party can dictate policy—including how oil revenues are allocated.

That consequence of this tight victory has inflamed ethnic tensions. The APNU has already begun accusing the PPP of directing oil wealth to their constituents, the Indo-Guyanese, and away from Afro-Guyanese and other ethnic groups. The party especially worries about the Natural Resource Fund, a sovereign wealth fund that holds Guyana’s excess oil revenues. In a break from recent practice, the PPP did not give the APNU a seat on the board of the fund. That made the APNU furious. It worries that, left unchecked, the PPP will direct funds to Indo-Guyanese disproportionately.

So far, there is no hard evidence of such discrimination. But that does not mean it does not—or cannot—take place. For the Guyanese government to make good on its oil boon, it must ensure all its citizens get to ride the oil boom—not just a select few.

Climate Considerations

The third challenge is a more existential threat to Guyana: climate change. Guyana’s geography leaves it extremely vulnerable to coastal flooding. Ninety percent of Guyanese live in low-lying regions along the nation’s Atlantic coast. The capital, Georgetown, lies below sea level. For decades, seawalls have kept the roaring ocean at bay. But that may soon change. Rising sea levels are increasing the frequency and severity of coastal flooding. Crops have been flood-drowned. Ocean water at times rushes over seawalls. According to some estimates, Georgetown could be submerged by 2030.

Guyana’s climate vulnerability brings into question whether it is responsible for the government to promote oil drilling—a practice that accelerates climate change.

The type of oil drilling done in Guyana—deep-water offshore drilling—also risks a more immediate danger: oil spills. Such catastrophes could cause irreparable damage to the biodiversity of a country with thousands of endemic species and covered 85 percent by rainforests. This potential biodiversity loss could also have economic consequences. Fish and shrimp, for instance, constitute Guyana’s largest source of animal protein, but lately the sustainability of their stocks has become uncertain. Overfishing has already hurt fish and shrimp populations, and an oil spill could decimate them. That would leave many Guyanese, especially Indigenous communities who depend heavily on fishing, devastated.

The dilemma is made more difficult by Guyana’s storied history with climate action. In the past, Guyana’s climate vulnerability made it one of the greatest pioneers for climate action. For years, the country served as a carbon sink for Norway, sequestering oil on Norway’s dime so that Norway could continue to drill off its coast. Climate activists hailed the deal as a potential model for feasible climate action.

Despite these concerns, many Guyanese still seem intent on linking their future to oil. Numbers, they say, are a deciding factor. And they have a point. Over a decade, Guyana received US$150 million from Norway for leaving its oil in the ground. In one year, the government made more than double that from its own oil. This insufficient compensation for climate action occurs globally. The Paris Climate Accords, for example, promised US$100 billion to poorer nations for climate-related disasters. Those funds were never released.

Guyanese have also realized that the concern that oil drilling will accelerate global climate change is exaggerated. In a recent environmental impact report, Guyana’s Environmental Protection Agency (EPA) found that the country will remove more greenhouse gasses than it emits—even accounting for the oil drilling. Although oil production will certainly only contribute to climate change, Guyana will remain carbon negative.

Faced with these realities, Guyana’s government now sees oil as, paradoxically, a central component in its climate action plan. Oil windfalls could fund the reconstruction and expansion of seawalls. They could finance farmers affected by severe flooding. And meanwhile, Guyana’s rainforests would take in more CO2 than its oil rigs spew. Liquid gold could be the key to a safer future for Guyana—even though it could also spell the country’s downfall.

Reinvesting Responsibly

While serious concerns surround Guyana’s oil discovery, there is yet hope for the new petroleum power. Guyana’s response to this challenge should center around a fundamental principle: reinvesting portions of its oil windfalls to shore up its climate protections and to sustain and build wealth—with or without the oil.

There are two specific strategies Guyana can use to realize this goal. The first is to invest in infrastructure. That includes healthcare, education, roads, and of course, climate protections. This will ensure oil funds are used to improve Guyaneses’ quality of life directly. Guyana has already taken positive steps in this regard. The country is building 12 hospitals, multiple schools, seven hotels, two large highways, its first deep-water port, and a large gas energy plant that will double Guyana’s energy output and halve power bills. Infrastructure investments like these must continue. Expanding and improving the seawalls and other climate protections would also be costly but beneficial.

The second strategy is to invest diversely through a sovereign wealth fund. This strategy has two benefits. First, the accounts of the fund are public, so Guyanese can monitor how their government is using oil money. This transparency safeguards against corruption. Second, investing diversely through a sovereign wealth fund converts excess oil windfalls into sustainable growth that is, crucially, independent of oil. If some day Guyana’s oil reserves ran dry or oil prices plummeted, a diverse fund would ensure Guyana could still pay its dues. Guyana has a good guide in this endeavor. Norway—one of the few petrostates that avoided the resource curse to achieve economic prosperity—has an enormous sovereign wealth fund valued at more than US$1.3 trillion. The fund accounts for almost 20 percent of the government budget, which finances one of the best social nets in the world. It also contains fiscal limits on how much the government can spend from the fund. That ensures that the fund is maintained and Norway can spend more should its economy fall on hard times. Many accredit the fund’s success to clever, diverse investing.

Guyana has already established a sovereign wealth fund—a good first step—but the fund is not without challenges. Namely, it is managed by only one of the political parties, inflaming ethnic tensions. Nevertheless, the establishment of the fund represents a positive development.

There have been other small but positive signs, too. In 2017, Guyana joined the Extractive Industries Transparency Initiative, which requires member countries to publicly disclose how their governments reward resource rights and use oil revenues. The effort suggests that Guyana is committed to clamping down on corruption—a promising sign. In May 2023, a Guyanese court ruled that Exxon must offer an “unlimited guarantee” to cover the cost of a potential oil spill. Exxon appealed, but the ruling nonetheless represents a significant step for Guyana. It demonstrates Guyana’s commitment to not only environmental protection, but also its judiciary system. Clearly, the courts are still willing to hold giants like Exxon accountable.

Despite these encouraging indications, the road to a new Guyana is long. The persistent challenges of an oil boom—the resource curse, the Dutch curse, inequitable wealth distribution, and environmental disasters—still loom. That said, no number of concerns can negate the reality that Guyana has won the oil lottery, and with it the potential to lift its people out of poverty to a world of prosperity. The promise of a golden Guyana remains. The government just has to take the necessary precautions to realize it.