Dutch Disease and Oil-Producing Countries
Dutch disease is the weakening of manufacturing and export industries when natural resource income strengthens the national currency.
Dutch disease is the weakening of manufacturing and export industries when natural resource income strengthens the national currency. It takes its name from the Groningen gas field, found in the Netherlands in 1959. The Economist used the term in 1977, and it has since been applied to countries that grow on oil, gas or mineral income. Norway avoided the trap by building a very large fund, while Nigeria and Venezuela fell into it.[1]
Finding the Groningen Gas
NAM, the joint company of Shell and Esso, began drilling near Kolham in the municipality of Slochteren on 29 May 1959 and found methane on 22 July. Nobody knew the size at first. Estimates rose year by year and reached 2,000 billion cubic metres in 1967.[7] This was the largest gas field in Western Europe. In 1962 the government and the companies settled how to share the business in an arrangement known as the Gasgebouw. The concession was granted on 30 May 1963 and the field opened that July.[7]
The gas went into Dutch homes and was sold to neighbouring countries. Output peaked in 1976, and the 1973 oil crisis had raised its value. Foreign currency flowing in pushed up the guilder, and a stronger guilder left the country's other exporters expensive abroad. Gas production was capital-intensive and employed few people, so it did not replace the work industry was losing.[1][2]
The Article That Named It
The Economist set out the contradiction in numbers in its issue of 26 November 1977. While gas money flowed in, the magazine said, unemployment had risen from 1.1% to 5.1% between 1970 and 1977 and corporate investment was falling. The headline was The Dutch Disease, and the name stuck.[1][2] The economist Scott Sumner points out that unemployment rose across Western Europe in the 1970s, so the whole Dutch increase cannot be laid on gas. He adds that the country remains very rich today.[2]
The Corden and Neary Model
The economists W. Max Corden and J. Peter Neary turned the magazine's account into a formal model. Their 1982 paper splits the economy into three sectors: the booming energy sector, the lagging sector of manufacturing and agriculture that takes its prices from the world market, and non-traded services.[1]
The model describes two channels. In the resource movement effect, the energy sector pays high wages and pulls workers from elsewhere, which the authors call direct deindustrialisation. Oil and gas employ few people, so in most countries this effect stays small. The spending effect is usually seen as the main channel. Extra income is spent at home, demand for services rises, and service prices and wages go up. An exporter's price is set on the world market, so it cannot pass on higher costs and its profit shrinks. That is indirect deindustrialisation. Both work in the same direction, and manufacturing's share of national income falls.[1]
Proving that a country has the disease is hard, because the real exchange rate can rise for other reasons. A 2020 study by Harding and colleagues found that unexpected, very large oil and gas discoveries on average raise the real exchange rate and shrink the lagging sector.[1] The bill usually becomes visible when the resource price falls, because by then industry has weakened and the budget depends on one source of income.
Norway and Keeping the Money Out
With the Dutch example in plain view, Norway faced the same test across the North Sea. It claimed sovereign rights over its continental shelf resources in May 1963. The first well was drilled on 19 July 1966, the rig Ocean Viking found oil on 21 August 1969, and Ekofisk became the country's first field. The state company Statoil was set up in 1972.[8] As the first oil investments were made in the 1970s, the current account deficit reached about 12% of GDP.[3]
The lasting answer came only when the country was in trouble. Parliament set up the petroleum fund mechanism in 1990, during the deepest recession since the war, and the first money went in during 1996. A fiscal rule followed in 2001. Over the cycle the government could spend the fund's expected real return, set at first at 4% and cut to 3% in 2017.[3] The logic runs against the Corden and Neary mechanism. Oil income does not get converted into kroner and spent at home. It goes into shares and bonds abroad, which limits both the pressure on the currency and the spending effect. Norges Bank governor Øystein Olsen argued in 2018 that this cautious path protected the country from Dutch disease.[3] The fund stood at 22,683 billion kroner on 30 June 2026.[4]
Nigeria, Oil and the Fall of Farming
Nigeria took the opposite road in the same years. Shell D'Arcy began exploring in 1937, and in 1938 the colonial government gave it a monopoly. Commercial oil was found at Oloibiri in 1956. The country became independent in 1960 and exported 847,000 tonnes of crude that year. Before the 1970s the state earned its foreign exchange from farming. Cocoa, palm produce, groundnuts, rubber and cotton made up more than half of export earnings.[5][9]
The oil boom followed the Biafran War of 1967 to 1970. Nigeria joined OPEC in 1971.[10] By 1979 petroleum provided 96% of the government's external revenue but only 27% of GDP, and cocoa output fell 43% between 1972 and 1983.[5] A 1999 study by the economist Richard Ilorah explains the decline in Corden and Neary's terms. The oil sector employed so few people that it took no labour directly from farming. The exchange rate rose in nominal and real terms, which was the spending effect at work. Farm prices were set on the world market, so labour became more expensive against them. The state cut taxes on farmers in the 1970s, and even so farm profitability did not recover.[9] A major crude producer went on importing and subsidising its petrol for a long time. President Bola Tinubu ended the subsidy as he took office on 29 May 2023. The private Dangote refinery, rated at 650,000 barrels a day, began supplying the market in September 2024.[11]
Venezuela and the Collapse
Venezuela's history with oil goes back further. The Zumaque I well at Mene Grande was completed on 15 April 1914, the Barroso well at Cabimas blew out in 1922, and by 1928 the country was the world's leading oil exporter.[6] The danger was spotted early too. On 14 July 1936 the writer Arturo Uslar Pietri published "Sembrar el Petróleo" in the newspaper Ahora, urging the country to sow its oil by putting the income into new productive industries rather than imports.[12]
The 1943 Hydrocarbons Law split oil income roughly evenly between the state and the companies.[6] The minister Juan Pablo Pérez Alfonzo was one of the moving forces behind OPEC, founded in Baghdad in September 1960.[13] Output peaked in 1970 at about 3.7 million barrels a day. Under President Carlos Andrés Pérez the industry was nationalised on 1 January 1976 and PDVSA was created.[6] That same year Pérez Alfonzo called oil "the devil's excrement" and said it would bring ruin within ten or twenty years.[13]
Pérez returned to office in 1989 and announced an IMF-backed austerity package. Petrol prices roughly doubled and bus fares rose by about 30%. The Caracazo riots began in Guarenas on 27 February 1989 and lasted about a week. The government reported 277 dead, while independent estimates run from 2,000 to 5,000.[15]
Dependence deepened under Chávez, with oil rising from 77% of exports in 1997 to 89% in 2006. After the strike of 2002 and 2003 the government dismissed PDVSA staff, with sources giving figures between 12,000 and 18,000. Foreign Policy wrote that Venezuela had one of the worst cases of Dutch disease in the world.[6] The 2014 price fall and then US sanctions came on top. OPEC's monthly report put output at 356,000 barrels a day in June 2020.[14] The fall had begun in 2014, and sanctions deepened it.
After US forces captured Maduro in early January 2026, acting president Delcy Rodríguez began reopening the sector. PDVSA's vice president for exploration and production, Eduardo Pinto, said in October 2026 that output had reached 1.252 million barrels a day. This is the company's own figure, a little over a third of the 1970 peak.[16]
New Producers and Guyana
New oil countries are following the Norwegian pattern. In Guyana production began at the end of 2019 and the income goes into the Natural Resource Fund. According to the Ministry of Finance the balance stood at US$753.3 million at the end of the first half of 2022, after US$200 million was moved to the budget that May.[17]
In shipping, changes in these countries show up as tanker cargoes and port calls. When Venezuelan output fell from 3.7 million barrels a day in 1970 to 356,000 in 2020, there was far less oil to lift at its export terminals. Supply shifts at large producers also feed into the Brent price.
The End of Groningen
The field that gave the term its name ended with a different bill. Half a century of production compacted the ground and set off earthquakes. The Huizinge quake of 16 August 2012, magnitude 3.6, was the largest recorded above the field, and thousands of buildings were damaged. The government cut the production cap step by step from 42.5 billion cubic metres in 2014, and normal production ended in October 2023.[7] The Dutch Senate approved the law closing the field for good in April 2024. By then gas had brought the Dutch treasury an estimated 363 billion euros.[18]
Frequently asked questions
What is Dutch disease?
Dutch disease is the weakening of manufacturing and export industries when natural resource income strengthens the national currency.
Where does the name Dutch disease come from?
The Economist used the term on 26 November 1977, in an article on the decline of Dutch manufacturing after the Groningen gas field was found in 1959.
How can a country avoid Dutch disease?
Norway is the best-known example. Oil income is invested in assets abroad, and the budget takes only the fund's expected real return. That keeps the money from flooding into the home economy and limits pressure on the currency.
Which countries have had Dutch disease?
Besides the Netherlands, the most cited examples are Nigeria and Venezuela. The economic literature also studies other resource producers, such as Indonesia and Russia, in the same framework.
Sources
- Wikipedia. Dutch disease (secondary source).
- Econlib. What Is Dutch Disease, quoting The Economist, The Dutch Disease, 26 November 1977.
- Norges Bank. Speech by Øystein Olsen, 22 March 2018.
- Norges Bank Investment Management. Record-high krone return in the first half of the year, 12 August 2026.
- Wikipedia. Petroleum industry in Nigeria (secondary source).
- Wikipedia. History of the Venezuelan oil industry (secondary source).
- Wikipedia. Groningen gas field (secondary source).
- Wikipedia. Petroleum industry in Norway (secondary source).
- Richard Ilorah. Petroleum and its Consequences for Prices, Employment and Wages in Nigeria, South African Journal of Economic and Management Sciences, 1999.
- Wikipedia. OPEC (secondary source).
- Wikipedia. Bola Tinubu (secondary source); Nairametrics. Petrol import into Nigeria drops sharply in October as Dangote refinery ramps up production, 16 October 2024.
- Wikipedia (Spanish). Sembrar el petróleo (secondary source).
- Wikipedia. Juan Pablo Pérez Alfonzo (secondary source).
- Agenzia Italia. La produzione di petrolio in Venezuela cala ai livelli del 1934, 14 July 2020; Caracas Chronicles. An Overview of the Decline of Oil Production in Venezuela, 26 February 2021.
- Wikipedia. Caracazo (secondary source).
- AzerNews. Report on Venezuelan oil production, 24 October 2026.
- Ministry of Finance of Guyana. Natural Resource Fund report, 2022.
- Pipeline & Gas Journal. Dutch Senate approves law to permanently close Groningen gas field, 17 April 2024.
