Nigeria Business

The Politics of Crude Oil This Day (Lagos) May 8, 2000 By Chidi 'Uzor

Lagos - The price of oil continues to be a key variable in the functioning of the world economy. This is due, among other things, to the fact that it is the leading product on the international market in terms of both volume and value, in addition, oil prices significantly influence the prices of those goods and services that involve the intensive use of energy, while the prices of alternative fuel sources, such as natural gas and coal, among others, are linked to the performance of crude oil prices. For these reasons, abrupt changes in oil prices are transmitted by diverse means to different regions and socio-economic sectors, in countries that produce and consume oil alike.

The erratic course followed by oil prices begining in 1970 and the instability that has characterised this market in the last three decades generate tremendous uncertainty with regard to the economic future of the underdeveloped countries. this is even more evident if one takes into account the predominant role of oil in the energy budgets of these nations.

Since the second quarter of 1999, the effects have been felt of a considerable rise in oil pr ices, which surpassed the barrier of 30 dollars a barrel in the first quarter of the year 2000. This price increase can basically be explained by the cuts in production adopted by OPEC and other crude oil producers between late March of 1999 and late March of 2000. These have been combined with a certain recovery in the demand for oil in Asia, in comparison with the depressed levels of 1997-1998.

Consequently, the price of oil, which fell to some 13 dollars a barrel in 1998, rose to 18 dollars a barrel in 1999 and averaged some 26 dollars a barrel in the first two months of 2000.

The majority of the industrialised countries, which are net importers of energy, have seen themselves affected by the rise in international crude oil prices. In many of these countries, inflationary pressures have been registered as a result of the high price of fuel throughout 1999 and the first months of 2000. 'This has led to successive increases in interest rates, in both Europe and the United States. For the latter, the high costs of gasoline and home heating fuel have become a hot theme in an electoral year.

Despite the fact that the United States is the world's second largest producer of oil, after Saudi Arabia, it is also the world's largest importer. Fifty years ago, the United States was almost self- sufficient with regard to oil and was a net exporter of natural gas. Today, however, it imports over half of the oil and 15 per cent of the natural gas it consumes. In 1998, the United States produced some 368 million tons of oil and imported some 513 million tons.

A significant part of the oil imported by the United States is absorbed by the transportation sector. In the mid- 1990s, there were 750 vehicles in circulation in the United States for every 1000 inhabitants (as compared with 519 per 1000 in Japan and 270 per 1000 in Europe). This contrasts sharply with the figure of eight vehicles per 1000 inhabitants in China. 22 per 1000 in Africa, and 88 per 1000 in South America.

As the world's largest importer of oil, the United States is the country that has exerted the greatest pressure on the OPEC countries to increase the supply and lower the prices of this product. The U.S. government has gone so far as to threaten OPEC members with the cancellation of the economic and military aid it provides to these countries, if they refused to comply with the requests to increase oil production in order to stabilise international crude oil prices.

While the United States imports only 21 per cent of the commercial energy it consumes, Japan imports around 80 per cent, and in numerous European countries, this figure is greater than 50 per cent. These include Portugal, at 87 per cent; Italy, 82 per cent; Belgium, 79 per cent; Austria, 71 per cent; Ireland, 71 per cent; Spain, 68 per cent; Greece, 64 per cent; Germany, 60 per cent; Switzerland, 59 per cent; Finland, 57 per cent; and France, 49 per cent.

Nevertheless, at the current time, these industrialised economies are much less vulnerable in the face of high energy prices than in the early 1970s. This is due, among other reasons, to a greater presence of socio-economic sectors and branches that require smaller amounts of raw materials and energy per unit of products or services. In many cases, these are high technology sectors, based on the intensive use of knowledge, such as informatics, telecommunications and biotechnology, among others.

The oil intensity (oil consumption per unit of GDP) of the highly industrialised economies, which had decreased by almost 40 per cent between l973 and 1985 under the impact of high oil prices, as further reduced by around 8 per cent between 1985 and the mid- 1990s.

In late 1999, the OECD countries had a stock of 3.86 billion barrels of oil (some 527 million tons), of which 2.636 billion barrels (some 360 million tons) were controlled by governments, and the rest by oil companies It should be recalled, as well that under conditions of high oil prices, the petrodollars received by underdeveloped countries that export oil tend to return, to a large extent, to the industrialized countries, through both trade channels (the acquisition of manufactured goods and other imports by oil exporting countries) and financial channels (financial investments by oil-exporting countries in the markets of developed countries) The underdeveloped regions that are net exporters of oil provide around 80 per cent. of the crude oil sold throughout the world: 53 per cent, is supplied by the Middle East and North Africa, close to 13 per cent, by Latin America, 8 per cent, by sub-Saharan Africa, and around 6 per cent, by exporters in Asia and the Pacific.

Oil exports from underdeveloped countries are prefcrentially directed towards the industrialised countries, which absorb around 80 per cent of these sales. Of these, 27 per cent correspond to North America, 24 per cent to Western Europe, and 9 per cent to the industrialised countries of Asia and the Pacific. The underdeveloped countries that are net importers of oil receive only the remaining 20 per cent. The OECD countries, which produce only 29 per cent of the world's supply, account for 63 per cent of the total consumption, which is distributed in the following manner: the United States, 25 per cent; the European Union, 19 per cent; Japan, 8 per cent; and the remaining OECD members, 11 per cent. Consequently, the three major power centers take up two-thirds of the oil marketed internationally, with the United States absorbing 28 per cent; Western Europe, 25 per cent; and Japan, 13 per cent.

The commercial energy consumption per capita in developed countries is 5.4 tons of oil equivalent (TOE) a year; in the United States, 8.1 TOE per capita are consumed-- as compared with a world average of I.7 TOE. The average commercial energy consumption per capita in underdeveloped countries is just 0 8 TOE (03 TOE in the poorest countries, also called the least developed countries), according to available 1996 data.

The high energy consumption rates per capita in industrialised countries represent serious damage to the envir-onment. According to United Nations estimates, highly hidustrialised countries, with about 15 per cent of the world's population, are responsible for approximately 44 per cent of C02 emmisions, which is the main greenhouse gas.

In the underdeveloped world, the latest increase in oil prices has had a highly adverse impact on the overwhelming majority of countries and is reminiscent of wilat happened during the 70s and the first half of tile 80s, when high oil prices significantly aggravated the terms of trade of net oil importing countries.

Approximalely three fourths of the underdeveloped nations have been adversely affected by high oil prices, as a result of the higher dependence on imported oil. Many of these countries are also subjected to serious external restrictions as a result of the increasing foreign debt and the depressed price levels of their main export products (generally commodities other than oil).

According to esthnates from the International Monetary Fund, some 40 underdeveloped countries depend preferentially on exports of primary commodities other than oil to guarantee the functioning of their economies. In 1998, these countries contributed barelv 2per cent of the world GDP and 1 2 per cent Of world exports of goods and services. In 1991-98, this group of countries spent more than 30 billion dollars to pay their oil account and about 110 billion dollars to service their foreign debt.

It should be taken into consideration that, as a result of the price increase of commercial energy sources, like oil, the poorest strata of the population in underdeveloped oil-importing countries are forced to increasingly depend on their own physical labour, on the use of animals, and on trditional boimass fuel to satisfy their basic energy needs.

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-- Martin Thompson (mthom1927@aol.com), May 08, 2000