15.1.15 Economic Development & Hydrocarbons: Old or New Challenges?
Macroeconomic Impacts of the Oil & Gas Industry
Oil production and oil dependency Some of the top oil producers are also the most oil-dependent. Countries % of GDP % of Exports Oil Production Ranking China % 1% 4 United States 1% 8% 1 Brazil 1% 9% 9 Mexico 3% 11% 1 Canada 6% 22% 5 Colombia 7% 52% 19 Norway 1% 36% 15 Iran 13% 6% 7 Nigeria 14% 81% 13 Russian Federation 17% 61% 3 Qatar 23% 37% 14 Venezuela 31% 79% 12 Saudi Arabia 38% 81% 2 Iraq 4% 98% 8 United Arab Emirates 46% 51% 6 Kuwait 52% 83% 11 Source: Unctad, IMF; EIA (data from 214)
Oil price volatility Oil dependency makes countries more vulnerable to swings in international oil prices. The most oil-dependent countries have seen large fluctuations in terms of trade in line with oil price movements. Index 3 Terms of Trade (2=1) Brent Spot Price US$ 12 25 1 2 8 15 6 1 4 5 2 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 United States Saudi Arabia China Iraq Mexico Kuwait Venezuela Nigeria Source: World Bank; EIA
Oil price volatility Government revenues are also vulnerable to volatile oil prices. 6. Oil Price & Government Revenue in % of GDP (% change) 4. 2. Oil Price Change. 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214-2. -4. -6. Brazil Colombia Iraq Nigeria Russian Federation Saudi Arabia United Arab Emirates United States Venezuela, RB Source: IMF
2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 2 21 22 23 24 25 26 27 28 29 21 211 212 213 214 Dutch disease Oil dependent countries are highly concentrated in primary rather than manufacturing goods exports. USA China Mexico 1,2 1, 8 6 4 2 2,5 2, 1,5 1, 5 35 3 25 2 15 1 5 Venezuela Saudi Arabia Kuwait 1 8 6 4 2 4 3 2 1 12 1 8 6 4 2 Unit: Billion $US Primary Manufacturing Source: Unctad
How to avoid the pitfalls In general, the key to addressing large fluctuations in oil prices is to smooth out spending. Sovereign wealth fund: Norway Fiscal rules: Chile Hedging: Mexico
Sovereign wealth fund Sovereign wealth funds insulate the domestic economy from commodity price fluctuations and avoid inflation & Dutch disease. Norway s Government Pension Fund continues to grow in value, even when oil prices drop. Billion kroner 7, 6, 5, 4, 3, 2, 1, 6,431 57.81 311.6 US$ 12 1 8 6 4 2 Market Value Norway's Government Pension Fund Global - left axis Net government cash flow from petroleum activities - left axis Europe Brent Spot Price FOB ($/barrel)- right axis * January August 215 Source: Norwegian Petroleum Directorate, Norwegian Ministry of Petroleum & Energy, US Energy Information Administration, Norges Bank
Fiscal Rules A fiscal rule imposes a constraint on fiscal policy through numerical limits on budgetary aggregates. Chile s fiscal rule reduces macroeconomic uncertainty, lowers volatility and protects social programs during cyclical downturns. % US$ 15 4.5 1 4. 5-5 25 26 27 28 29 21 211 212 213 214 3.5 3. 2.5 2. Public Net Debt (% of GDP)-left axis Economic and Social Stabilization Fund Balance (% of GDP)-left axis Copper Prices-right axis -1-15 1.5 1..5 Note: Public Net Debt is public sector liabilities minus public sector assets. -2. Source: COCHILCO (Ministerio de Minería de Chile) & Oficina de la Deuda Pública, Ministerio de Hacienda & IMF
Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Hedging Hedging uses market-based instruments to manage commodity price volatility. Mexico s finance ministry hedges the country s exports to ensure a steady revenue stream. US$/barrel 16 Mexico's Oil Hedging Program 14 12 1 NYMEX future price 8 6 4 2 WTI MME (Mexican Maya Crude-Oil Mix) Hedge
Local and Microeconomic Impacts of the Oil & Gas Industry
# of Hydrocarbon Wells (YPFB) Poverty Ratio (%) Local level revenue distribution In most countries, oil-producing regions receive a larger share of oil revenue to compensate for local impacts. This improves incomes for producing regions, but may lead to higher inequality. 4 35 3 25 2 15 1 5 Hydrocarbon Production and GDP Share by Region Pando Chuquisaca Potosi Oruro Tarija Cochabamba La Paz Santa Cruz Beni. 5. 1. 15. 2. 25. 3. GDP Share (%) 65. 6. 55. 5. 45. 4. 35. Poverty Ratio and GDP Share by region Pando Beni Potosi Chuquisaca Oruro Cochabamba Tarija La Paz Santa Cruz 3.. 1. 2. 3. GDP Share (%) Source: Instituto Nacional de Estadística de Bolivia, Unidad de Análisis de Políticas Sociales, and YPFB
Local conflicts over natural resources There are many conflicts over oil & gas as well as other extractive industries projects all over the world, leading to large investment losses. Cases by location 4% 18% 28% North America Oceania Cases by Primary Commodity 2% 8% 4% 2% 4% 4% 6% Zinc Silver Iron Nickel Coal 2% South America 1% Shale Oil Copper 4% 26% Central America & the Caribbean 34% 22% 4% Gold Uranium Diamonds Platinum Source: Proceedings of the US National Academy of Sciences (PNAS)
Sources of local conflicts The reasons behind protests vary greatly by country. Economic demands Land rights Environmental concerns
Oil Exports in % of Total Exports Oil Exports in % of GDP Corruption Corruption and weak local government capacity may prevent local communities from reaping the benefits from oil investment. Oil Exports in % of Total Exports and Corruption Score 12% 1% IRQ 8% VEN NGA KWT SAU 6% IRN COL UAE 4% QAT NOR 2% MEX CAN % CHN BRA USA 2 4 6 8 1 Corruption Score (Transparency International) 6% 5% 4% 3% 2% 1% % Oil Exports in % of GDP and Corruption Score IRQ VEN KWT SAU UAE QAT NGA IRN NOR COL CAN MEX BRA USA CHN 2 4 6 8 1 Corruption Score (Transparency International) Source: Transparency International, IMF, Unctad, 214
Mitigating local conflicts Some measures have proved successful in improving relations with local communities and increasing the microeconomic benefits of oil industry activities. Increase Government Intermediation Expand Human Capital Improve Local Content Improve Environmental Regulation Invest in Sustainable Projects
Increase Government Intermediation The key to reducing conflicts appears to be proactive and sustained government-led engagement from the start of each project. Increase institutional capacity to improve dialogue with communities Clear legal processes Provide more information for communities and government officials Clarify the role of companies versus the role of the state
Expand Human Capital Developing local human capital & service suppliers can mitigate conflicts and enhance benefits for local communities. Mexico provides an interesting case study. Support for Human Resource Formation from Mexico's Sustainability Fund in pesos (Jan 213-Jun 214) Ocean Energy Innovation Center Bioenergy Innovation Center Energy Sustainability Innovation Labs Non-Fossil Fuel Technology Demands Mexican Postdoctoral Projects in Sustainable Science and Technology Projects for Border Issues Institutional Strengthening for Energy Wind Energy Innovation Center Estimated Human Resource Development Investment Total Investment Approved Solar Energy Innovation Center Geothermal Energy Innovation Center 4,, 8,, 1,2,, Source: Programa Estratégico de Formación de Recursos Humanos (PEFRHME)
Improve Local Content While local content requirements can be challenging, they also present an opportunity for companies to create jobs by developing local supply chains. Norway (positive example): Prioritized technology transfer to develop competitiveness of local industry suppliers Encouraged R&D partnerships through tax incentives Timing and international context were important Brazil (negative example): Onerous & complicated local content requirements were created without enough preparation for local industries to meet the standards.
Improve Environmental Regulation Upholding environmental standards is critical to gaining confidence of local communities. In the US, regulation for the shale industry has been a critical challenge, but a body of best practices has been established. Establish baseline of water quality before drilling starts Separate environmental regulator & licensing agency Integrity of well construction Transparency on fracking fluids Address air pollution
Invest in sustainable projects Investment and tax revenues should be used to promote long-term local economic development. Invest in education, research, training Energy subsidies are less efficient than direct transfers Extractive Industries Transparency Initiative (EITI) can provide transparency about distribution of rents Source: International Energy Agency
Thank you Lisa Viscidi Director, Energy, Climate Change & Extractive Industries Program Inter-American Dialogue