It’s called “the resource curse” or “the paradox of plenty.”
The paradox is that what can make some people rich, like finding gold or oil in your backyard, often makes countries with those raw materials poor.
In fact, of the 51 countries identified by the IMF (the International Monetary Fund) as “resource-rich,” 29 are ranked by the United Nations as low or lower-middle income.
Why things work out that way is a complex question, but what’s simpler to see is what the resource curse does to a country, or a state.
First, politically, the riches of resource extraction tend to turn governments favorable to the extractive industries – pushing them to tax concessions and lax environmental enforcement. Second, for reasons both political and economic, the interests of the number one industry tend to squeeze out competing interests, including those of citizens, who might, for example, prefer to encourage cleaner wind and solar power over energy from fossil fuels.
But the biggest curse of the globally-valued resource is not so much the loss of competitive options as the loss of existential control. The resource-cursed entity, whether it be copper-connected Chile or oil and gassed-up New Mexico, finds its economy, especially its national or state budget, completely at the mercy of market forces far away.
When the New Mexico state legislature passed its 2020 budget, the price of oil was close to $60 a barrel and the lawmakers were underwriting hundreds of millions of dollars in new spending for schools and roads and public salaries.
By mid-March, when global oil prices were in retreat, falling below $40, the governor announced a first round of trims and began planning for a special session of the legislature to cut much, much more.
Which was before things got really crazy.
Like President Trump on the public health effects of the Covid-19 pandemic, the energy markets sustained a remarkable level of denial about the coronavirus’ effect on the world economy. But by mid-March, the energy traders had figured things out, sending prices into a month-long plummet, ending on April 20, when, for the first time in history, the price of oil went negative. Ostensibly you had to pay someone to take your oil off your hands … at the bottom that price was allegedly more than $30 a barrel.
You know that couldn’t last, and it didn’t. A day later oil was over $10 a barrel, a week later that price had more than doubled, and over a recent calendar week, May 13 to 20, the price of West Texas Intermediate oil – the American standard — went up by roughly another third …from a bit over $25 a barrel to $33.50.
This still leaves resource-cursed New Mexico in a deep financial hole … depending, of course on what happens next.
Professor Janie Chermak, Department of Economics, is a natural resources and environmental economics expert with an emphasis on energy, including oil and gas, water and invasive species.
Chernak has been in the Economics Department since 1995 when she was hired as an associate professor. She was formerly the chair of the Economics Department, a position she’s held since 2012.Other research Interests include interdisciplinary modeling and applied microeconomics.
Chermak teaches courses in natural resource economics, microeconomics, energy economics and dynamic optimization.