Special Report

The Failed States Index 2011

Three African states -- Somalia, Chad, and Sudan -- once again top this year's Failed States Index, the annual ranking prepared by the Fund for Peace and published by FOREIGN POLICY of the world's most vulnerable countries. For four years in a row, Somalia has held the No. 1 spot, indicating the depth of the crisis in the international community's longest-running failure.

The new edition of the index draws on some 130,000 publicly available sources to analyze 177 countries and rate them on 12 indicators of pressure on the state during the year 2010 -- from refugee flows to poverty, public services to security threats. Taken together, a country's performance on this battery of indicators tells us how stable -- or unstable -- it is. And the latest results show how much the 2008 economic crisis and its ripple effects everywhere, from collapsing trade to soaring food prices to stagnant investment, are still haunting the world.

Somalia's unending woes are the stuff hopelessness is made of. But elsewhere in the top 20, some countries showed improvement, even as others fell further behind. Afghanistan and Iraq both moved down the ranks, suggesting slight gains for the two war-torn countries as the United States seeks a sustainable exit strategy. Kenya moved out of the top 15, showing that the country continues to recover from its bloody post-election ethnic warfare of recent years. Liberia and East Timor, wards of the United Nations, largely stayed out of trouble. But Haiti, already a portrait of misery, moved up six places on the index, battered and struggling to cope with the aftermath of January 2010's tragic earthquake, which left more than 300,000 dead. Another former French colony, Ivory Coast, rejoined the top 10, grimly foreshadowing its devastating post-election crisis this year, while fragile Niger leapt four spots amid a devastating famine.

Africa's promise and peril are likely to figure prominently again this year, with 27 African countries scheduled to hold presidential, legislative, or local elections throughout 2011. As much as elections can contribute to democratic progress, they are often a flashpoint for conflict -- conflicts that invariably send already fragile states back up the ranks of the index. Uganda's incumbent President Yoweri Museveni won reelection in February, but the opposition has cried foul and his inauguration was met with violent protests. In Nigeria, steady in the rankings this year at No. 14, post-election rampages in April killed as many as 800 people. Sudan's closely watched referendum in January on an independent southern state was surprisingly free of bloodshed, but the country continues to hover on the brink of new violence.

As if its traumas last year weren't horrific enough, Haiti in 2011 is again proving to be a hard test for the world, with billions of dollars in donation pledges left unfulfilled and thousands still living in squalid tent camps, battling a cholera epidemic that has killed more than 4,600. After a fraud-marred first round, a presidential runoff election in March brought to power an untested stage performer nicknamed "Sweet Micky."

Perhaps the biggest challenge of all for 2011 will be dealing with the global fallout of the Arab revolutions, which began in Tunisia and quickly spread to Egypt, Bahrain, Libya, Yemen, and Syria. Few could have predicted that a street vendor's humiliation would be the spark that set an entire region ablaze, with consequences that may reach far beyond the Middle East. After all, if peaceful protesters can unseat an entrenched dictator in Cairo, why can't they take to the repressed streets of Tashkent or Rangoon?

Photo: Robin Hammond / Panos

Special Report

Big Oil in Turnaround

The world's biggest energy companies have bigger problems than Congress and are adrift in a marketplace they don't understand.

On May 12, the top executives from the five biggest international oil companies re-enacted a familiar ritual: the Capitol Hill perp walk that accompanies every spike in gasoline prices. Sen. John D. Rockefeller IV (D-W.Va.) -- himself the scion of the United States' greatest oil dynasty -- accused the oilmen of being "deeply, profoundly out of touch" with ordinary Americans. "I find it hard to understand how you can come here before this committee and the American people and say, when you are projected to make $125 billion in profits this year," Sen. Robert Menendez (D-N.J.) said, "that somehow the loss of $2 billion a year ... is somehow so punishing, somehow not part of shared sacrifice, somehow you need to go back at them at the pump to make up for it."

But these days, Big Oil has bigger problems than the U.S. Congress -- and Congress has bigger problems than Big Oil. This weekend marks the 100th birthday of the modern oil industry, and few energy observers would contest the fact that Big Oil is showing its age. A century after the breakup of John D. Rockefeller's Standard Oil empire gave birth to the modern oil industry, Rockefeller's heirs are being eclipsed by nimbler rivals with less to lose -- as well as less nimble but powerful state-owned companies around the world. Meanwhile, Big Oil has mostly turned inward over the past 25 years, pursuing a strategy of ever-greater industry consolidation without either producing new significant sources of oil and gas or addressing the need for alternative energy sources.

To understand their current position, the oil majors would do well to look at the history of a very different industry: information technology. There is a reason why IBM could not create Microsoft, Microsoft could not create Google, and Google could not create Facebook. While a company's performance may require economies of scale, innovation often benefits from the opposite, since it necessarily comes at the expense of the existing business -- and therein lies Big Oil's problem. Big Oil either must reinvent itself -- and quickly -- or become obsolete.

Big Oil's business model served a useful purpose in its day. In the post-World War II period, major international oil companies developed vast oil fields in Saudi Arabia, Kuwait, Iran, Iraq, Venezuela, Nigeria, Indonesia, and elsewhere. To create markets to absorb this increased supply, they built refineries, distribution systems, and retail stations in Europe and Asia, in addition to the United States. The postwar economic boom in the industrialized world was largely fueled by oil (and natural gas) discovered, developed, produced, transported, refined, and sold by these megacorporations.

This spurt of development was, at least in part, enabled by the Supreme Court's 1911 ruling. The breakup of Standard Oil introduced more market competition and drove industry efficiency and technical and business innovation, which spread globally. The companies were still big and technologically adept enough to conduct risky exploration in far-flung places; their vertical integration enabled them to sell as much oil as they could produce. Even after the rise of OPEC, the majors continued to contribute major new oil and gas supplies to the global energy portfolio from the North Sea, Alaska, the Gulf of Mexico, Australia, Angola, the Caspian region, and elsewhere.

Successive waves of mergers have since consolidated much of the publicly traded oil business in the hands of seven "supermajors": ExxonMobil, Shell, Chevron, BP, Total, Eni, and ConocoPhillips. The argument that the companies themselves made before antitrust enforcement agencies in defense of these mergers was that they produce the economies of scale and concentrations of capital necessary to expand oil exploration into the last remaining frontiers: high-risk, high-reward plays such as deep-water offshore and Arctic drilling; technically challenging projects such as recovery of extra-viscous heavy crude oil; Canadian oil sands; and liquefied natural gas around the world.

But how much do the supermajors really have to show for these efforts? Rising oil prices over the past dozen years have largely masked any problems the companies have in terms of financial performance; the considerable increase in the value of the majors' underlying assets has been enough to keep share prices steadily climbing. Yet the companies' ability to find new oil reserves to replace current production remains anemic, and they lag far behind independent oil and gas producers in net profit margin.

Most tellingly, the supermajors, despite vast exploration resources and technical expertise, missed the shale gas revolution altogether. Recent breakthroughs in the exploitation of these previously untapped natural gas resources were spearheaded by independent producers and oil field service companies who were small and spry enough to experiment with new techniques. The major oil companies, by contrast, had long since outsourced core skills -- geophysical surveying, seismic data processing, drilling, well-logging, engineering, and construction -- in a fit of cost-cutting and manpower reduction. Their comparative advantage now lies in mobilizing and managing these essential oil-field services supplied by contractors rather than possessing them themselves.

Arriving late to the party, the supermajors have been buying up the independent producers that led the shale gas revolution -- part of a longer-term trend in which the companies, lacking new major discoveries to replace their existing production, aggressively acquire other enterprises to make up the difference. But it is an open question whether this Pac-Man strategy is sustainable. Every time a major acquires an independent at a premium to market share price, it dilutes the value of its own shareholders by overpaying, unless it can generate more income in the process. In the past, dubious acquisition deals were papered over by higher oil prices -- but there's no guarantee that Big Oil will always be so lucky. The supermajors have also taken to using their ample cash flows to repurchase their own shares in hopes of enhancing remaining shareholder value. This, plus their acquisitions-led growth at a time of high oil prices, suggests that these businesses have run out of ideas.

It's not all Big Oil's fault, of course. Eighty percent of oil and gas reserves are in the hands of national governments and their national oil companies. The supermajors are fighting over a much smaller share of existing assets and future opportunities. And growth in worldwide oil and gas demand no longer resides in the industrialized world but rather in emerging economies, especially China, Southeast Asia, India, Brazil, and the Middle East, where the multinationals have no natural advantage in the retail market -- and where consuming countries such as China and India are expanding their own national oil companies' international activities in order to ensure supply. Meanwhile, demand in North America and Europe -- Big Oil's home turf -- is declining in relative terms due to slower economic growth and (in Europe, at least) climate-change policy decisions. The growth of spot markets -- markets in which purchases are made on short notice rather than on long-term contracts -- in crude oil, petroleum products, and liquefied natural gas (LNG) means vertical integration no longer brings the business advantages it once did; refiners and end-users can simply buy oil when they need it.

The supermajors would argue that even in this dramatically changing environment, their unique skills and resources are still valuable -- and that they alone have the organization and proven track record to pull together complex business deals and manage the high risks of technologically advanced projects. And it is true that Big Oil can still boast unparalleled financial resources, ability to attract capital, and some proprietary technologies -- it is hard to imagine, for example, large LNG projects proceeding without the multinationals' participation. But the biggest failures -- both operational and financial -- of recent years have also belonged to Big Oil. The massive oil spill in the Gulf of Mexico last year was the work of BP and its contractors. The partners in the much-delayed Kashagan project -- an oil field in Kazakhstan where $30 billion has been spent on the largest oil discovery in 30 years without a drop of commercial oil production to show for it -- include a veritable who's who of Big Oil heavy-hitters: ExxonMobil, Shell, Total, Eni, and ConocoPhillips.

Big Oil needs a new corporate narrative. Without one, it faces the danger of becoming obsolete in energy markets dominated by national oil companies on one hand and oil-services companies or more agile and risk-happy independents on the other. If this scenario keeps supermajor CEOs awake at night, they might consider adding some more reading material to their nightstands: former IBM CEO Louis Gerstner's Who Says Elephants Can't Dance? Inside IBM's Historic Turnaround. The book tells the story of how Gerstner's company, sliding into irrelevance and unprofitability in the early 1990s as a mainframe computer manufacturer, reinvented itself as an information-technology services company. In 1992, IBM was lost in a rapidly transforming computer industry and in financial free-fall, reporting the then largest single-year loss (nearly $5 billion) in the history of American business. Last year, Fortune ranked it the seventh most profitable company in the United States.

Big Oil could learn a thing or two from the company. Like IBM, it may be too late for the oil majors to reclaim the vanguard of its industry: Development of alternative energy sources, for example, is better left to new ventures with the incentive and culture to innovate, not to hidebound fossil-fuel behemoths. But the majors still have plenty of opportunity to reinvent themselves in useful ways. One option would be to sell themselves as profit margin-based service providers to resource holders -- national governments in places like Brazil, Iraq, and Russia -- and use their unique capabilities to manage complex and risky projects that are beyond the reach of the governments' own oil companies. This would be a very different business from the one that the majors have known throughout their corporate lives, but one that could prolong their usefulness to the global economy.

Mark Wilson/Getty Images