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Ending Dependence: Hard Choices for Oil-Exporting States

11844_0708oildependence.pdf
42 pages | 746 Kb
Published: July 11, 2008
Source: A Chatham House Report
Executive Summary

Since 2003, countries whose economies depend on the export of oil and gas have enjoyed a surge of revenue driven by rising oil prices and, in some countries, rising export volumes. The press has captured petroleum-fuelled prosperity in images of futuristic construction plans and the rocketing assets of sovereign wealth funds. However, this obscures important differences among oil and gas exporters in terms of reserves size and social development challenges. Based on a major study of twelve hydrocarbon-exporting countries,1 this report shows that the boom does not guarantee economic sustainability for these countries, most of which face hard policy choices over domestic consumption, development spending and rates of economic growth.

The report estimates the timeframes these countries have in which to make the necessary changes and examine their prospects for success given the existing human, institutional and technical capacity, competitive advantages, infrastructure and access to capital.

Challenging the 'resource curse'

Development based on the export of hydrocarbons presents serious challenges. In the short term, spending the revenues that accrue fromoil and gas exports can cause inflation and stimulate unsustainable government expenditure and subsidies. In the long term, depletion of the hydrocarbon reserves will limit what the hydrocarbon sector can do for the rest of the economy. The exploitation of resources may, however, become a cure for the problems of underdevelopment and poverty which affect many hydrocarbon-exporting countries – if the resources are used to develop the non-hydrocarbon potential of their economies so as to replace hydrocarbon income in the long term. This report shows how much change is necessary for the countries studied, and how soon it will need to be implemented to achieve this result.

Oil prices since 2005 exceed those of the 1970s and early 1980s in inflation-adjusted terms. Current high prices reflect the end of the structural surplus of oil production capacity, which has dominated the world oil market since the second oil shock of 1979–81. During this period of surplus, oil exporters sought to cooperate within OPEC to protect revenues by managing supply. The challenge has now changed: what investments will best increase capacity, and how should the surplus revenues which are now being generated be managed? This report places these questions in the larger context of how to sustain economic growth in the long term as hydrocarbon exports are increasingly constrained by depletion and rising domestic consumption.

This report is designed to inform these policy considerations by drawing on a series of depletion, consumption and export simulations and an investigation into the principles of managing resource wealth (for methodology see Box 1, page 10).

The report does not directly forecast a possible range of future oil prices and production. Unless there is a global recession, high oil prices are likely to persist, but how high they will be in the long term is uncertain. The pricing power of the oil exporters will diminish as their share of world energy demand falls.Within the liquid fuelmarket, alternative demand technologies and fuel supplies (at currently unknown costs and prices) will cap the oil price at some level, for which $100 dollars (2006 $) a barrel is taken here as a benchmark.

Prescribing resource cures

A key conclusion of the report is that, because of their legacy of institutions, their demographic structure and skills, access to other natural and technical resources, and policy frameworks, countries vary greatly in their dependence on hydrocarbon exports. They differ also in their ability to replace oil tax revenues and foreign exchange earnings by diversifying their economies in future. In Part 2, the twelve countries are loosely grouped into four categories according to their stage of depletion and level of dependence on the hydrocarbons sector. These are: 'near sustainable' (Indonesia, Malaysia, Norway), 'soon in transition' (Algeria, Nigeria), 'early dependence' (Angola, Azerbaijan, Kazakhstan, Timor-Leste) and 'long-term depletion options' (Saudi Arabia, Kuwait and Iran). While these groups are facing the challenges of depletion with varying levels of urgency, the report concludes that no country whose economy now depends on oil and gas exports can escape the eventual transition to lower dependence on hydrocarbons, which will involve a combination of:

 Domestic energy policy to restrain the growth of consumption and encourage the development of other fuels;

 More rapid growth of non-hydrocarbon sectors to pay taxes and generate exports (or reduce imports);

 Lower targets for economic growth.

The challenge exists even for Saudi Arabia. The country could cease to export in thirty years' time, on the basis of its planned capacity of 12.5 million barrels per day of crude oil production, if consumption grows on a 'businessas- usual' path. For other countries such as Algeria, Malaysia and Indonesia, whose production is already in or near decline, transition begins very soon.

It is clear that changing the limits of human, institutional and physical infrastructure will take time, money, and coordinated efforts by national governments, business and professional sectors, educational institutions and of course leading individuals. Almost all the solutions require some combination of internal reform and efforts to harness global resources of technology and management. Capital, in most cases, is not now a problem, except in the sense that efficient financial structures are needed to use the available capital efficiently, and access to global technology and management often means admitting global capital. Few governments – except those of countries where production is already in or near decline – seem to be addressing these long-term issues.

This will happen, within varying time frames, as (a) country production flattens and falls and (b) continuing domestic consumption absorbs more of each country's production. The task is extremely difficult because of uncertainty over future additions to their oil and gas reserves, and over future international prices. To produce now or later?

Some governments are questioning whether to avoid or delay investment in further increases in production, which would contribute to financial surpluses but not necessarily develop the non-hydrocarbon economic sectors. Referring to Saudi Arabia's 2007 decision not to increase production capacity beyond 12.5 million barrels a day in the near future, King Abdullah is reported to have said, 'I keep no secret from you that when there were some new finds, I told them: "No, leave it in the ground, with grace from God, our children need it."'2 'Leaving oil in the ground' now for production later would delay and lessen the eventual changes needed to reduce dependence on the hydrocarbon sector. On the other hand, building up foreign investments can provide a strategic hedge against the uncertainties of future reserves and prices.

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