The brewing oil crisis and Pakistan

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30 October 2000 Monday 02 Shaban 1421

The brewing oil crisis and Pakistan

By S.H. Zaidi

"Leave it to the market forces, something always told to us by the major industrial nations. Well, here we are, market forces."

- Sheikh Saud Nasser al Sabah, Oil Minister of Kuwait

The 4th decade after the first oil crisis in the early 70's has started off with the 4th oil crisis in Europe. In the first three crises, the OPEC was perceived by the Europeans as the villain of the piece. This time, however, they hold their own governments responsible for the high price, while the governments hold the oil companies responsible.

This is not without reason. The price of petrol at the pump in Europe is on an average, composed largely of taxes: 70 per cent on an average, varying from a maximum of 76 per cent for UK to 58 per cent for Ireland.

The US in contrast levies the least amount of tax, just 22 per cent. There is no shortage of crude in the world market. The Kuwaiti oil minister, Sheikh Saud Nasser admits though that the issue is the refineries which are not supplying the market with what they need.

The refineries claim they are operating at full capacity but he thinks that, 'as oil prices rise, refineries usually reduce their capacity - the economics don't make sense for them.' [Newsweek, Sept 25].

While the European governments accuse the OPEC of increasing the price, the OPEC wants the European governments to reduce the tax burden on their people. In Europe, the sales tax that is calculated as a per cent of price is only 12 to 25 per cent of the price. The remaining are energy taxes.

The statement by Ray Holloway, director of Britain's petrol retailers' association, that politicians, not the OPEC, are to blame should be seen in this light.

He says, "We are getting to the limit of taxable capacity; this is a revolution about taxes."

The energy taxes in Europe have made the Europeans more energy efficient than the US where these taxes are the lowest in the world.

In contrast with Europe and America, the demand in Pakistan is hardly elastic. That means it is unlikely to come down significantly with increased taxes, because we are already using up only the minimum for our requirements, except perhaps the demand in the defence services and the public sector.

But there prices do not much influence the demand, although that is where the consumption is maximum. Can any way be found to reduce demand in these two sectors?

The other important sector is power production, where we can switch to gas in which we are more or less self-sufficient. Our indigenous resources can meet the needs of the power plants using gas as the fuel. Even imported gas can prove ultimately to be cheaper than furnace oil.

Taxes are also the main chunk of price at the retail level in Pakistan. The problem becomes even more acute, however, when the poor purchasing power of the people is considered. Unfortunately, petroleum is one of those commodities reserved for levying of taxes to augment government revenue off and on.

Though the recent price hikes in the international market do provide some justification for the enhancement of retail price of petroleum products, it is expected that prices would come down from the current level of around $34 per barrel to about $23-25 per barrel in the second quarter of 2001.

In Europe, the 'energy taxes' are not used for projects related to energy or environment; they are added to government revenue, and used for such normal subjects as health, education, municipal services or infrastructure projects.

In France, for instance, $ 21 billion collected in energy taxes are added to $42 billion in income taxes and used for routine government expenditure. In Pakistan, with perennial shortage of revenue, there is no question of using such taxes for specific purposes.

Danger of dampening economic growth: Consumer nations such as the US and European states are worried that high prices, which have already sparked mass protests all over Europe, will fan inflation and dampen economic growth.

The World Bank President James Wolfensohn has said that prices above $30 a barrel could prove especially damaging to import-dependent poor nations where economic growth rates could fall. Already, prices in Pakistan have been revised upward as the current policy is to revise the price every three months in accordance with the world crude prices. Within the span of a year, we have had four price hikes. Except once, this revision has been invariably upwards.

Unlike the first oil crisis in 1973, however, when the Organization of Petroleum Exporting Countries, (OPEC) unilaterally increased prices, thus subjecting the world to a far-reaching crisis, the hopeful thing this time is that both the OPEC and non-OPEC countries are making a joint effort to bring the prices down.

Oil prices fall as oil is released from the US strategic reserves to diminish soaring crude prices. [London Brent futures fell $1.02 to $32.72 a barrel, and the US light crude oil for November traded $1.29 cents lower at $33.95 as soon as hints for release were given.] Non-OPEC Norway, the world's second biggest oil exporter after Saudi Arabia, enhanced annual production to 3.2 million bpd, lifting a 100,000 bpd restriction on output from July 1, in conjunction with an OPEC attempt to ease surging oil prices.

Increased oil prices used as a weapon by the OPEC states ultimately harmed the Third World more than the industrialised world. The latter, after some temporary difficulties, got over it and covered its losses by corresponding increases in the prices of its products. The Third World countries having neither industry nor oil to export suffered the most and would likely be the victim of the increases this time as well.

Pakistan is already suffering an economic recession and will be hard hit even if it manages to get petroleum at concessional rates from its friends in the Middle East because of the impact of the world market prices on prices of industrial goods.

Differences within the OPEC: Within the OPEC there are differences. Kuwait with a population of less than a million is running a large deficit, due mainly to its massive re-building plans, which it wants to balance. Iran with its 70 million people has problems of its own. Some exporters would like to see the price climb to $50 a barrel, but the effort of most is to come to a consensus of around $25 a barrel.

Iraq is not allowed to increase production beyond 200,000 bpd. Its major exports are to Jordan, [which is exempted from sanctions] and that also on concessionary terms.

It is high time the US changed its attitude with regard to its perceived 'enemies' - countries like Iraq, where children die for want of milk and medicine arising out of sanctions, and Afghanistan, which is reportedly forced to turn to selling drugs because of the aggravation of its plight stemming from the civil war and the UN sanctions.

Reasons for the price hike: Venezuela's Rodriguez, current OPEC president, believes that the price hike has been fuelled mainly by refining bottlenecks, transport problems and financial market speculation.

He doubts oil importing countries' resolve to stabilize oil price by intervening in futures trading and thus help OPEC keep prices within the target range of about $25 per barrel. He says that speculation is adding $8-10 per barrel onto the price based on supply and demand considerations alone. Speculation keeps pushing the prices high because trading volume on paper in the 'futures' exchanges in London and New York exceeds the world oil production! Presently, "Futures" prices are being fuelled by the rumour that the United States may run short of heating oil in the coming winter!

There are differences also among the consumers on ways of dealing with the crisis. The US prefers to deal with the petroleum exporters individually rather than as a bloc. Discussions do go on between the oil producers and consumers - the next meeting is scheduled for Nov 16 in Riyadh - and hence is cool to the French proposal for a meeting between the major consumers and OPEC.

According to Thailand's second largest shipping firm, Thoresen Thai Agencies Plc, the rise in world oil prices was boosting both its costs and revenues.

A surge in operating costs as a result of rising oil prices has been offset by higher dollar-denominated freight rates, which accounted for more than 90 per cent of total revenues. By the same token, all prices of industrialized countries' products and services would go up, and countries like Pakistan that have neither oil nor industry would be the main sufferers - as happened in the earlier oil crisis.

A very basic reason for the crises has had more to do with the reaction of the oil traders and the 'market' than actual shortages. Politics was instrumental in the first two hikes but it led to 'crises' in tandem with the panic created by the traders and those who intended to benefit from a scare and the shortages, artificial or real, in the 70s. The current crises is also largely fed, according to David Brown, chief economist at Bear Stearns, London, by "the global supply-demand mismatch, tight capacity constraints of refining, worries about stocks and Middle East tension."

Current price forecasts: North Sea Brent averaged $18 a barrel in 1999 after rising from $13.50 during the 1998 price slump.

According to a Reuters poll of oil experts and economists, oil prices will not lose significant ground until the second quarter of next year when benchmark Brent is expected to fall to an average of $23.45 a barrel.

But prices are expected to stick just above $30 through the fourth quarter of 2000, but somewhat lower than the current high of almost $36 a barrel. The 2001 forecast shows a $4.67, or 17 per cent, decline from this year's expected average of $28.12 a barrel, but it would still be 18 per cent more expensive than the average price of $19.25 a barrel over the past 10 years, without allowing for inflation.

Uncertain factors: There are some uncertain factors which might keep the prices high in the peak winter season of the oil-consuming nations. These are:

1. Severe cold spells could signal disaster. If there is shortage of heating oil and diesel, prices may stay high. High prices are often linked to low product stocks and speculation, not insufficient crude supplies.

2. Iraq could stop exports during the US presidential election after 10 years of sanctions. This is a classic case of politics impinging on economics. The US has got sanctions in place against Iraqi oil exports through the Security Council, though Iraq has been augmenting production. But you can impose upper limits on exports [though even that could to some extent be violated], but you can do nothing against a voluntary cessation of production! Baghdad's current exports of 2.3 million bpd mean any drastic reduction in their exports, and the prices go shooting up.

President Saddam Hussein has warned that fellow OPEC member states should ignore pressure from "superpowers" to contain rising prices. What he has in mind is anybody's guess. However, the sudden surge of love for Iraq on humanitarian grounds in certain Western governments may be linked to the petroleum crisis created by the speculators and the oil companies and traders. The net influence of this love, however, may be positive for the world economy.

3. Saudi Arabia is the only country which holds substantial idle capacity in the exporter group. But the market is confused. Despite recent OPEC claims of increase of 800,000 bpd, it seems it has no control over stabilizing prices.

4. There may be some supply disruptions in Nigeria.

5. Some point to the mid-70s oil crisis when increase in oil exports by the former Soviet Union, Romania and Albania helped drive crude prices down. But the situation has changed significantly since then. Russia is now unable to assume this role of saviour for Europe. Its own domestic demand being significant, and prices quite unrelated to world market position, nothing dramatic could be expected, least of all in winter. Russia exports around one-third of its output (6.3 barrels per day) and could increase its exports somehow, but it would be unable to bear the domestic political cost of this, as substantial rise in exports will soon have a deficit at home. The government cannot afford a fuel deficit, shortage of electricity and the prospect of blackouts and inflation.

For energy-deficient countries like Pakistan, the best course will be to switch to the available sources of energy wherever possible, viz, natural gas, specially for power generation and transportation and to intensify mineral prospecting for fossil fuels and search for alternate, preferably renewable, energy sources.

http://www.dawn.com/2000/10/30/ebr8.htm



-- Martin Thompson (mthom1927@aol.com), October 30, 2000

Answers

It's taxed at the well head, it's taxed as moves through the pipeline, it's taxed in the refinery, it's taxed when it's transported to the service station, it's taxed when you buy it.

-- David Williams (DAVIDWILL@prodigy.net), October 31, 2000.

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