Olle Östensson

1. 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

2. 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

3. Terms of trade, developing countries and countries in transition Source: UNCTAD, Trade and Development Report, 2008

4. 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

5. 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

6. 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

7. At least half in developing countries

8. Share of foreign companies in oil and gas production, selected countries, 2006, %

9. Oil and gas production of selected TNCs outside their home country, 2005, million barrels of oil equivalent

10. Foreign Production Locations of Oil & Gas TNCs from Emerging Economies 1995 Source: UNCTAD, based on data from IHS

11. …and in 2005 Source: UNCTAD, based on data from IHS

12. 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

13. 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

14. 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

15. Rising fuel costs have had little impact on container freight ratesUSD per TEU (freight rates) and USD per tonne (bunker prices) Source: UNCTAD, based on data provided by Containerization International www.ci-online.co.uk.

16. Dry bulk freight rates have risen dramatically - but for other reasons(Iron ore freight rates, Jan 1998-Aug 2008, Brazil-China/Japan, US$/ton) • 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 Source: UNCTAD, Iron Ore Statistics 2008, September 2008

17. 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.

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. Thank you!