The energy crisis: Implications for developing
countriesShort courses for Permanent Missions in
GenevaAdapting to the new energy realities: trade
and development perspectives31 October 2008
Olle Östensson
Outline
• General economic implications– Terms of trade– Investment– Government budget
• Transport costs– The reversal of globalization?– The distribution of transport work among modes of transport and
their sensitivity to energy prices – Energy and transport costs in LDCs and African countries
• Production costs in agriculture and industry– Sharpened competitive advantage for oil and gas producers in
energy intensive industries– Mixed effects on other industry and on agriculture, net effects
are likely to be limited
Terms of trade, developing countries and countries in transition
Source: UNCTAD, Trade and Development Report, 2008
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
200.0
2000
2001
2002
2003
2004
2005
2006
2007
Oil exporters
Exporters of minerals andmining products
Exporters of agriculturalproducts
Exporters ofmanufactures
Implications, oil exporters
• Real exchange rate appreciation
• Undiversified exports and economic structure, low productivity growth
• Subsidized fuel consumption, leading to allocation errors and inefficiencies
• Widening income differences
• Eventually, slow growth
• But, the scenario takes place against a background of high incomes
Implications, oil importers
• High energy costs act as a tax on development, reducing real income
• For commodity exporters, effect is offset – at least to some extent - by high prices for export products
• Exporters of manufactures experience income losses
Investment
• If current trends continue, fewer than 40 per cent of African countries will attain universal access to electricity by 2050
• Large investment needs, particularly in power generation
• The FDI paradox:– TNCs would like to invest in oil and gas production,
governments are reluctant to let them in– Governments welcome FDI in power generation, but
TNCs are wary
At least half in developing countries
Share of foreign companies in oil and gas production, selected
countries, 2006, %
0
20
40
60
80
100
Kuw
ait
Iraq
Sau
di A
rabi
aM
exic
oB
razi
l
Iran
, Isl
amic
Rep
ublic
Chi
naV
enez
uela
Uzb
ekis
tan
Rus
sian
Fed
erat
ion
Net
herl
ands
Alg
eria
Uni
ted
Ara
b E
mira
tes
Can
ada
Qat
arN
orw
ay
Liby
an A
rab
Jam
ahir
iya
Egy
ptU
nite
d S
tate
sN
iger
iaM
alay
sia
Kaz
akhs
tan
Uni
ted
Kin
gdom
Sud
anA
ngol
aIn
done
sia
Arg
entin
a
Equ
ator
ial G
uine
a
Oil and gas production of selected TNCs outside their home country, 2005,
million barrels of oil equivalent
35
35
46
46
49
53
66
98
114
129
188
366
512
550
584
1 291
1 045
749
1 427
0 200 400 600 800 1 000 1 200 1 400
ONGC
Norsk Hydro
Lukoil
CNOOC
Sinopec
Statoil
Petrobras
Petronas
BG
Inpex
CNPC/ Petro China
Repsol-YPF
ConocoPhillips
Chevron
ENI
Total
Royal Dutch Shell
BP
ExxonMobil
Foreign Production Locations of Oil & Gas TNCs from Emerging Economies
1995
Source: UNCTAD, based on data from IHS
…and in
2005
Source: UNCTAD, based on data from IHS
Government budget, oil importers
• Fuel accounts for a high portion of government spending, when oil prices rise, other expenditures have to be cut
• Development and social programmes have borne part of the cost of higher oil prices, damaging future growth prospects and increasing poverty
• Many developing countries subsidize fuels, the burden on the government budget has become intolerable and subsidies have been cut
Will Soaring Transport Costs Reverse Globalization?
(Jeff Rubin and Benjamin Tal, CIBC World Markets, May 27, 2008)
• Oil prices account for half of total freight costs• A crude oil price of $150/bbl is equivalent to an
11% US import tariff• World trade as a share of global GDP grew
much slower during the two oil price shocks (1974-86) than before (1960-73) or after (1987-2002)
• Higher transport costs will lead to a reversal of the globalization process and to regionalization of trade
Transport and energy: Maritime transport
• Maritime transport accounts for 90% of cross-border world trade as measured by volume but uses only 7% of all the energy consumed by transport activities
• Maritime transport is the cheapest way of shipping goods and, maybe, the least sensitive to energy cost increases
• Fuel costs are a major portion of operating costs (up to 50 % at recent bunker oil prices), but overall costs are dominated by capital costs
• Major savings can be made, simply by going slower (10 % speed reduction gives 25 % fuel savings)
• The Rubin/Tal argument focuses on maritime transport, but effects may be more visible for other modes of transport
Rising fuel costs have had little impact on container freight rates
USD per TEU (freight rates) and USD per tonne (bunker prices)
Bunker Prices
Freight Rate Transatlantic
Freight Rate Pacific
Freight Rate Asia-Europe
0
200
400
600
800
1000
1200
1400
1600
Q1
2001
Q2
2001
Q3
2001
Q4
2001
Q1
2002
Q2
2002
Q3
2002
Q4
2002
Q1
2003
Q2
2003
Q3
2003
Q4
2003
Q1
2004
Q2
2004
Q3
2004
Q4
2004
Q1
2005
Q2
2005
Q3
2005
Q4
2005
Q1
2006
Q2
2006
Q3
2006
Q4
2006
Q1
2007
Q2
2007
Q 3
200
7
Q4
2007
Q1
2008
US$
Source: UNCTAD, based on data provided by Containerization International www.ci-online.co.uk.
Dry bulk freight rates have risen dramatically - but for other reasons
(Iron ore freight rates, Jan 1998-Aug 2008, Brazil-China/Japan, US$/ton)
Source: UNCTAD, Iron Ore Statistics 2008, September 2008
• Freight volume rising by 6-7 %/year, mainly because of Chinese demand•Tonne miles rising even faster because of reorientation of trade• Ship building has not kept up• Shipyards preferred building higher margin ships• Port infrastructure has not kept up, port congestion is important • No sign of increased regionalization - so far
0.0
20.0
40.0
60.0
80.0
100.0
120.0
Transport and energy: Land transport
• Land transport accounts for the great majority of energy consumption. Road transportation alone is consuming on average 85% of the total energy used by the transport sector in developed countries.
• Road transportation accounts for almost all additional energy demand for transport over the last 25 years.
• Higher petrol prices appear to have had an immediate impact on passenger road transport. However, the impact is relatively small (declines of 5-10 % in response to 50 % price increases) and implies a low price elasticity of demand
• Longer term effects may be more important as the composition of vehicle fleets changes.
• Rail transport accounts for 6% of global transport energy demand. It remains four times more efficient for passenger and twice as efficient for freight movement as road transport. The competitiveness of rail transport increases with higher fuel prices.
Transport and energy: Air transport
• Air transport accounts for 8% of the energy consumed by transportation.
• Fuel accounts for 13-20% of total expenses of the air transport industry
• Even relatively large increases in fuel prices have a limited impact on total transportation costs and air freighted goods can probably easily bear the cost increases
The energy and transport situation of African countries and LDCs:
Energy
• Most African countries are energy importers• Domestic energy markets are small and often
sub-optimal for power stations and oil refineries• Energy markets are not linked – no pan African
power grid, underutilized opportunities for trade in refined petroleum products, low capacity utilization in oil refineries
• Domestic energy prices are often high, due to market failures and poor distribution systems
The energy and transport situation of African countries and LDCs :
Transport• Transportation infrastructure is poor
– Inefficient ports– Few navigable rivers– Sparse and badly maintained rail infrastructure – Few paved roads, particularly in rural areas
• Transport accounts for a major share of fob export values (50 % is not unheard of), placing exporters at a competitive disadvantage
• High transport costs act as a barrier on domestic commerce, making it difficult for farmers to reach markets and for sellers to reach rural customers
Effects of oil price increases:the positive side
• Africa’s international competitiveness is strengthened somewhat as a result of higher operating costs for ocean transport – African ports are close to those of the major customers in Europe
• High commodity prices have made it easier for African producers to bear transport cost increases
Effects of oil price increases:the negative side
• The dominance of road transport in the total cost of delivering goods at the dockside is an important handicap
• Inefficient fuel distribution systems have permitted price gouging
• “Food miles” and similar distorting campaigns undermine the African market position
Energy in industry and agriculture
• Oil and gas producers have a competitive edge in energy intensive production (aluminium, steel, cement), particularly where flare gas is used, and in petrochemicals, a geographical shift is under-way
• For most manufacturing, energy costs are not critical for competitiveness
• Farming in LDCs is not energy intensive and the “food mile” argument can be turned around– LDC farmers use less mechanical equipment that needs fuel– LDC producers cannot afford to use synthetic fertilizers; after oil
prices went up, so did fertilizer prices• On balance, the effects on competitiveness, whether
positive or negative, are likely to be small compared to the effect of transport cost increases
Thank you!