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Policy Study on Impacts of Rising Oil Prices on the Poor and Implications for the MDGs

Presented to: UNDP Technical Review Committee 23-24 March 2006, Bangkok Rekha Krishnan & Team TERI

Study Objectives

Assess overall economic and social impacts of oil price increases on developing countries of the region, and their specific impacts on the poor’s access to modern energy services. Assess impacts on key economic and social sectors, e.g., agriculture, transport, industry (especially SMEs), commerce, physical infrastructure, health and education. Assess impacts on various components of MDGs and relate the outcomes to progress made towards meeting the MDGs. Assess effectiveness of energy strategies, policies and mechanisms to enhance the poor’s access to modern energy services against oil price increases and continued volatility in global markets. Identify strategic directions and policy options for regional governments to cope with future oil price uncertainties, with special reference to options to safeguard the interests of the poor.

Coverage of Interim Reports  Global assessment — overall macro-economic impacts at international level based on secondary data  Regional assessment — region-specific impacts. accounting for sub- regional diversities. based on secondary data  National assessment — macro level assessment based on secondary data. combined with micro level survey of poor communities in 2 villages in India .

In real terms. Oil price rise coincides with a period of dollar instability. Marked growth in demand for transportation fuels – gasoline and diesel. .Key Findings of Global Assessment: Highlights of recent oil price trends      Rise in prices. current oil prices are still below the all-time highs reached in 1979. though persistent. has been relatively gradual in comparison to some previous spikes. Recent rise in prices due to a combination of strong demand against tight supply and rising marginal costs less rather than a consequence of supply disruptions as such.

00 10.00 90 92 94 96 98 00 02 19 19 19 19 19 20 20 20 04 Average of Nominal Prices of Brent.00 30. WTI and OPEC Basket ($ per barrel) year .Key Findings of Global Assessment: Average Nominal Prices of Crude ($/barrel) average of Brent.00 50. WTI and OPEC basket ($/barrel) Average nominal oil prices: 1990-2005 60.00 40.00 20.00 0.

Key Findings of Global Assessment: Nominal and Inflation-Adjusted Monthly Oil Prices: 1946-2005 Source: Financial Trend Forecaster. 2006 .

. Underinvestment in the sector. Inflow of speculative money and risk premium’s emergence which may have caused excessive price hikes. Nigeria and Mexican Gulf coast Low levels of investment in exploration in Mexico and OECD Europe. such as gasoline. and the United States. oil companies’ rationalization and cost-cutting efforts.Key Findings of Global Assessment: Major factors underlying oil price increases        Substantial growth in world oil demand concentrated in Asian developing countries. diesel and jet fuel. Unstable Middle-East situation and oil supply insecurity elsewhere in Russia. particularly in exploration. and concentration of excess capacity in a few countries — leading to increased vulnerability of world oil market. Declining excess supply capacity. particularly China. Environmental regulations resulting in reduced capacity to manufacture transportation fuels.

depending on ‘oil intensity’ of sectors/activities. with possible wage-price spirals as experienced during first oil price shocks of 1970s. Trade deficits due to higher cost of exports. and in currency exchange rates due to changes in economic activity. Unemployment triggered by cost-cutting measures by manufacturers/service providers. Higher general price levels/inflation. Volatility in equity and bond valuations. corporate earnings. Rise in cost of production of goods and services. Reduction in oil demand where prices are passed through to consumers.Key Findings of Global Assessment: Potential macro-economic impacts based on past experience         Contraction of economic output — 0. including investment in non-oil energy options. Incentives for energy suppliers to increase production (to the extent there is scope for it) and investment.50% per $10/barrel of increase in oil prices. . inflation and monetary policy.25 to 0.

7% during 2004-2005. No marked change in per capita oil consumption.Key Findings of Global Assessment: Actual macro-economic impacts observed so far Decline in world GDP growth by about 0. Stable aggregate consumer price indices for developing and developed nations. when oil prices rose steeply.     . Consistent decline in oil intensity of GDP irrespective of oil price trends.

depending on how sustained oil price trends will be. notably China and India. especially in the Euro zone and Japan. Question of time-lag. partly offsetting impact of higher oil prices in many countries.     . Relatively low interest rates. though this trend is being reversed. Weakening of US$ since 2002.Key Findings of Global Assessment:  Reasons for lack of dramatic impacts Oil price rise coincides with economic revival and low inflation where firms and governments are less able to pass on higher energy costs to prices of goods and services because of strong competition and consumer pressures. Rapid economic growth in some developing countries.

there would be growing upside risks to prices due to: o strong demand side pressures from Asian countries. o continued tightness in North American gasoline markets o political instability. . so market will likely remain tight and vulnerable to risk of large. oil markets may remain broadly balanced. with incremental oil demand being met mostly by higher non-OPEC production. However. However. From 2010 onward. OPEC supply may increase significantly as nonOPEC production peaks while global demand continues to rise. particularly China. prospects for higher spare capacity are unfavourable. unexpected price changes. especially in the Middle East o long lead times and high costs of establishing new refining capacity o underinvestment in supply infrastructure in various countries.Key Findings of Global Assessment: Outlook for future    Up till 2010.

moderate increase in South and West Asia since 2000.   Foreign exchange reserves: Increase in all sub-regions since 2001. Pacific Island Countries with market-determined pricing report increases in inflation. Inflation: No significant inflationary impact so far in South-East Asia. faster than growth in current account surplus due to capital inflows into the region. Relatively low inflationary impacts linked to moderate pass-through in most economies with administered prices for petroleum products. GDP growth flat in Pacific Island Countries since 1990. . particularly transportation costs. Trade balance: No major adverse impact in Asia sub-regions.Key Findings of Regional Assessment: Macroeconomic impacts of oil price rise   Real GDP growth: Asian sub-regions not adversely impacted so far due to economic revival in OECD economies which has spurred demand for Asian exports. Significant negative impact in Pacific Island Countries. average inflation rates in North-East Asia and Mekong.

High inflation in Myanmar .Overall.India’s high foreign exchange reserves Pacific Island Countries .Stable GDP growth and control over inflation in Malaysia and Thailand .China’s high foreign exchange reserves South-East Asia .Fiji and Papua New Guinea with greatest diversity of economic activities .Key Findings of Regional Assessment: Economic profiles of sub-regions     North-East Asia and Mekong . low dependence on/potential for domestic growth .Narrow range of exports.High dependence on imports .Relatively health GDP growth rates .Healthy GDP growth rates in all countries .Negative GDP growth in Timor Lese .High trade deficit of Philippines South and West Asia . dependence on tourism .High inflation in Iran and Sri Lanka .High inflation in Lao PDR.Low openness of Cambodia and Lao PDR economies . followed by Mongolia and Vietnam .

though overall shares in energy supplies remain low. except Iran. except Vietnam. except Papua New Guinea. Bhutan. Considerable interest in renewable energy sources. produce oil. Nepal and Sri Lanka do not produce any oil. Maldives. Energy use patterns differ significantly between nations with Myanmar using the least energy per capita and largely dependent on traditional fuels. South-East Asia Malaysia is the only net oil exporter. South and West Asia All economies. are oil importers. are net oil importers. Pacific Island Countries None of the economies. .Key Findings of Regional Assessment: Energy profiles of sub-regions     North-East Asia and Mekong All economies. Cambodia and Lao PDR are heavily dependent on traditional fuels. Nepal and Bangladesh have high dependence on traditional fuels. Afghanistan. with Indonesia’s status reversed in 2004. Bhutan.

new transport infrastructure. non-conventional oil production.g.Overall Conclusions of Global and Regional Assessments     Eventual impacts of oil price likely to affect oilimporting developing countries most severely Countries with weak policy frameworks. renewable energy. low foreign exchange reserves and limited access to international capital markets will be worst-affected Policy action favouring price pass-through (subsidy removal) needed to trigger demand side responses Technological responses will be crucial — e.. efficient energy production/use processes/equipment .

Increase in public spending on renewable energy development. Increase in trade deficit.Key Findings of National Assessment: India: Macroeconomic impacts of oil price rise         No decline in consumption of crude and petroleum products. and 136% for other industrial consumers. Natural gas prices increased 12% for the power and fertilizer sectors. partly due to partial pass-through of oil price increases to consumers and partly due to low weightage given to petroleum products in consumer price index. social and political concerns. No increase in prices for small-scale industries and transport sectors. . Electricity pricing unlikely to be impacted since only 10% of electricity generation is oil-based and tariff setting is influenced by several economic. including agricultural and industrial GDP. No effect on public spending on physical infrastructure and social sectors (education. health and poverty alleviation). Only a modes impact on Inflation. No impact on GDP.

with important repercussions for industry due to higher costs on account of transportation. now recover one-third of their loss from upstream oil companies. Higher transportation costs will also impact on people’s access to workplace. . which bear 8590% of subsidies on kerosene and LPG. and education and health centres. Fertilizer sector: Prices unchanged since 2002 despite growth in international prices. Transport sector: Since 2002. markets.Key Findings of National Assessment: India: Sectoral impacts of oil price rise    Petroleum sector: Oil marketing companies. prices of petrol increased by 60-70% and of diesel by 80-90%. 25% increase in government subsidy per tonne of urea since 2000.

water and public transport). which continues to depend on agriculture. Expenditure on transportation increased by about 50%. possibly due to reduced diesel consumption of diesel. However.000 per month) and by about 61% in non-poor households. energy expenditure has declined. There has also been an increase in fertilizer costs of about 25% and pesticide costs by over 30%. Expenditure patterns: No change in share of energy expenditure in total household spending on necessities (including food. etc. Impact on major economic activity (agriculture): Only 3 out of the 11 farming families surveyed owned diesel pump sets. .. No change in employment pattern. if expenditure on diesel is included. and for taking produce to market. All farmers travelled 8-14 kms for various activities such as buying seeds. energy.Key Findings of National Assessment: India: Microeconomic and poverty impacts of oil price rise — community-wide impacts    Income patterns: Increase of 25% among poor households (income < or =Rs 3. others used electric pump sets. fertilizers.

distance to nearest hospital. Health care affected the most due to 8 kms. Transportation costs: Cost per trip by public transport to school.Key Findings of National Assessment: India: Microeconomic and poverty impacts of oil price rise — direct impacts on households    Changes in energy expenditure: 45% increase among poor households and 59% increase among non-poor households. Poor households affected more due to longer travel distance and higher reliance on public transport. mainly due to higher prices of kerosene. Changes in energy consumption: 39% of households have stopped using LPG/kerosene for cooking while 44% have reduced consumption of these fuels to less than 50%. Many households stay in darkness for longer hours due to reduced use of kerosene for lighting. . Resultant increase in biomass fuel consumption stated to have increased health hazards and time expenditure on fuel gathering. Some families have withdrawn children from better quality schools to lower quality schools closer to villages. health centre and marketplace have nearly doubled. LPG and diesel.

potential implications of emerging barter trade in oil (e.Comments for Follow-Up  Global Assessment o Generally benign assessment of impacts so far and outlook due to reliance on limited secondary data sources — need for further research and live consultations to present more conservative view as an alternative future o Time lag factor not fully addressed.g. Venezuela) and Euro bourse for oil not addressed .. with inadequate coverage of longer term impacts o Basic assumption of cyclical trend in oil prices debatable as there is an emerging school of opinion suggesting prices may have entered a secular trend o Importance of US Dollar’s future and its potential adverse impacts on world economy and oil prices not fully understood/addressed o Related to above.

reversion to biomass due to LPG/kerosene price increase. questionable as these are not common cooking fuels. especially by poor.g..Comments for Follow-Up   Regional Assessment o Geophysical and geopolitical informative but not very useful to assess vulnerability of sub-regions o Poverty and inequality profiles useful. . e. but need to be correlated to energy profiles o Need for live consultations with different stakeholders National/micro assessment o Longer term impacts not adequately covered o Contradicting results of micro level assessment need reconciliation o Some data.

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