It would be nice if the poor were to get even half of the money that is spent in studying them.
    — Bill Vaughan, American journalist and author

Today’s front month oil contract stands at about $77/barrel. Such prices have not dampened demand in China, where demand growth is running at 11%, or in the United States, where finished motor gasoline consumption reached 9.71 million barrels per day in the week ending July 13, 2007. The volatile but rising oil price since 1999 is the primary signal of a growing supply and demand imbalance in a market with little spare capacity. This indication of scarcity now only inconveniences the wealthy, whose past income growth still allows mostly pain-free purchases. But what about the poor?

A note on a forthcoming ESMAP study, How are Developing Countries Coping with Higher Oil Prices?, describes “policy alternatives adopted by developing countries in response to the increases in world oil prices since the end of 2003.” Before looking at the results, let’s look at some emerging stories in the developing world to get a feel for what’s going on.

  • Liquid Fuel Shortages — Nepal hit by deadliest fuel crisis:

    After days of acute fuel shortage, the Kathmandu valley was Tuesday hit with its worst crisis in history as the state-owned petroleum importer and distributor reached the lowest level of fuel stocks and stopped supplies to gas stations.

    “Kathmandu valley now has just 300 kilolitres of petroleum,” said Bishwanath Goyal, managing director of Nepal Oil Corporation (NOC). “This is the minimum mandatory stock we have to keep. We can’t sell any of it” …

    Signs saying “No diesel”, “No petrol” hung at the entrances of petrol pumps.

    Also see Kenya: Acute Gas Crisis Hits Towns, where “an acute shortage of liquefied petroleum (cooking) gas (LPG) has hit major towns countrywide” and a “survey yesterday showed that some dealers had not received fresh supplies for the past three months.”

  • Fuel Switching and Efficiency — Thailand boosting palm oil production for alternative fuel:

    In a bid to boost consumption of alternative fuel by motorists in Thailand, the Ministry of Agriculture and Cooperatives has drawn up a plan to develop and enlarge the palm oil growing area between 2008 and 2012, a senior ministry official said Sunday…

    The decision to grow more palm oil is aimed at catering to the rising demand for fuel in the future as well as to increase the potential of the industry, said Theera Wongsamut, deputy permanent secretary for Agriculture and Cooperatives.

    The Thai government is encouraging motorists to switch to using alternative energy as local oil prices have jumped sharply, causing the country to apply significant amounts of foreign currency for imported oil.

    Also see Namibia: Free Lights to Counter Power Shortages, where the “national power utility … NamPower announced that it had budgeted N$14 million for the purchase of compact fluorescent lights (CFLs) to be distributed for free to Namibians in a move intended to counter power shortages widely expected in the southern African region.”

  • Passing Costs Through — Malaysia has no plans to cut fuel prices:

    Malaysia, which heavily subsidizes fuel prices, sharply raised prices of gasoline, diesel and liquefied petroleum gas in February last year by as much as 23 percent after global crude oil prices shot up to US$70 a barrel.

    Despite the subsidy slash, Malaysia’s fuel prices remain among the lowest in Southeast Asia. But the price hike prompted a series of public protests, with demonstrators saying it was unnecessary as Malaysia is a net oil exporter.

    Also see the Philippines, where P0.50 per liter fuel hike surprises motorists. “As if the threat of power and water shortages were not enough, motorists got another whammy Saturday as three major fuel firms raised prices of their fuel products by 50 centavos per liter. QTV-11 television reported Saturday that the 50-centavo hike covered gasoline, diesel and kerosene… It said the oil firms justified the price hike, saying world prices of crude oil had gone up from $65.80 per barrel to $71 per barrel.”

The sporadic, almost anecdotal, nature of such stories in the press hides the systematic reduction of oil consumption in the developing world. The poorer countries get priced out of the market, or can not obtain the fuels they require when supplies are tight. The western press rarely covers the issue. Stories that address the problem surface, and are then forgotten. (See Toiling in the Dark: Africa’s Power Crisis, New York Times,  July 29, 2007.) Web searches often turn up reports from 2005, when oil prices first hit $70/barrel. Press accounts from the developing world are hard to find. These stories tend to report on local events, and assume some knowledge of local conditions. Some commentators in peak oil circles have labeled these events with the unorthodox (for economists) term “demand destruction”, but the phenomenon is poorly documented..

The problem created by high oil prices is widespread, as Africa’s Energy Crisis Worsens: Viable Clean Energy Alternatives Are Imperative (Center for American Progress, July 17, 2007) makes clear.

With world crude oil prices nearing $75 a barrel, economies across Africa are grinding to a halt under the burden of soaring energy costs. The spike in world oil prices this summer will exacerbate economic problems, pounding already fragile national budgets and offsetting hard-fought gains from poverty reduction programs, international development aid, and debt relief efforts.

In Senegal’s capital city of Dakar, the cost of taxis has almost doubled since 2005 and blackouts occurred every day last summer because the state-owned utilities couldn’t afford to pay for fuel. The country relies on oil imports to power its diesel-fired generators, and while conditions relaxed somewhat over the winter, power cuts are on the rise again. As of May, the capital was facing 10-hour power cuts several times a week and the government was warning of impending, unprecedented shortages. 

Senegal is paying nearly twice what it was a few years ago to import the same amount of oil. The increased cost alone is more than seven times as much as the country is gaining through multilateral debt relief programs. The government has responded to the energy crisis by providing direct subsidies to consumers. Since the rise in world oil prices began in 2002, these subsidies have increased five-fold, creating yet another incredible burden on the national budget.

Developing_country_policies The ESMAP survey carried out by former World Bank officials polled 38 developing countries to find out what measures they were taking to cope with high oil prices (graph left, click to enlarge). Countries are divided up into (i) 16 non-oil producers (e.g. Cambodia, Senegal, Nicaragua); (ii) 13 producers who are net oil importers (e.g. Pakistan, Ghana, Thailand); and (iii) 9 net oil exporters (e.g. Argentina, Mexico, Vietnam). China and India fall into the second category, along with Brazil, who proclaimed their oil independence last year.

Of the 38 countries surveyed, 26 have suffered shortages or have resorted to rationing oil products or electricity. Developing countries are very reluctant to pass higher fuel costs on to consumers. This is a very unpopular thing to do in fragile economies where many people are just scrapping by and government budgets are tight. Net oil exporters usually try to absorb most of the price increases, but sometimes can not—see Gasoline Subsidies and Iran. (Iran is not part of ESMAP study.) Countries without oil or net importers pass some of the increased costs on, but, like Senegal, provide a cushion for consumers through subsidies. Price hikes often result in civil unrest, which happened in Indonesia in 2005. Examples abound—protests also followed a price hike in India in 2006.

To protect their citizens from higher prices, 23 developing nations have reduced fuel taxes and 20 have financed fuel subsidies from government budgets. ESMAP notes that tax breaks are especially common among the oil exporters, whose citizens can not understand why they sell oil to others but must also pay higher prices at the pump. More than half of the countries that had market pricing have now suspended it—12 nations never did have it. Various kinds of subsidies may temporarily shield consumers from real fuel costs, and leaders from being deposed, but they also take away from fiscal programs meant to provide essential social services and aid the poor. (See the Center For American Progress article on Africa, link above.)

It is sad to say, but in a world that is likely to see ever-rising oil prices, a government-funded respite from high domestic liquid fuel costs does not come with a longer term exit strategy. Such price-based policies merely postpone an inevitable crisis in which oil may eventually become altogether unaffordable in much of the developing world. The lasting effects for governments and civil societies of continued subsidies will likely be worse than the oil price shocks they are meant to remedy.

It thus makes sense that the prevailing strategy to cope with high oil prices is fuel switching. Only 12 of the countries surveyed by ESMAP have mandated or announced conservation measures or incentives to encourage efficiency, but 28 countries have “implemented or actively promoted switching to alternative sources of energy to reduce dependence on oil.” Biofuels from high-yield tropical plants appear to be a perfect fit for net oil importers or non-producers. But appearances can be deceiving.

The Center for American Progress believes that the future for alternative energy is bright in tropical Africa. There is a great potential for generating electricity from wind and solar. It is hard to argue the point. The future of hydroelectric is more uncertain. In Uganda, regional droughts have cut power generation sharply. With aid from the ever-helpful World Bank, the East African country filled the breach with two diesel-fired generators!  In the long run, there is no excuse for importing oil or diesel to generate electricity where renewable alternatives might be available. If peak demands can’t always be met, it’s still certainly better than the alternative—permanent shortages.

The Center’s optimism extends to biofuels. Author Rebecca Schultz tells us:

Biofuel is another sector where the continent could rival major global producers and play a central role in meeting the soaring demand for ethanol in Europe, United States, and China. Africa’s arable lands are well-suited to a range of energy crops, especially in the tropical climate zones around the equator that enjoy optimal rains and a long growing season. Conventional feedstock crops like sugarcane, maize, and soy, as well as new oilseed crops, are already being grown and converted into biofuels.

Senegal_wadeDemocratically-elected Senegalese president Abdoulaye Wade (pictured left) has announced the formation of a Green OPEC “aimed at making African countries less dependent on oil by replacing it with biofuels. This organization, dubbed ‘PANPP’ (‘Pays Africans Non-Producteurs de Pétrole’), unites 15 non-oil producing countries on the continent … to stimulate the exchange of knowledge, skills and technologies for the development of a biofuels industry.”

The problem with large-scale biofuels production is the food versus fuel issue. Higher demand for agricultural commodities creates spiraling food costs. Consider palm oil, a biodiesel fuel crop grown primarily in Malaysia and Indonesia. More palm oil is consumed world-wide than any other vegetable oil used in cooking. This is only one of its many uses (e.g. soap, make-up).

At the end of January, 2007, the crude palm oil (CPO) price on the Malaysian Derivatives Exchange (MDEX) stood at 1899 MYR/ton, where MRY abbreviates Malaysian Ringgit. This was ≅ $543/ton. On July 25th, the price was 2521 ringgit ($736 at today’s conversion rate) a ton (Bloomberg, July, 25). The graph (below left, from LONSUM ) shows the two year price trend. Soybean oil, also used for biodiesel, has shown a similar price rise.

Cpo_mdex_futures_monthly The reasons for higher prices are not hard to find: “Rising demand from China and India, coupled with the government’s move to mandate a five percent palm-oil based biofuel blend for all diesel have sent Malaysia’s crude palm oil prices soaring over the past year” (Forbes, July 30).

In the May/June 2007 issue of Foreign Affairs, C. Ford Runge and Benjamin Senauer argue that a large-scale biofuels industry will harm developing nations, not help them (How Biofuels Could Starve the Poor). The authors flatly state that “if oil prices remain high — which is likely — the people most vulnerable to the price hikes brought on by the biofuel boom will be those in countries that both suffer food deficits and import petroleum.” Just as with palm oil, the article argues that food prices will soar as crops are grown for the biofuels market. One of their examples is casava, which is an excellent ethanol source due to its high-starch content.

In the poorest parts of sub-Saharan Africa, Asia, and Latin America, where cassava is a staple, its price is expected to increase by 33 percent by 2010 and 135 percent by 2020…

The production of cassava-based ethanol may pose an especially grave threat to the food security of the world’s poor. Cassava, a tropical potato-like tuber also known as manioc, provides one-third of the caloric needs of the population in sub-Saharan Africa and is the primary staple for over 200 million of Africa’s poorest people. In many tropical countries, it is the food people turn to when they cannot afford anything else. It also serves as an important reserve when other crops fail because it can grow in poor soils and dry conditions and can be left in the ground to be harvested as needed.

If the developing world turns to biofuels to replace oil, it seems like a case of “damned if you do, damned if you don’t.”

A large-scale “Green OPEC” biofuels industry may never work out for Africa’s developing countries, but more power to him if Senegal’s president Wade can make it work. Much smaller scale biofuel production that minimizes competition with food remains a hopeful possibility as a substitute for oil. There are also promising crops like jatropha, which “thrives in arid areas and can be grown on desert and marginal lands without taking land out of cultivation for food production and without requiring expensive inputs like fertilizers and water” (Center for American Progress).

A cynic might say that the poor have always suffered at the hands of the rich, and there’s no reason to believe that will stop now. The predicament in the developing world brought about by the oil price shocks ultimately results from overwhelming, wasteful demand for oil in places like the United States, and increasingly, China. Peak oil is an issue for most developing countries only insofar as they are suffering even more now than they already were. This is one of the many reasons why there’s no ASPO-Uganda. It’s becoming long past peak for the poor, so let’s hope they can reorganize their local economies to replace something most of them never had much of to begin with—oil & gas products.