Theater of Cruelty

Oil prices are stifling developments in Africa

Per Kristian Foss rubs his hands and sees the billions of oil roll in, but who pays the party?


If we are to believe the media, it is mainly the US motorists who pay our increased revenues from oil exports. Fear spreads in the United States, when the price of a gallon of gasoline breaks the symbolic $ 3 limit. This entails a liter price of NOK 5,20. But American drivers do not take the bill alone.

Precisely the one-sided focus on Norway's increased wealth creates resentment in some environments.

- A rosy presentation that belongs nowhere, says Espen Villanger, economist at Christian Michelsen's Institute, to Ny Tid. He emphasizes that for oil-importing developing countries, the current oil price is a serious obstacle.

- A focus on Norway's wealth does not correspond to our own agenda for eradicating poverty. Unemployment in developing countries is the biggest problem, and many countries have an active policy of creating jobs. Among other things, with the help of low wages and high prices on the world market. But here the oil price works in the opposite direction, Villanger points out.

Prevents development

Last year, the African continent accounted for 3,3 percent of the world's total oil consumption, or 2,64 million barrels per day. The vast majority of sub-Saharan countries are now experiencing a sharp rise in inflation, weakening currencies and increasing population dissatisfaction.

Many of the African countries have subsidized the sale price of gasoline and diesel to ensure that the population at all can afford to pay. These subsidies are now costing the countries dearly. In a continent where a great deal of transport is underway, today's oil prices cause a rise in prices for most goods. Locally, this means that access to certain goods is restricted.

A $ 30 barrel price increase for 2005 will result in an additional bill for the African continent of close to $ 30 billion. By comparison, the G8 countries promised a $ 50 billion aid summit in Gleneagles this summer over ten years. Much of the imported oil is of Murban quality, a less pure oil than Brent, and therefore somewhat cheaper. Murban, in turn, provides less gasoline and diesel per barrel, and the price increase has been similar.

- It is clear that developing countries that are net importers of oil products are now finding it much more difficult financially and will have difficulty achieving their development goals. In Norway, we talk a lot about how rich we become from this level of oil prices, but that is not where the focus should be, says Villanger.

Increased risk of corruption

The calculation must also include the increased export revenues from own oil production. Sub-Saharan Africa has two major producer countries, Nigeria and Angola, and the question is to what extent each country is actually left with the increased income from exports.

Due to limited governance, lack of financial control or the legacy of previously corrupt regimes, the ability to profit from increased prices seems to be limited. This means that either the income disappears in the pockets of powerful people in or near the state leadership, or they disappear out of the country with the multinational oil companies.

This is even better illustrated by Indonesia's situation. The country accounts for 1,4 percent of the world's total oil production, but is now experiencing weakened economic growth. The reason lies, among other things, in the former Suharto regime's handling of the oil sector, where revenues went straight into its own pocket ahead of long-term economic planning for the benefit of the national economy. Combined with political uncertainty, the result is that Indonesia is today a net importer of petroleum products.

Rising oil prices will at the same time make the work against corruption in oil-producing developing countries more difficult, believes Peter Eigen, founder of Transparancy International.

"The challenges will be much greater, because high oil prices make everyone more greedy," Eigen told FT last week.

In the case of Statoil in Angola, the ratio between taxes paid to the state and revenues to the company last year was 8 to 13; ie the company retained just over 60 per cent. There is reason to believe that the percentage increases with increased oil prices. In Norway, the situation is reversed, as the tax rate for activities on the Norwegian shelf is around 80 per cent.

Expensive subsidies

Even for the world's eighth largest oil producer, Nigeria, is suffering from the high oil price. The state oil company, NNPC, is involved in several collaborative projects with multinational companies. The country exports around 2,4 million barrels of oil per day, but due to the small refining capacity at the country's four refineries, which cover almost half of the country's needs, the country last year imported petroleum products for two billion dollars. High oil prices mean that costs will be much higher this year.

An expensive element is a strong subsidy of the domestic petrol price, which costs the country around NOK 30 million per day. The subsidies have led NNPC to the brink of bankruptcy, according to the company itself, and have meant that they no longer pay for the crude oil they buy for refining. The company's debt currently amounts to one billion dollars. This week, NNPC's top manager, Funso Kupolokun, stated that the company is no longer creditworthy.

The company has announced a removal of the subsidies, which this week led to a price increase of 50 percent, and a liter price of 75 naira, equivalent to 3,70 kroner. The change was met with hoarding at the old price and strong protests. A low petrol price is one of the few benefits most people have, as a result of oil production in Nigeria. The changes should have been implemented as early as 2003, but the authorities postponed this due to fears of unrest. The NNPC has had to pay the market price for crude oil since 2003, according to the Financial Times.

Import stop

According to an analysis in the Ugandan newspaper The Monitor recently, the high oil price is now hitting almost every sector in the country. The country gets its oil through the oil port of Mombasa in Kenya. The country recently changed its tax policy on petroleum products, which means that oil companies must pay import duties in advance. The system led to a temporary decline in demand and a warning of a shortage of petrol in several of the Central African countries.

In any case, the price of oil will affect several areas, including the price of electricity. The private company Aggreko started a diesel-powered power plant outside the capital Kampala this spring, due to a lack of enough power from hydropower. The plant consumes six million liters of diesel per month and the imported diesel now costs the country's electricity customers dearly.

At the same time, rising prices are limiting trade between African countries. Either the wholesalers cannot afford to pay for shipping from neighboring countries, including agricultural products such as fruit and vegetables, or the customers cannot afford to pay the increased prices of the goods, and imports stop.

- To create development, these countries must import goods such as computers, medicines and a number of input factors into the industry. For this, they need much-needed currency. When the oil price reaches such heights as now, the countries must use this currency for oil, and this means that other imports stop. In the past, the World Bank has provided funds to ensure that economic reforms do not stop at high oil prices, but as far as I know they have not done so this time, says Villanger.

At the same time, many fear that the situation could threaten the provision of health services in rural areas. Here, one is dependent on both the possibilities of transporting patients and equipment by car, at the same time as the hospitals receive electricity from smaller units. One solution could be to demand a deductible for the services.

The situation has triggered uncontrolled inflation in Uganda. The sales link makes sure to blame for more expensive transport when setting up prices, whether the goods have been transported or not. The result is lower turnover, and combined with more expensive raw materials, this means increased uncertainty for employment. At the same time, the price of oil has raised the prices of passenger transport, both by plane, ferry, bus and taxi.

Inflation driving

Kenya is about to go on an economic slump this year due to the high oil price. The latest figures available show that the country's oil imports cost NOK 7,7 billion from April 2004 to April 2005. This is a doubling of expenditure from 2002. And since April, the oil price has risen by a further just over 10 dollars per barrel. The oil price is the main reason why the country's inflation is now over 10 per cent.

For South Africa, the country is in the process of breaking the inflation target of 6 per cent, the upper limit with which the country's Reserve Bank operates. The transport industry accounts for five percent of the country's consumer price index, and with a price increase for fuel so far this year of 30 percent, and a further increase in store, the country is unlikely to meet the inflation target, the newspaper Business Day reports.

For every dollar the oil increases, the search for other energy sources will intensify. Even for an energy exporter like Zambia, the oil price is noticeable. The country's energy consumption is covered by 80 per cent of its own hydropower. Today, more than own demand is produced, and the profits are exported. The remaining consumption is mainly covered by coal and oil. It is now being discussed what can be done to limit dependence on imported oil. An increased degree of electrification is a possibility, writes Nic Money, director of Zambian drilling and electrification, in a comment in the newspaper The Times of Zambia. He envisages increased electrification of, among other things, trains and buses, at the same time as electricity production in rural areas is still a major consumer of petroleum products. Zambia's advantage over many other countries is precisely that the bulk of the electricity comes from hydropower, and not oil-fired power plants.

In the state budget for the current year, the Norwegian government has estimated revenues in the order of just over NOK 500 billion from the petroleum sector. Then the Ministry of Finance has assumed an oil price of 300 kroner a barrel, or just over 46 dollars. With today's price, it is clear that the income estimate is too low. New revised budget coming in October.

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