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Readers’ choice | High cost of oil creates new world order of the rich and powerful

Readers’ choice | High cost of oil creates new world order of the rich and powerful
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First Published: Thu, Nov 08 2007. 09 07 AM IST
Updated: Thu, Nov 08 2007. 09 07 AM IST
New York: As oil surges towards a symbolic milestone of $100 a barrel—hitting $96.70 on Tuesday—it is creating new winners and losers across the globe.
In southern China, high oil prices forced Wang Pui, a trucker, to wait in line 90 minutes the other day to fill up, just to be told he could pump only 25 gallons, as China faced spot shortages of petrol and diesel.
When Vladimir V. Putin was making Russia’s bid to be host of the 2014 Winter Olympics last July, he reached into the country’s deep pockets, bulging with oil profits, and pledged $12 billion to turn a Black Sea summer resort into a winter-sports paradise. Russia, which was nearly bankrupt a decade ago, won the Games.
The prospect of triple-digit oil prices has redrawn the economic and political map of the world, challenging some old notions of power. Oil-rich nations are enjoying historic gains and opportunities, while major importers—including China and India, home to a third of the world’s population—confront rising economic and social costs.
Managing this new order is becoming a central problem of global politics. Countries that need oil are clawing at each other to lock up scarce supplies, and are willing to deal with any government, no matter how unsavoury, to do it.
In many poor nations with oil, the proceeds are being lost to corruption, depriving them of their best hope for development. And oil is fuelling huge investment funds run by foreign governments, which some in the West see as a new threat. “Five months ago, readers would not have recognized SWF as meaning sovereign wealth fund,” said Daniel Yergin, chairman of Cambridge Energy Research Associates, referring to the funds set up by Russia, Norway and others to invest their oil profits. “And yet now,” he said, “they’re recognized as one of the fundamental forces of the global economy.”
The basic calculus of expensive oil still holds: Exporters enjoy a windfall and importers bear a heavier burden. But some unexpected countries are reaping benefits, as well as costs, from higher prices. Consider Germany. Although it imports virtually all its oil, it has prospered from extensive trade to a booming Russia and West Asia. German exports to Russia grew by 128% between 2001 and 2006; exports to the US grew 15% in that period.
Throughout Europe, the rise of the euro has acted as a hedge against fluctuations in the dollar-denominated oil market, while the heavy taxation of fuel has made rising oil prices less jarring to motorists.
“For Europeans,” said David Fyfe, a senior oil market analyst at the International Energy Agency in Paris, “$100 oil is mostly symbolic.”
Elsewhere, it is much more. For developing countries, oil can be a tool of national transformation—whether the goal is a middle-class standard of living or a utopian society.
In Venezuela, President Hugo Chavez is pouring oil proceeds into a socialist revolution, creating free health care, free education and cheap food; enabling massive public spending that has helped fuel four years of economic growth.
The trouble, said Theresa Paiz, a Latin American director for the Fitch ratings agency, is that “it’s not really clear how the money is invested”. Chavez’s government is steering large chunks of money to development funds and state-owned firms not subject to audits. Transparency International, an organization that tracks corruption, ranked Venezuela near the bottom of its 2007 corruption index: 162 out of 179 countries.
Fears of corruption are even more pronounced in Nigeria and Angola. Oil-rich Angola is taking in two-and-half times as much cash as it did three years ago. Hotels in the capital, Luanda, are booked months in advance, largely by foreign oil companies. Sales of luxury cars are booming, and the International Monetary Fund (IMF) projects the economy will grow 24% this year, one of the world’s fastest rates. Yet, analysts for the Catholic University of Angola’s research centre say two in three Angolans live on $2 or less a day, the same percentage as in 2002, when the country’s decades-long civil war ended.
The government is eager to show oil wealth is benefitting ordinary citizens. It has rebuilt 2,400 miles of roads, refurbished four airports, and laid 430 miles of new railroad track. But many Angolans take it as a given that oil has enriched public officials most of all. In 2003, a newspaper in Luanda identified the 20 richest people in Angola: 12 were government officials; five were former officials.
Angola’s growing muscle— it is now the biggest oil supplier to China and the sixth biggest to the US—is leading it to rethink its place in the world. It recently joined the Organization of the Petroleum Exporting Countries and is limiting its cooperation with IMF.
In perhaps the most far-reaching change, China has become Angola’s financier, lending Luanda as much as $12 billion for the country’s reconstruction, in return for guaranteed oil supplies.
The contest among importers to secure access to oil supplies has become fierce.
China, a one-time oil exporter that now must import half its oil to lubricate its booming economy, is facing politically troublesome shortages of fuel, as Chinese refining firms refuse to supply diesel at unprofitable, state-regulated prices. To head off a crisis, China raised retail prices for fuel nearly 10% on 1 November.
India is potentially even more vulnerable than China, some analysts say. Although it consumes a third as much oil as China, it imports 70% of its oil. It also has no strategic reserves, and demand is growing faster than in any other economy except China’s. Like China, India subsidizes fuel, particularly the kerosene used by poor families for cooking—a policy that costs it some $12 billion a year. If oil reaches $100 a barrel and stays there, analysts say, India will be forced to roll back those subsidies.
Without a hike in retail prices, officials at India’s ministry of petroleum and natural gas warned recently they might no longer be able to buy adequate supplies of crude for India’s refineries. “Unless consumers are paying for what they consume,” said M.S. Srinivasan, the petroleum secretary, the ministry “is going to be left with a big hole in its pocket”.
But raising fuel prices could ignite even greater civil unrest in India than in China, where a man was killed recently after jumping a line to buy gas in the city of Xinyang, in Henan Province.
Even in developed countries such as Canada, rising oil prices can cause dislocation. The region around the oil sands in northern Alberta is the closest thing the developed world has to a 19th-century boom town. The influx of workers has created a skilled labour crunch in neighbouring British Columbia, where, among other things, facilities are being constructed for the 2010 Winter Olympics.
But for most oil producers, the most burning question is what to do with all the money.
Norway, the world’s 10th largest oil producer, wants to guarantee every child a subsidized kindergarten spot by end-2008. It has increased spending on kindergarten to $3.3 billion this year, from $2.75 billion, partly using money from its $350 billion State Pension Fund, once known as the Petroleum Fund. Most of the fund is earmarked to pay the future pensions of Norway’s 4.6 million people.
Perched on the Persian Gulf, Dubai has also taken a similarly long view. It used its oil proceeds to expand into tourism, trade, real estate and construction. Oil now accounts for only 5% of Dubai’s GDP.
But perhaps no country has revelled in its oil wealth like Russia. NetJets Europe, the private-jet company, plans to open an office in Russia because the traffic between Moscow and London has become so dense. This month, Christie’s will stage what it expects to be a record-setting auction week dedicated to Russian art.
And Russians have kept London’s high-end real estate market buzzing.
Back home, Putin is using it to finance “priority national projects,” such as improved health care, education, and affordable housing.
Oil may also help Putin cling to power after he leaves the presidency, perhaps as prime minister. As he noted recently, “We all remember what state the country was in seven, eight years ago.”
©2007/NEW YORK TIMES
Ian Austen in Ottawa, Keith Bradsher in Shenzhen, Thanassis Cambanis in Dubai, Walter Gibbs in Oslo, Jens Erik Gould in Caracas, Sophia Kishkovsky in Moscow, Sharon LaFraniere in Angola, Heather Timmons in New Delhi, and Julia Werdigier in London contributed to this story.
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First Published: Thu, Nov 08 2007. 09 07 AM IST