The Norwegians got it right. If you discover oil create a sovereign wealth fund and invest the revenues outside your own economy. [1]
[1] - http://www.spectator.co.uk/2008/04/why-hasnt-britain-got-a-s...
I was under the impression that this phenomenon does not hold for so-called developed countries, like Norway and the UK. I could be mistaken.
The long and short of the dutch disease is that if you introduce a revenue source that is independent of the rest of your economy and pour all of the money into your economy, it will cause your currency to appreciate, making every product made in your country less competitive. So even while your country keeps getting richer through oil revenues, all the rest of your economy stagnates or decays, until you import most of what you consume and are wholly dependent on your oil revenues.
Note that this is not limited to oil. The Spanish went through this in the 16th and 17th centuries because of silver imported from the new world.
For most of the first half of the 20th century, the Saudi Arabia of the world, in terms of oil extraction, was the United States.
But the situation was moderated by a few factors, at least as I see it:
1. The US had an industrial capacity (though much of that developed over this period), largely in the northeast. Much of the oil production was in economically underdeveloped regions of the country, particularly Texas and Oklahoma.
2. There wasn't a large world market for oil initially. Oil demand was being built up as supply was established. Flooding the market with cheap oil money simply didn't happen. Actually, demand was so low relative to extraction costs that oil prices hit a low of two cents per barrel after the 1930 East Texas Oilfield discovery (see Daniel Yergin's The Prize for an extended discussion of this).
3) WWII. The economic climate from 1930 - 1945 was not one of what we consider conventional growth markets. Initially the problem was the Great Depression, during which global economic activity contracted markedly. Then came the command economy of WWII. In the aftermath, the US was both the sole oil and economic power left standing.
4) By the time other countries were establishing themselves as substantial consumers of oil, the US itself had begun importing oil from Saudi Arabia.
I'm not aware of formal economic treatments of this, though it strikes me that the US experience was significantly different from that of, say, Argentina, Saudi Arabia, or even Russia / the USSR.
this might not be totally true, the Saudi Arabia sovereign wealth fund is almost as large as Norway's (so the saudis have not just dumped all money on their people) and AFAIK it's quite secretive but somewhat diversified between internal and foreign investments, so they will still have money when the oil runs out.
As it is, Britain’s sovereign wealth was effectively distributed to taxpayers to spend or save as they chose, and in very many cases that means it ended up in bricks and mortar, in Britain’s absurdly overpriced residential property market. But it’s too late now: the end of North Sea oil is nigh, we’ve privatised everything, the pensions bill is mounting, the habit of personal saving has been all but lost, the housing market is tottering and the government’s finances are hopelessly adrift. We’re on a course set for us a generation ago; in a generation’s time, as John Hawksworth says, we’ll look enviously at Norway and the Gulf and wonder: where did our oil money go?
I think this is a somewhat lazy analysis that mars an otherwise interesting and thought-provoking piece. I'm not convinced that the government disbursing oil wealth in the form of tax cuts went mostly into higher property prices. I get that real estate is inflated - it's inflated in all major cities in the US too - but I feel like the author takes too large a leap of faith in his logic here. What is the mechanism that links this argument together?
It may be that they have a cultural preference for investing in residential real estate.