High Oil Price May Worsen Poverty

from All Africa

This Day (Lagos)


By Constance Ikokwu
Washington, DC

The prevalent high and volatile oil prices may have devastating consequences for oil-exporting and importing developing countries, the World Bank has warned.

Although it was silent on the countries that may be affected, Nigeria is one of the world's largest producers of oil.

In his keynote speech during a conference entitled "Oil Price Volatility, Economic Impact, and Financial Management", co-sponsored by the World Bank and George Washington, University in Washington, D.C., the Bank's Managing Director, Graeme Wheeler, tried to establish a connection between high oil prices and poverty.

"One of the cruel ironies today is the connection between rising energy and food prices. This coupling can have devastating implications for global poverty and food security. Higher energy prices have increased fertilizer and transport costs and stimulated bio-fuel production.

"Just as the poorest on this planet are the most exposed to the effects of climate change, they are also highly vulnerable to the effects of rising fuel and food prices. Food and energy prices usually represent over 70 per cent of the consumption basket of the poor. The long term consequences are considerable. Poor households will cut back on food consumption and education - and girls will invariably be the first to be withdrawn from schooling. Reliance on traditional fuels will increase with obvious environmental consequences," he remarked.

Fluctuating oil price has become a subject of intense discussion in state capitals all over the world. A similar conference last week drew policy makers from over 100 countries to Washington, D.C. to seek solution to the problem.

There, World Bank notes that high and volatile prices make it hard for energy importers to budget for energy costs. It has also hurt economic growth, investment and trade, the Bank said. Oil exporters, it further argued, faced challenges in managing revenues and planning development, adding that a booming oil sector and rising currency might mean other sectors in the economy fail to grow, a development which could result in countries losing ground in the fight against poverty.

According to the Bank, four million people slid back into poverty in 2006 as a result of rising oil prices and a higher cost of living in the Philippines.

A consultant with the Oil, Gas and Mining Policy Division of the World Bank and former lead energy economist and manager of the division, Robert Bacon, added that volatile oil prices had put pressures on developing countries to look for ways to smooth out the bumps in the market.

Bacon's 2006 study, "Coping with Higher Oil Prices," co-authored with Lead Energy Specialist, Masami Kojima, looked at the experience of 38 developing countries that tried various ways of doing this.

The study noted that "Chile, Malaysia, Thailand, Indonesia and others used 'price-smoothing', in which a country sets a target oil price. The government subsidises oil if the international price goes above the target, and imposes taxes if it goes below."

The downside, according to the study, is that "the policy often ends up encouraging more fuel consumption and subsidising the rich. In Indonesia, the government reformed the fuel subsidies and compensated the poor by paying them conditional cash transfers. Another technique is 'hedging' - using financial instruments such as futures and options and 'collars' which could mitigate price risks at a cost. Hedging, rarely used by governments but often by companies, requires a high amount of expertise and could backfire if the internal control and governance structure is not in place," says Bacon.

However, the head of derivatives in the World Bank Treasury, Ivan Zelenko, contends that "derivatives are the best way to transfer oil price risk to markets, provided they are used with a sound governance and trading platform. Derivatives are very effective to mitigate oil price risk in the near/medium term (5 - 7 year horizon). Over the longer term, however, other solutions (like oil wealth funds) can be used."