The benefits gained by poor African countries from debt relief will be more than offset by the rising cost of oil imports.
The debt deal, agreed by Group of Eight (G8) finance ministers last month, is set to save sub-Saharan African countries about $1bn (€840m) a year in interest costs. But International Energy Agency (IEA) officials believe the rise in crude prices will cost the region an additional $10.5bn a year in oil imports.
|Saudi Arabian oil refinery at Yanbu, on the Red Sea coast - Oil prices will continue to rise until world economic growth slows, due to supply constraints at both pumping and refinery level.|
According to the Financial Times, agency officials estimate the oil import bill of sub-Saharan Africa will double to about $20bn on the back of crude prices of more than $55 a barrel. As a result, the increase in oil costs “is going to be greater than the debt relief given to sub-Saharan countries this year”, said Fatih Birol, chief economist at the IEA.
The countries of sub-Saharan Africa are among the world's poorest. They depend heavily on imported oil and use it inefficiently. According to Birol, the region required 80 per cent more oil than a developed country to produce the same unit of gross domestic product.
Oil producers like Angola and Nigeria are benefiting from additional income, which may or may not be used wisely as oil prices may fall from their current levels, in the long term.
On the New York Mercantile Exchange, light crude for August delivery, closed at $58.75 per barrel on Friday and in London, Brent crude closed at $57.07.
In a statement this week on the price of oil, Claude Mandil, Executive Director of the IEA said:
Oil prices have reached new heights, topping $60 per barrel, and possibly won’t stop there! Faced with this apparently relentless climb, we ask ourselves three questions: Do such high oil prices hurt the economy? What causes such high prices? And what can we do about it?
Do such high oil prices hurt the economy?
Obviously yes. The IEA and the IMF rang the alarm bell a year ago and the message was largely ignored due to continued robust growth in the US and in China. Today, everybody recognises that the risk for the world economy is significant. President Bush has dubbed it "a foreign tax on the American dream". He is absolutely right, but he could add that it is a tax on the world dream of more prosperity and less poverty. And the poorer the country, the higher the burden.
So, what can be done about it?
First, more oil must be brought onto the market, a decision resting mainly with OPEC. Several OPEC ministers or officials have recently suggested that there was no need for more oil, as the bottleneck was in refining capacities. I do not share this view - even if it is difficult to increase refining throughputs, it is useful to have more oil in commercial stocks ahead of uncertain times, and the structure of the market, in contango (meaning that forward prices are higher than current prices), should eventually encourage this.
Second, the oil market needs more capacity, both upstream and downstream. That cannot happen overnight, but all governments can take immediate measures to improve the attractiveness of investment in the oil sector. OPEC governments should announce clearly their programmes and schedules for new capacities, consuming and producing countries should review and streamline investment regulations in refining. And operators need to continue to invest to meet growing demand.
Third, a demand response to the high price signals. Governments in all consuming countries have now put energy efficiency as a top priority on national agendas. Energy ministers of the IEA countries committed on May 3rd, 2005 "to reinforcing [their] efficiency efforts". There is now an urgent need for implementation.
More oil, more investment, more energy efficiency - that is how market forces should react to market signals. However, sometimes this reaction is slow. If it does not happen soon, with government impetus when needed, it will happen later, more painfully.