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The government of Bolivia last week issued a decree revoking consumption subsidies on some petroleum products. The action sparked a wave of strikes by trade unions as well as civil groups. Prices of diesel in the country increased by 83% while those of low- and high-octane gasolines increased by 73% and 57% respectively. Following meetings with various union and civil society groups, Eva Morales, the country’s president reportedly reversed that enabling decree .
The International Energy Agency, IEA, in a recent report estimated the total fossil-fuel subsidy for the year 2009 at US$312 billion compared with US$57 billion for renewable energy. It also estimated that eliminating fossil fuel subsidies by the year 2020 would reduce carbon emissions by almost 6% while reducing energy demand by about 5% at that time.
Many countries – developed and developing – retain subsidies for various products in sectors such as energy and agriculture. According to the Energy Information Administration, EIA, for example, total fuel-specific energy subsidies in the United States for financial year 2007 was US$7.435 billion; and fossil-fuels accounted for most of that. For many of these countries then, the issue of eliminating both production and consumption subsidies constitutes a political minefield. Lobbyists and interests groups wield formidable influence in developed countries while for developing countries, the prospects of a “Bolivia” response are daunting; in Pakistan, a vote of confidence in parliament looms large as an ally in a tenuous coalition bolted citing the 9% increase in gasoline price just a few days ago.
That said, there are in the main, three energy subsidy issues that impact the global economy:
First, international crude oil prices. Energy demand by developing countries has been on the increase; for many of the oil-exporting countries among them, the hike in demand has been boosted by significant levels of consumption subsidy, according to the Center for Global Energy Studies, CGES in London. The CGES reports that during the period 1998-2010, while global crude oil demand grew by 1.2% per year, the demand growth for members of the Organization of the Petroleum Exporting Countries, OPEC, was 3% per year. The import then is that the increasing domestic demand would place constraints on export quotas, a possible driver for higher international crude oil prices. The head of Saudi Arabia’s Saudi Aramco, last year warned that domestic energy demand could rise from 2009’s 3.4 million barrels per day of oil equivalent to 8.3 million barrels per day of oil equivalent by 2028, citing inefficiencies; oil and natural gas are used for generation of heavily-subsidized electricity in Saudi Arabia.
Many of these producer-nations have also embarked on very capital-intensive, medium-term national development programs which require crude oil prices of between US$59 and US$76 per barrel for break-even. It is therefore unlikely that they would be averse to higher, international crude oil prices. One frightful aspect of resource-driven boom is that for unprepared countries, price-collapse is usually devastating.
Secondly, the issue of inadequate energy prices among many oil and gas producer-nations, has stifled capital investment and therefore supply. In resource provinces where natural gas is associated with oil, operators elect to flare the gas and exploit the oil rather than invest in gas infrastructure which would not provide adequate returns. For mostly natural gas provinces, investment is almost non-existent for the same reason. According to Oil and Gas Journal, Nigeria for example held 185 trillion cubic feet, Tcf, of natural gas as at January 2010, giving her the world’s eighth-largest natural gas reserves. The country, however flares a significant proportion of her natural gas production. The amount of natural gas flared in one year could easily meet some countries’ total energy needs for the same period. According to EIA, the country flared 532 billion cubic feet, Bcf, of natural gas in 2008. The country herself consumed only a total of 430 Bcf of natural gas (about 65% of which was used for electricity generation) in the same year. Of the country’s gross natural gas production in 2008, only about 50% was marketed.
The result is that in Nigeria, only about 47% of the people have access to electricity; those manufacturing companies that are still standing – many have fallen away – have had to invest in private power generation and that has increased operation costs by as much as 20% to 40%. However, the current president, Goodluck Jonathan, has instituted a complete overhaul of the country’s power sector with a new investor-friendly gas roadmap; but the country’s poorly regulated oil and gas sector has also led to an acutely notorious lack of transparency as well as gas flare problems and oil spills more severe than the April 20, 2010 Gulf of Mexico disaster.
Finally, the sustainability of excessive energy subsidies. The steeply rising proportion of energy subsidies in national expenditure for highly subsidized economies has challenged their economic viability. In Iran, for example, inherent energy problems associated with high subsidies – until just December last year, gasoline prices were only ten cents a liter – have been accentuated by the recent series of asphyxiating economic sanctions spearheaded by the United States. According to TheNational, energy subsidies cost the country a third of her GDP. The degree of infrastructural decay is such that the country, which has the second-largest natural gas reserves is a net importer and the third-largest consumer behind United States and Russia despite having a smaller population. The situation with her crude oil is not much better. The lack of capital investment means that the country with one of the highest reserves could soon become a net importer. Even with the new US$0.40/liter price, the allowable monthly gasoline ration for each motorist would be meaningless in many countries.
Venezuela, with the world’s sixth-largest crude oil reserves is also an unenviable paradigm. A grossly mismanaged energy sector which has witnessed nationalization of assets and gasoline prices as low as US$0.07/liter has left little revenue for President Hugo Chávez to finance his ambitious 21st Century Socialism program. The result has been spates of food and power rationing and an inflation rate which the country’s own central bank put at 26.9% for 2010. The devaluation last week, of the country’s currency – one of several in the past and the second in the last twelve months – would probably add to her woes.
In Nigeria (the fifth-highest foreign supplier of crude oil to the U.S in 2009), the Petroleum Product Pricing Regulatory Agency, PPPRA, has reported that in the period between January 2006 and June 2010, about US$13 billion was expended to subsidize petroleum products. In comparison, provisions for total capital expenditure in the country’s 2011 budget amount to about US$6.4 billion. In that 2011 budget, recurrent expenditure takes about 59% of total outlay, boosted by politicians’ salaries and expenses. As reported, each Senator in the country’s legislature takes home about US$1.34 million per annum while a Representative takes home about US$848,000 per annum (not so sure how that stacks up with the U.S. Congress); and that in a country where about 7 in 10 people live on less than US$2 per day. The country’s central bank governor has at different fora inveighed against such massive fraud associated with her petroleum product subsidies and which make the exercise both meaningless and unsustainable. A Petroleum Industry Bill which was supposed to sanitize the country’s oil and gas sector has been languishing in the legislature; the Freedom of Information Bill, FOI, which is needed to enshrine transparency and good governance is also buried there in ten years of the chamber’s dust. One of the sponsors of that FOI bill has pointed out that the books of the country’s National Oil Company, are not subject to any legislative audit.
The oil major BP is currently preparing for a “total kill” (an industry expression meaning a permanent plug) of the disaster-stricken Macondo oil well in the Gulf of Mexico. Attention is now shifting to determination of liabilities, an exercise for which legal gladiators have since been readying their swords and shields. Preliminary estimates of total liability to BP have been put at between US$30 billion and US$70 billion and its impact on the oil major as well as some niche industries may be severe.
Some industries as well as their regulatory bodies have seemingly failed to learn from previous disasters, a situation that has often compounded the severity of subsequent incidents. Recent accounts show the Macondo well disaster to have been “all too foreseeable”.
While many lessons from that Gulf of Mexico disaster abound, four, with regard to due process, stand out:
First, a weak, regulatory regime conduces inevitably to poor service delivery. Many industries have proved incapable of self-regulation and the recent global financial crises constitute a painful testament to that. According to U.S. Department of Interior documents, federal officials with oversight duties for Gulf of Mexico drilling, used illegal drugs, watched pornography at work and accepted gifts from oil companies (which they were supposed to supervise). The Mineral Management Service MMS, as it was then called, reportedly rubberstamped BP’s drilling plans and exempted the oil major from oil-spill response and prevention plans. One of the worst mine disasters in the United States during the last four decades resulted in the main, from weak regulatory oversight as did the current salmonella outbreak which has seen the recall of over 500 million eggs.
Presentations at a committee of the National Academies of Science currently studying the April 20 explosion at the Macondo well in the Gulf of Mexico, have indicated gaping regulatory and operational loopholes that need to be properly addressed by proper regulations if such accidents must be prevented in the future. However, much more important than such regulations, is the will to enforce them and to make regulatory officers accountable for their assessments (or lack thereof). Unenforced regulations or opaque regulatory processes are as good as no regulations and often breed a culture of graft.
Secondly, for operators, the gains from skimping on due processes are often ephemeral and do not justify the much larger, associated losses of the medium and longer term. The oil major BP, racked up quite a disproportionately (if not notoriously) large number of safety violations; and while a final report of findings on the Macondo well disaster is yet to be issued, there are clear indications that due processes were not employed in some critical operational functions. For example, as reported, certain critical integrity tests were omitted while the design of some crucial systems was woefully flawed; even supervisors aboard the ill-fated rig were reportedly aware one year earlier, of its disabled alarm systems, a situation that could prove crucial in liability considerations. The potential liability of that disaster would certainly be unsavory to BP and investors who saw shares slide by as much as 45% at one point.
Third, many oil producing companies, especially at their top management levels need to upgrade their public communication skills. They quite often bear such cavalier attitudes (even if unintended) that are inimical to the very corporate brands they represent. The verbal gaffes of Tony Hayward – CEO of BP – in the aftermath of the Macondo well explosion, made him a proverbial “stench in the nostrils” of Americans, compounding the woes of the BP brand in their country; and when an incensed president Barack Obama joined the fray, the fate of Mr. Hayward was sealed.
At a U.S. congressional hearing on the Macondo well disaster, Tony Hayward, when grilled by impassioned lawmakers who were driven perhaps by public umbrage in an election year, was rather subdued and seemingly out of sorts. Oil executives are often more at ease among political claqueurs; but for a rather ill-advised congressman who apologized to BP for a US$20 billion “shakedown” (his interpretation of the company’s initial outlay to cover liabilities in the Macondo oil well disaster), the sudden volte-face was not unexpected.
Finally, the woeful lack of a proper, disaster or crises mitigation template was all too evident in that Gulf of Mexico incident; as it was in that of Hurricane Katrina and even arguably, in the last U.S. financial crises. The need for adequate contingency procedures is often lost in massive political dunghills, especially when interest groups hold substantial financial or other influence. For many industries, advances in operational technologies have over the years outpaced regulatory capabilities – or perhaps more appropriately, regulatory functions have been mindlessly relegated for ease of progress in operational processes. The result is that when such disasters occur, functionaries are hopelessly unprepared and this adds to the severity of the incident.
Recent industry data do give credence to my arguments on all three scores: