Leadership (Abuja)
Kunle Somorin
8 January 2008
analysis
The surging price of oil, from just over $10 a barrel a decade ago to $100 last week alters some orders hitherto considered moral or axiomatic.
It changes the wealth and influence of nations and industries around the world. It has much more implications for producers, as well as importing nations. The following are perceived changes brought about by the unprecedented price regime in the global oil economy, which KUNLE SOMORIN dubs:
Oil price peaked at 100.09 dollars last Thursday after the US government said oil reserves fell by four million barrels. Light, sweet crude, for which the countries of the Gulf of Guinea are famous, had stood at 99.32 dollars a barrel in Asian trading on the New York Mercantile Exchange. While the global market feels the impact, the circumstances that led to the meteoric surge are antithetic to the growing quest to stem the tide of expanded price of oil under the liberalization of the world economy. Further ironic is this projection as it stands the logic of economic law of demand and supply. Oil is the most sought after product in the world today. It provides energy needs for manufacturing nations, wealth for producing nations and has been the major cause of conflict around the world. So common sense dictates that those who own this resource would exercise a modicum of control over it. This growing costs may ease back this year as the world's economy slows, dampening demand. In London, Brent crude rose 32 cents to 97.92 dollars a barrel.
Paradox 1: Climate
The first major paradox is the fight against global warming through the aviation and manufacturing activities. Surging oil prices are a mixed blessing for the environment, experts say. Clean renewable energy and recycling are getting a major boost from a $100 barrel crude - but so are coal, a massive contributor to global warming, and nuclear power, which remains shadowed by safety concerns. The price of oil remained in sight of its record high after breaching 100 US dollars a barrel for the first time. Costly oil already is forcing sweeping changes in the airline and auto sectors. It is intensifying the politics of climate change and adding urgency to the search both for fresh sources of crude and for oil alternatives once deemed fringe. Steep gasoline prices also threaten America's long love affair with the automobile, while putting strains on many lower-income people outside big cities who must spend an increasing share of their budgets just on fuel to get to work. The International Energy Agency said the $100 a barrel should remind consuming countries of the need to improve fuel efficiency.
Paradox 2: Heightened Violence
For the first time in history oil hit $100 mark in the international market. It is ironic that the new price regime came as a consequence of practices inimical for peace and progress, especially geopolitical troubles. Speculative buying has also been blamed for the record price. According to a BBC reports, the price increase was caused by violence in the Niger Delta area of Nigeria, Algeria and Pakistan. The Niger Delta has been a hot bed for militants who protest oil spillage, neglect and environmental degradation in the last two decades. Many activists and non governmental organisation have sprung up to ventilate the grievances of the people. But rather for hostilities to abate, they keep escalating. Using Nigeria as a case study - Chairman of Nigeria's Senate Committee on Sports and a native of Ijawland, the hub of the violence and oil exploration, Heineken Lokobiri, there is a need for a legislation to increase the amount paid by oil firms to the NDDC.
"I believe that part of the problem we are facing is that the oil companies, in collaboration with the NNPC, have actually failed in their corporate responsibilities to the host communities..." He liken Escravos and Brass as being another lesson in paradox, "there are two communities - where the oil workers stay, which is like London, and where the natives stay, which is an eyesore".
Market watchers have also called attention to the possibility of a hike when suicide bombers mowed down the leading opposition leader in Pakistan, Benazir Bhutto. This same has been said of the Algerian genocide where religious extremism has been promoted to the real of art, to eliminate innocent citizens and investors.
Paradox 3: Conflict Ridden Opulence
In Khartoum, the once-drowsy capital of Sudan, glimmering skyscrapers are rising along the Nile as oil riches attract investors from Asia and the Persian Gulf. Sudan, accused by Washington of supporting terror groups and killing civilians in Darfur, had been hobbled for years by U.S. economic sanctions. Those restrictions are having less effect now, with the desire for oil resources high and with both know-how and capital pouring in from the Gulf and Asia.
Paradox 4: The US & OECD Economies:
The arrival of $100-a-barrel oil adds to the pressure on the U.S. economy, which has sustained a big blow from a drop in housing prices and a wave of foreclosures. Even at today's prices, though, the oil spike alone isn't enough to push the world into recession, economists say. Surging oil prices have also weakened the Bush administration's efforts to use financial pressure to get Iran to back off its nuclear program. This week's developments signalled more misery for UK motorists, who are now paying an average of 103.3p for a litre of petrol. The cost of filling a typical 50-litre tank is £7.36 higher than a year ago. The recent hikes in the price of oil have also hampered the Bank of England's efforts to keep a lid on inflation. When crude oil hit its 1980 high, drivers squealed and the economy slumped. So far there is no comparable pain, and America, which consumes a quarter of the world's crude, retains its taste for big cars and energy-devouring homes. That's largely because the U.S. economy is more efficient and most Americans spend less of their disposable income - about 4 percent - on gasoline than in 1980, when they spent about 6 percent.
Paradox 5: Emerging Market
China, eager to secure all possible access to energy, increasingly is turning to Iran as a trading partner, with oil going east and Chinese technology heading the other way. High oil revenue, meanwhile, has kept the otherwise rickety Iranian economy humming and Iran's current government firmly in power. US figures showed a fall in crude oil stocks for a seventh successive week.
The robust economies of Asia, especially China, have so far swallowed the price surges with relative ease. That's because the price spurt this time is itself largely caused by surging demand within the developing world, not by politically induced supply shocks as in the 1970s and early 1980s. But there are signs of strain. China, in a bid to limit demand and the huge fuel subsidies it gives consumers, announced in October that it would impose an almost 10 percent increase in domestic prices for gasoline and diesel fuel. Other countries that heavily subsidize domestic fuel use, which include the oil-rich states Iran and Venezuela, are feeling the pinch as prices climb.
China and India are leading the global economy at the moment; but Zachary Oxman, a senior trader at Wisdom Financial in California, warns that: "$100 is just the beginning. This is kicking off what you are going to see this year. There will be huge moves up in gold and huge moves in crude". India and China, the new economic hegemons are busy negotiating oil deals some of them very selfish in design and orientation. This is another irony. Nigeria had rejected a railway-for-oil-deal with the Chinese in the dying days of Obasanjo because of the loan arrangement by the financiers from China was lopsided against Nigeria's oil interest.
Paradox 6: Forex
The sharp surge in energy prices has nearly everyone scratching their heads about where oil prices may be headed next and what currency pair they could trade to profit from that view. Some oil traders are calling for $80 a barrel while more aggressive ones are setting their sights on $100.
The rise in oil has made headlines across the globe for months now. Strong demand from China and India, the lack of ability by Saudi Arabia (and other OPEC countries) to increase oil production, as well as weather related supply shocks have fueled the continual rise in crude oil prices. From our economics 101 textbooks, we remember that high oil prices act as a tax for consumers by slowing down consumer spending, which eventually takes a bite out of growth. Yet the actual impact of oil prices on different currencies can be very mixed.
Some currencies stand to benefit significantly from rising oil prices while others suffer greatly. Traditionally we know that commodity currencies rally when energy prices increase because those currencies are from countries that tend to be net exporters of commodities such as crude oil. Therefore the oil producers within the country are simply reaping higher profits for the same barrel of oil. Currencies of countries that are net oil importers on the other hand face increasingly higher costs whenever energy prices rise. So taking a look at this from a net oil exporter / importer perspective, the currency pair that should be impacted the most by changes in energy prices is the Canadian Dollar and the Japanese Yen. Canada is the world's ninth largest crude oil producer, while Japan imports 99% of its oil.
Paradox 7: OPEC
In International Economic Relations, a Cartel is a group of sellers who work together to set prices and outputs; they therefore exercise a monopoly control on the markets for their products. Established in 1962 with headquarters in Geneva, OPEC is presently the most important and most successful cartel in the world, because there seems to be no immediate substitute for oil. The agreements of OPEC on production, competition allocation of markets to forestall price war would come under fierce politicking by the consumer nations, especially the US and ECC. This hike may widen division within the cartel and amplify the intensification of the powerful consumer countries to deepening crisis of confidence by member nations of OPEC. Such politics accounts for Gabon's to withdraw from OPEC; and even though they are oil producing countries, Norway, Britain, Russia and Mexico have distanced themselves from OPEC. OPEC oil cartel, which decided against raising production levels in December, may consider lifting output in February amid stronger-than-expected winter demand.
Julian Jessop, chief international economist at Capital Economics, said: "For now the cartel's view is that underlying supply and demand conditions are nowhere near as tight as record oil prices would suggest. But if oil prices are still around 100 dollars a barrel in the run-up to the next OPEC meeting on February 1, we would expect quotas to be raised again."
Some OPEC member are currently being tempted to boost production to bring the prices down, many analysts think that high prices will themselves do the trick by cutting down the demands.
"It is unlikely the cartel will decide to increase output quotas ahead of the normally low-demand second quarter", said Addison Armstrong, director of exchange traded markets at TFS Energy Futures in Stamford Connecticut. He added that research has shown that "furthermore, the US economy is slowing, the result of which is likely to be lower demand for oil".
Paradox 8: Poor Gets Poorer
For poor nations that don't produce oil, the past several years have been a full-blown oil shock. The price rise adds another obstacle to providing modern energy to the estimated 1.6 billion people who have no access to electricity and the 2.4 billion who cook with traditional sources like wood, coal or dung. A recent World Bank study concluded that a sustained $10 increase in the price of a barrel of oil translates roughly into a 1.5 percent knock to the gross domestic product of the world's poorest countries.
Few places have been harder hit than Malawi, a small southern Africa country with annual per capita gross domestic product of just $179. According to the World Bank report, a $10 oil-price increase is expected to translate into a 2.2 percent fall in the GDP of Malawi, where tobacco is the dominant cash drop.
"When gasoline goes up, everything goes up, so we really have to struggle to earn a living," said James Mdachi, 43 years old, an assistant accountant for the government. He and his wife, a teacher, bring in about $200 a month, to support three children and five other dependents. A world away, U.S. industry has so far managed to take the oil surge in stride, although economists fret that this may not last long. Automakers, for instance, may have even more reason to fear high oil prices today than they did in the late 1970s, when price shocks and gas lines tipped Detroit's auto giants into crisis. Then and now, surging petroleum prices caught U.S. automakers with model lineups full of powerful rear-wheel-drive vehicles designed for an era of cheap gas.
Paradox 9: Inflation
There are concerns that the high price of crude oil will stoke inflation. Coming at a time when most Central Banks are adopting and enforcing measure at cutting down interest rates in order to simulate economic growth, it is rather unfortunate. Already, the US shares had been hit, just as in the European Economic Community, EEC, which is reputed to have the best stock exchanges in the globe. Their manufacturing sectors are also feeling the impact of the rising oil prices. The manufacturing sectors started contracting. They fell with Dow Jones trading 215.1 or 1.6 percent, lower at 13,049.73, even as analysts downplay the relevance of the $100 mark. According to Tim Evans of the Citigroup Futures Research in the US: "The entire focus on $100 oil is frivolous. It is not a magic number. It doesn't suddenly make this a fundamentally strong market"
Paradox 10: Middle East
Oil's run-up is bringing the most startling changes of all to the Middle East. Big producers like Saudi Arabia and the United Arab Emirates are using their billions in profits to build their economies with roads, schools, airports and entire new cities. The value of hydrocarbon exports from the Middle East and Central Asia is expected to approach $750 billion this year, almost four times the level in 2001, according to the International Monetary Fund.
Paradox 11: External Debt
In spite of the rising prices of oil, Nigeria's economic mainstay, the debt profile of Nigeria is increasing. The Federal Executive Council released a data of $3.3 billion at it December 18 meeting. The debt stock keep ballooning. According to Finance Minsiter, Shamusideen Usman they were consumed by "targeted developmental projects'. The government has instead of focusing on the oil and gas; power and railways- area of strategic development relevance, predicate the development of these sectors on availability of soft loans. Excess crude oil revenue prior to $100pbd stood at N1. 5 trillion, yet in far away Saudi Arabia, Minister of Energy (petroleum) was busy soliciting for $3.8 billion to finance oil and gas projects. It seems that season of oil boom always provide opportunities for Nigerian leaders to seek new loans.
Paradox 12: Hustling for Oil Till
The rising oil revenue for Nigeria seems to provide an impetus for pro-activism for State Governors to seek better terms of sharing the accrued funds. Since they are also the costudians of local government fund and are responsible for the mounting new debt at $2billion against Federal Government $1.3 billion, it remains to be seen why they would not converge soon in Abuja to discuss how to share the windfall. A newspaper editorial enjoined the government on the recourse to fresh borrowing would lead to productive enterprise adding that: "state Governments and their Federal counterpart are continually bickering could best be utilized in remediation of our infrastructural deficit"
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