Posts Tagged 'oil revenues'

The anger over fuel price reform in Nigeria

By: Ingrid Krüger

Earlier this month, the Nigerian government decided to more than double the domestic fuel price, from the initially subsidized price of 40 cents per liter. After a week of general strike, the Nigerian government gave in to the pressure, only keeping less than half of the initial price increase.

What makes a fuel price reform so difficult in Nigeria? Nigeria is the largest crude oil producer in Africa, producing more than two million barrels of crude per day(1) and cheap fuel is considered a birth right among Nigeria’s citizens as in the other OPEC member states. The Nigerian government’s ability to subsidize fuel is challenged, however, both by the vast size of Nigeria’s population and by the country’s lack of sufficient refinery capacity.

Nigeria is the most populous country in Africa, with a population estimated to almost 160 million inhabitants.(2) This makes Nigeria oil poor when crude oil production is measured in per capita terms compared to, say, sparsely populated Kuwait, that produces around the same amount of crude. Furthermore, the Energy Information Administration (EIA) reports that because of “poor maintenance, theft, and fire”, Nigeria’s four refineries are operating below capacity. In 2009 and part of 2010, Nigeria’s refineries were operating below 30 percent of capacity, forcing the country to import around 85 percent of the fuel it needed.(3) The vast population and the lack of sufficient refinery capacity in Nigeria make subsidization of the domestic fuel price a very expensive economic policy for the Nigerian government. This may help explain why international comparisons rank Nigeria’s domestic fuel price above the OPEC average and even above the OPEC average within Africa.(4)

Even though subsidization of fuel implies great costs for the Nigerian government, it is difficult to make the citizens in Nigeria accept a domestic fuel price increase. Corruption and poverty make domestic fuel price increases highly unpopular and fuel price hikes have led to general strike in the country in the past. Nigeria receives the very poor rating of 2.4 on Transparency International’s Corruption Perception Index (CPI), an index scaled from 0 to 10 where 0 is “highly corrupt”.(5) In December, the Economist wrote that “the most moderate estimates suggest that $4 billion to $8 billion is stolen from Nigeria’s state coffers every year”.(6) The corruption among politicians in Nigeria indicates a great waste of the country’s natural resources. To the citizens in Nigeria, it seems that they are picking up the bill for the politicians’ corruption. The revenues foregone by corruption could have been spent investing in poorly needed refinery capacity. Furthermore, poverty makes a doubling of the fuel price unbearable for many people. In 2004, which is the most recent year with data available, more than half the population was living below the national poverty line in Nigeria.(7) As long as corruption and poverty remain high, fuel price hikes will continue to cause great anger in the oil producing country.

 
1 OPEC Annual Statistical Bulletin 2010/2011: http://www.opec.org/opec_web/en/publications/202.htm
2 The World Bank: http://data.worldbank.org/indicator/SP.POP.TOTL
3 Energy Information Administration (EIA): http://www.eia.gov/countries/cab.cfm?fips=NI
4 GIZ. Data Preview ‘International Fuel Prices’ 2010/2011: http://www.gtz.de/en/themen/33729.htm
5 Transparency International: http://cpi.transparency.org/cpi2011/results/
6 The Economist. Dec 3rd, 2011: http://www.economist.com/node/21541042
7 The World Bank: http://data.worldbank.org/country/nigeria

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Oljemarkedet og den politiske utviklingen i MENA-landene

By: Ådne Cappelen & Knut Einar Rosendahl

Under finanskrisens mest akutte fase for tre år siden stupte råoljeprisene til under 50 dollar per fat. Nå er prisen rundt 110 dollar til tross for en ny økonomisk nedgang i OECD-området og svak vekst i verdensøkonomien. En av flere faktorer som kan forklare denne utviklingen er den politiske utviklingen i MENA-landene. Særlig bortfallet av oljeproduksjon i Libya var viktig siden landet normalt er en betydelig nettoeksportør av råolje. Produksjonsfallet i Libya ble riktignok motvirket av at andre OPEC-land – særlig Saudi Arabia – økte sin produksjon. Men den politiske utviklingen i mange arabiske land siden høsten 2010 har gjort at aktører i oljemarkedet er mer bekymret for usikkerheten i leveransene av råolje enn tidligere. Det gjør at dagens råoljepris inneholder en slags risikopremie. Denne premien vil normalt avta gradvis hvis den overhodet gjør det, og i så fall vil det skje som følge av en normalisering av politiske forhold i MENA-landene.  Skulle derimot flere av landene ende opp med stammefeider fordi nasjonalstatene er svake og ikke har høy legitimitet i befolkningen, vil antakelig en slik politisk risikopremie kunne vare lenge.

 

Det er vanskelig å spå om den politiske utviklingen i MENA-landene og situasjonen er langt fra avklart. Det er imidlertid grunn til å reflektere litt over hva som kan bli utviklingen i oljemarkedet dersom mange MENA-land skulle lykkes med en demokratisk utvikling framover. Ifølge IEAs ferske World Energy Outlook er det ventet at MENA-landenes vekst i oljeproduksjonen fram mot 2035 vil utgjøre over 90% av den globale produksjonsveksten. Her skal vi først og fremst diskutere hvordan OPEC kan tenkes å bli påvirket. Man kan spørre seg om et OPEC bestående i større grad av demokratiske regimer vil ha større samhold enn et OPEC bestående av udemokratiske regimer med svak legitimitet i befolkningen.

 

Før vi forsøker å si noe om dette, bør vi minne om at mange har spådd OPECs endelikt tidligere. Nobelprisvinner i økonomi Milton Friedman mente allerede på 1970-tallet at OPEC ville gå i oppløsning fordi karteller ikke er økonomisk bærekraftige. Fra midt på 1980-tallet da Saudi-Arabia la om sin produksjonspolitikk og til langt ut på 1990-tallet var det mange som mente at OPECs samhold var i ferd med å forsvinne og at oljeprisene ville forbli lave. 2000-tallet har gjort slike spekulasjoner til skamme. Samholdet i OPECs kjerne, som omfatter arabiske land pluss Iran, kan lettere forstås når man tar i betraktning at både de autokratiske statslederne og befolkningen oppfatter seg som del av en større politisk og kulturell enhet hvor tradisjonell nasjonalstatlig lojalitet kommer i bakre rekke. Som en saudisk økonom i utviklingsdepartementet sa til oss en gang; først muslim, så araber, dernest saudier. De færreste nordmenn ville nok ha sagt; først kristen, så europeer, dernest norsk. Det er vanskelig å se for seg at noen medlemmer av OPECs kjerne (typisk Kuwait og Saudi-Arabia) kan sette i gang med en ”egoistisk” nasjonalstatlig oljepolitikk uten at det ville få betydelige politiske følger. Det gjelder både i forholdet til andre arabiske land og i forhold til egen befolkning som ikke føler spesiell lojalitet til et lederskap som lever høyt på strå i forhold til den jevne araber. En ren nasjonal strategi vil nødvendigvis måtte gå på bekostning av andre OPEC-medlemmer som ikke kan ekspandere sin produksjon og dermed vil kunne komme i alvorlige økonomiske problemer.

Høy befolkningsvekst og fallende levestandard har lenge preget mange MENA-land og gitt grobunn for politisk misnøye. I land med store oljeinntekter har man kunnet dempe denne misnøyen med sjenerøse ytelser fra staten uten å måtte ilegge skatter. Forutsetningen har vært at oljeinntektene var store nok, og på 2000-tallet ble de det. Men det er begrenset hvor mye oljeinntektene kan vokse; i noen land av ressursgrunner, i andre land fordi etterspørselen på verdensmarkedet kan falle. Uten et system hvor offentlige ytelser som utdanning og sosiale tjenester kan øke i takt med befolkningsveksten, fordi man verken kan beskatte innbyggerne eller øke oljeinntektene, får man problemer og potensiell ustabilitet.

 

Med en demokratisk utvikling og folkelig representasjon i styrende organer, er det mulig å skattefinansiere deler av offentlig sektor i OPEC-landene. I EU er statsgjelden høy, skattene for lave i forhold til dagens utgifter og det demokratiske styresettet blir utfordret ved at politisk valgte ledere gir seg til fordel for ”teknokrater”. I mange OPEC-land kan man nå tenke seg muligheten for å gå motsatt vei ved å innføre demokrati, øke beskatningen og tilby tjenester som befolkningen etterspør, og som en mer diversifisert økonomisk og politisk utvikling krever. Det betyr at avhengigheten av høye oljeinntekter for å finansiere offentlige utgifter kan bli redusert. Når budsjetthensyn i mindre grad er direkte koblet til høye oljeinntekter, kan det tenkes at samholdet i OPEC i mindre grad blir sårbart for nasjonale solospill. Dette tror vi vil være den mest sannsynlige effekten på kort og mellomlang sikt. En demokratisk utvikling i MENA-landene vil ikke framstå som en utfordring for samholdet i OPEC. På virkelig lang sikt kan man derimot se for seg muligheten for at nasjonalstatene blir viktigere enheter, på bekostning av den religiøse, regionale og etniske enheten i MENA. Da vil noe av ”limet” i OPEC bli svakere og nasjonale hensyn få større vekt enn i dag på bekostning av hensynet til andre land i regionen.

 

 

A window of opportunity to restructure Libya’s economy

By: Ingrid Krüger

The conflict in Libya has led to a steep fall in oil production in the North African OPEC member, oil installations have been damaged and migrants have returned home. Furthermore, if the aftershock of the financial crisis leads to a sharp decline in global activity, it will put downward pressure on international energy prices, which implies a further reduction in the Libyan state’s revenues.[1] Libya’s new regime is provided with a window of opportunity to restructure Libya’s economy. And so, today’s economic challenges in Libya may be a blessing for Libya’s economy in the long run.

The founder of OPEC, Pérez Alfonzo, said in an interview[2] during the booming 1970s that petroleum was the devil’s excrement; “Look at this locura [(madness)] – waste, corruption, consumption, our public services falling apart …” The petroleum spending locura continued after the booming 1970s for the OPEC members. Today, the locura of the past necessitates a restructuring of Libya’s economy. With this year’s disruptions to Libya’s economy, people are likely prepared for changes. And the fall of Gaddafi’s regime provides people with hope for improved economic performance in the long run. With people in Libya prepared for changes – and hopeful that economic reforms will improve the current situation – the new regime can make wonders.

Libya’s economy under Gaddafi was characterized by corruption, mismatches in the labor market, and a poor business environment.[3] So, there is room for increasing both the size of the cake and the piece of the cake that goes to the poorest people. As international sanctions are removed and Gaddafi’s assets unfrozen,[4] large resources will become available to the new regime. As the fiscal space increases, the new regime is put to the test; will the new regime be tempted to evolve on politically motivated extravagant spending as the economy improves, just like Gaddafi’s regime? As Besley and Persson[5] argue, “almost all dimensions of state development and effectiveness are positively correlated” and “coevolve in a complex web of interdependent causality”. If the window of opportunity to restructure Libya’s economy is acted on, then political and economic stability may reinforce each other in Libya in the time to come.


[1] IMF. October 2011. “Regional Economic Outlook – Middle East and Central Asia”. World Economic and Financial Surveys. http://www.imf.org/external/pubs/ft/reo/2011/mcd/eng/pdf/mreo1011.pdf

[2] Karl, Terry Lynn. 1982. The Political Economy of Petrodollars: Oil and Democracy in Venezuela. PhD dissertation. Stanford University.

[3] IMF. October 2011. “Regional Economic Outlook – Middle East and Central Asia”. World Economic and Financial Surveys.

[4] For further details, see the Economist Intelligence Unit’s October Report on Libya: http://country.eiu.com/Libya

[5] Besley, Timothy & Torsten Persson. 2011. Pillars of Prosperity. The Political Economics of Development Clusters. Princeton University Press.

Oil wealth and regime characteristics

By: Ingrid Krüger

How are regime characteristics affected by oil wealth? The State Fragility Index[1] (SFI) indicates that Norway is more “fragile” than, say, Sweden because of the Norwegian state’s oil wealth. The SFI measures state fragility in terms of the state’s effectiveness and legitimacy with respect to security, governance, economic development, and social development. The SFI “punishes” states that are more dependent on exports of primary goods (as opposed to manufactured goods) with a weaker economic legitimacy score and therefore with a higher state fragility score than other states, all else equal. In fact, based on SFI’s ranking, the economic legitimacy of the Norwegian state is lower than that of Zimbabwe.

The authors[2] behind the SFI point out that the petroleum producers in Africa and the Muslim regions of the world have highly autocratic regimes. Based on this statement, the motivation for “punishing” countries for their natural resource abundance appears to be the positive correlation between authoritarianism and oil wealth in the international data. However, the oil rich states’ natural resources indirectly ensure them high ratings of legitimacy and efficiency in other dimension, which measure e.g. GDP per capita, human development, and infant mortality. The oil rich Gulf States are, isolated speaking, directly “punished” – increasing the indexed fragility – for their natural resource dependence, but they are at the same time so developed economically that they in sum are deemed more efficient and legitimate than many other authoritarian states in the world.

The researcher is left with the task to explain why the Norwegian government, despite its oil wealth, is not in reality suffering from a lack of economic legitimacy, or why the regime in the Emirates, despite the high income levels and the high living standard of the UAE’s citizens, in fact suffer from illegitimacy in many respects. Theorizing the answers to these questions will help us to better understand when oil wealth matters (and when it does not matter) for the political development of states.

 

 


[1] For data and more information on the SFI, see http://www.systemicpeace.org/inscr/inscr.htm

[2] Marshall, Monty G. and George Mason. 2007 (p.13). “Global Report on Conflict, Governance and State Fragility 2007”, http://www.systemicpeace.org/peace.htm

The Tunisian domino puts the rentier theory to the test

By: Ingrid Krüger

As the question of a Tunisian domino effect is raised, it is time to discuss the explanatory power of the rentier theory anew. Last week, BBC put up a regional map marking which of the regimes in North Africa and the Middle East could be challenced next.[1] Leaders of all North African countries from Morocco to Egypt were marked as potential candidates. Furthermore, BBC had marked both Jordan and Yemen on their map, but the domino chain was cut off between these latter two countries; none of the highly undemocratic regimes in the Gulf Region would be challenged, according to BBC. Since the number one demand that has spread across the Tunisian borders is a demand for democratization, why exclude the possibility that widespread civil unrest will take place in the Gulf States in the near future?

Although similar in terms of suppression, the economic conditions are different in the Gulf Region. Here we find some of the most extreme examples of rentier states, defined as governments receiving substantial amounts of external rents on a regular basis.[2] According to the rentier theory, the external oil revenues provide these governments with the tools they need to avoid political dissent from surfacing. According to the rentier theory, by bribing citizens through the unconditional distribution of oil revenues, potential pressure groups will not voice demands of political participation.

The Tunisian domino effect puts the rentier theory to the test. Will the rentier theory prove itself weak or may the degree of preemptive domestic distribution of oil revenues help predetermine the extent of the Tunisian domino effect? Will the decades long provision of direct economic benefits in the Gulf Region be sufficient to silence potential upcoming demands of democratization? According to the rentier theory the distribution of oil revenues helps secure regime durability. However, “what is frozen is not necessarily peace, but conflict; not freedom, but oppression’’.[3] Will the regimes in the Gulf Region be forced to give substantial political concessions in the near future despite their decades long preemptive distribution of oil revenues?


[1] BBC (February 3, 2011). `Mid-East: Will there be a domino effect?’, http://www.bbc.co.uk/news/world-africa-12204971

[2] Mahdavy, H. (1970). `The Patterns and Problems of Economic Development in Rentier States: The Case of Iran,’ in M.A. Cook, ed., Studies in the Economic History of the Middle East, Oxford University Press.

[3] Luciani, G. (1987).  `Allocation vs. Production States: A Theoretical Framework,’ in Beblawi, H., and Luciani, G., eds., The Rentier State, Croom Helm.

Iran, Iraq, and energy

By: Annette Wolden

There are many issues that have to be resolved in today’s Iraq. First and foremost, in order to get the country back on track, the energy sector needs to be back on track. A large contributor to the rebuilding of the sector is neighboring country Iran. Iran’s energy exports to Iraq in 2009 reached $1 billion, of which $400 million accounted for electricity exports and $300 million to petroleum products.[1] Iran has also been involved in rebuilding Iraq’s energy infrastructure. In 2007 Tehran signed a $150 million contract to build a 300-megawatt power plant in Baghdad,[2] and in 2008 it agreed to build a 400-megawatt electricity line between Abadan and al-Harasa.[3]

Prior to the fall of Saddam, Iran and Iraq had competed against each other over regional hegemony for decades and had been engaged in a war against each other. The fact that Iran is now a large investor in Iraq is a matter of huge controversy. Politically, a close relationship with Iran, is a sensitive issue in Iraq. Moving closer to Iran is perceived by many as a sign of weakness and of Iran trying to control Iraqi affairs. In addition, the changing quality of Iran-Iraq relations has led the region’s political leaders to express their concern of the development of a “Shia Crescent”. A term that refers to a new trend of Shia dominance stretching from Beirut to Tehran, and the fear that this development will cut through the Sunni-dominated Middle East. A closer relationship between Iran and Iraq would enforce this “Shia grip” over the region.

It is difficult to stipulate Iran’s true intensions for investing heavily in Iraq, but from Baghdad’s point of view, Tehran makes out for both a security threat and a much needed investor. Since after the invasion in 2003 there has been talk of establishing a closer cooperation between the two nations’ energy sectors. The Basra-Abadan pipeline is one example, first proposed in 2005. If cooperation between Iran and Iraq’s oil sectors were to become a reality, the countries would obtain a unique place in the international oil market. By committing to cooperate, they would hold a larger marked share between them, enabling them to dictate output levels to a greater extent than what is possible now. This is also true for OPEC negotiations.

By deciding to strengthen the ties to Iran, Iraq will experience protests from within. Especially from the Sunni communities wanting to avoid Shia control. To cooperate will also mean risking appearing as a puppet-state under Iranian control. However, the close energy tie-up between the two nations could also serve as a buffer to any external political pressure on Iraq.

Cooperation demands a large degree of openness and it is not clear whether Iran is prepared to make that kind of commitment towards Iraq, or if Iran is hoping to be the stronger part in the relationship, and thereby dictate the premises.

 

 

 

 

 

 

EU sanctions against Iran

By: Annette Wolden

Since 2003 Iran has not been fulfilling its International Atomic Energy Agency (IAEA) obligations. In response to the controversies around the Iranian nuclear program, the UN announced its first round of sanctions against Iran in 2006. New rounds of sanctions have since been announced in 2007 and 2008. The passing of the forth round, the United Nations Security Council Resolution (UNSC) 1929 on 9 June 2010, was partly a result of the uncovering of a new nuclear facility in Qom in 2009.

 

After the announcement of the new UN sanctions, the EU declared that it too would be imposing sanctions on Iran, based on the UN sanctions. However, according to sources, the EU sanctions go even further in targeting Iran’s nuclear program and in preventing investments in Iran’s oil and gas sector. According to the Council of the European Union’s press release, the Council adopted on 26.07.10 “a Decision implementing the measures contained in UNSC 1929 as well as accompanying measures, with a view to supporting the resolution of all outstanding concerns regarding Iran’s development of sensitive technologies in support of its nuclear and missile programs, through negotiation.”[1] The press release further states that “the aim of the EU is to achieve a comprehensive and long-term settlement which would rebuild international confidence in the exclusively peaceful nature of Iran’s nuclear program, while respecting Iran’s legitimate rights to the peaceful uses of nuclear energy under the Nuclear Non- Proliferation Treaty.”

 

Officials said the package was “by some ways the most far-reaching sanctions adopted by the EU against any country”.[2] The sanctions focus on preventing oil and gas investment, stopping dealings with Iranian banks and insurance companies, and stemming financial transfers. What has been described by some as the hardest-hitting element of the sanctions, is the move to prohibit new investment in and technical assistance to Iran’s refining, liquefaction and liquefied natural gas sectors which are a mainstay of its energy-based economy. The sanctions are intended to put financial pressure on Iran, which is the world’s fifth largest crude oil exporter but has little refining capacity and has to import about 40 percent of its gasoline needs for domestic consumption. According to Mark Fitzpatrick, an Iran specialist at the International Institute for Strategic Studies, most of the sectors that have been targeted in the EU sanctions are ones over which Europeans have a substantial leverage.[3]

 

Iranian Foreign Ministry spokesman Ramin Mehmanparast reacted to the passage of EU sanctions stating that “these sanctions will not help in resuming talks and will not affect Iran’s determination to defend its legitimate right to pursue a peaceful nuclear program”.[4] According to EU officials the sanctions will be the end for international companies operating in Iran.

 

By targeting the energy sector, the EU sanctions will have economic implications for Iran. The UN sanctions have already affected Iran’s ability to export oil. OPEC statistics show that Iran’s crude oil export has declined by 8.5% since 2005.[5] The sanctions have also led to a market shift, where Asia has become one of the largest markets for Iranian exports, rising from 23% of Iran’s total oil exports in 1995 to 36% in 2009. Exports to Europe made up 47% of the total exports in 1995, but only 25% in 2009, even before the implementation of the new EU sanctions.[6] European refiners still buy at least 238,000 barrels per day (bpd) from Iran, down from 608,000 bpd in 2008, while Asian refiners take roughly 1.4 million bpd.[7]

 

The reasoning behind the EU sanctions was to increase pressure for a diplomatic solution after the nuclear negotiations stalled last year. New negotiations were to be held from November 11-17. However, an adviser to President Mahmoud Ahmadinejad stated on the 31.10.10 that Iran would not discuss its nuclear program at talks with global powers.[8] In addition, Iran fueled the Russian-built Bushehr nuclear plant earlier in the week.[9] These actions both contributed to adding fresh doubt to the chances of a negotiated end to Iran’s standoff with the West.

 

 

 

 



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