Lamborghinis in London

“Power tends to corrupt and absolute power corrupts absolutely.”

“Liberty consists in the division of power. Absolutism, in concentration of power.”

Lord Acton, 1887

Corruption from concentrated oil wealth costs the world $US200B per year, an amount sufficient to install 100 gigawatts of wind turbine capacity per year — enough power for 70 million US homes — or to other great causes, instead of to oil prince playboy supercars and the like. How can vast wealth not corrupt when it is in the concentrated, inherited ownership of powerful families or clans? Here’s the analysis to show the costs.

Supercars, capable of 200mph, in a city center where traffic rarely moves much faster than walking pace. But if money is no object, “why not?” is the question that, it seems, many oil-rich playboys ask. So, off to London they go, with their crazy cars air-shipped in. These cars exemplify mind-boggling levels of economic inefficiency, among other things.

Our analysis here asks: are countries that gain much of their wealth from fossil fuel extraction more corrupt than other nations? The answer is, for the most part, yes. In fact, we provide a rough estimate — that corruption costs $US150 billion — $US200 billion per year. Our detailed analysis:

1. Examines the statistical correlation between a country’s fossil-fuel wealth (measured as oil reserves per capita — what we call the reserve ratio here) and its corruption (as ranked by Transparency International). We’ll show how the data were used (and where they came from and we’ll note the strengths and limitations of the data and analysis
2. Estimates the cost of corruption by gauging it against estimates of the total cost of corruption to the global economy.

The full analysis, with links to original data and tons of source data is at https://deepfutures.consulting/the-end-of-fossil-fuels

Correlation between corruption and fossil fuel wealth

For corruption: We used Transparency’s corruption perceptions index (CPI) as our source of data on corruption. Transparency International has been tracking, and trying to quantify, the corruption of nearly all the world’s countries since 1993. It does so via in-country surveys of how ordinary life and the processes of government and business are corrupted, and it aggregates corruption data from other sources using different approaches.

For fossil fuel wealth: we used mostly OPEC’s data fields. Then we model the extent to which fossil fuel reserves dominate the economy, comparing fossil fuel reserves, valued at $20/barrel, to the GDP / capita of each country.

The next chart shows corruption versus fossil fuel wealth (depicted here without the names of countries — because they overlap. Top right: overlapping bubbles — the highest ratios of fossil fuel asset value to GDP (both per capita) AND highest levels of corruption: Venezuela and Libya. Bubbles here are proportioned to national GDP: the large blue bubble is US; the large red circle is China.

Here it is clear: the least-corrupt countries also have much lower values of oil assets as a fraction of their GDP — while highly corrupt countries may or may not have big oil reserves. But the reverse is not true: countries with lots of oil reserves (compared to overall national wealth) are clearly more corrupt. We quantify this by calculating the correlation for countries based on their fossil fuel wealth, as shown in the next chart. The correlation between fossil fuel wealth and corruption is very high when the ratio of aggregate reserves to GDP is above 5, but weak when the ratio drops below 2.5.

Corruption is indeed highly correlated with the extent to which a country’s wealth is concentrated in fossil fuel assets — the correlation increasing with a rising ratio of reserves to GDP.

The cost of fossil fuel corruption

So, how much does corruption cost? And how much specifically does it cost in the context of economies largely dependent on fossil fuel industries?

The United Nations has estimated that corruption’s harm to the global economy is about $US3.6 Trillion ($3,600 billion) per year, thus from 2.5% to 4% of the whole world’s economy. Taking the mid-point percentage (3.25%) implies corruption costs of $US195 billion per year.

At the beginning of this note, we estimated that corruption costs could otherwise provide capacity for 70 million US homes per year. Consider that US homes consume more energy than most, and that wind (and solar) power costs will continue to drop. Then: the cost of corruption from fossil fuels is so high that it could pay for energy for all the homes in the world in about 15 years.

Note

• We’re not investment advisors. Nothing here, or in any of the other related notes, should be considered investment advice.