Oil: Fueling Another Debt Crisis?

One hundred dollar-a-barrel prices for oil have shaken the U.S. and global economies. But as much as rising gasoline and heating oil prices hurt U.S. consumers, the impact is far more dire in the developing world.
           
High oil prices hit poor people in impoverished, heavily indebted countries hard as individuals and families must pay more to meet their personal energy needs, and businesses must pay more to keep operating. They also batter the national economies of poor countries without oil resources; they must spend scarce foreign currency on increasingly expensive oil imports. There is growing evidence that impoverished nations are paying a large price — both in financial terms and in social and ecological costs — for the world’s addiction to oil.
           
“In sub-Saharan Africa, in particular, the oil crisis is not a vexing cost crunch,” wrote Abdoulaye Wade, president of the West African nation of Senegal, in an October 2006 column in the Washington Post. “It is an unfolding catastrophe that could set back efforts to reduce poverty and promote economic development for years.”

In 2005, world leaders, under pressure from campaigners, announced a new deal to fight global poverty by agreeing to expanded international debt relief — promising more than $40 billion in debt cancellation to eligible poor nations. This debt relief — while limited to a select number of countries that comply with International Monetary Fund (IMF) economic policies — was made on the basis that it would free up financial space for poor countries to spend money on education, health care, environmental protection and clean water. And in many nations, debt relief works.
           
But more than two years after the deal was struck, it is clear that soaring oil prices are undermining the benefits of debt cancellation in some countries, especially poor oil-importing nations.
           
Take the case of Tanzania. Tanzania has invested resources freed up by debt relief to alleviate poverty. The 2005 UK Africa Commission Report found that Tanzania increased funding for poverty reduction by 130 percent between 1999 and 2005, thanks in part to debt relief.
           
But with the rise in the price of oil, according to figures from the Washington, D.C.-based Center for American Progress, the cost of Tanzania’s oil imports rose from $190 million in 2002 to about $480 million in 2006, representing an additional $290 million in payments each year for about the same amount of oil. Conversely, debt cancellation freed up roughly $140 million in 2006 in Tanzania, less than half of the additional amount that the country is paying for oil imports each year.
           
Nicaraguan economists have also raised serious concerns about oil price increases. The Nicaraguan Central Bank estimated that the government would spend $717 million on oil imports in 2006 — a whopping 66 percent of income generated by all of the country’s exports. This means that Nicaragua spent about $180 million more for oil in 2006 than it did in 2005 (for roughly the same amount of oil). This additional $180 million is more than three times the $49 million that was freed up by Nicaraguan debt cancellation in 2006. Nicaraguan economists have issued warnings about the impending collapse of the national energy sector and the “imminent economic collapse of several sectors of Nicaraguan industry as well as some sectors of tourism and trade” as a result of historically high oil prices.
           
Nicaragua and Tanzania are not exceptional cases. In 2005, the International Energy Agency (IEA) predicted that the cost of sub-Saharan Africa’s oil imports would roughly double to about $20 billion a year if oil prices stayed about $55 a barrel (and they have since soared into the $90-a-barrel region). This would represent an additional $10.5 billion per year in oil payments, which is more than 10 times the amount that all 16 African countries combined received after the debt cancellation under the G-8 debt deal.
           
High oil prices are undermining the economies of impoverished oil importers in a range of ways, and could force countries to take on more loans to pay for their higher energy bills, thereby creating more debt. They could also stop countries from enjoying much-needed benefits from debt cancellation. Additional resources to fight HIV/AIDS, to provide support for small-scale farmers, and to improve primary education are at risk of disappearing as increasing oil bills continue to eat away at impoverished countries’ limited resources. High oil prices threaten a new debt crisis, just as progress was finally being made to erase the debts of the most impoverished countries in the world.

Impoverished countries need energy. One approach to respond to this serious problem of skyrocketing oil prices would be to drill for more oil — to expand production. Indeed, this has been the response favored and funded by rich country governments over the past 20 years.
           
“There’s no doubt that energy poverty is a major dilemma in the South,” says Graham Saul, executive director, Climate Action Network Canada. “The idea that the solution to problems associated with oil is more oil has been the conventional wisdom for the past quarter century and that has failed us. Poor countries are looking to make a shift.”
           
A growing number of African countries are trying a different approach — and looking toward major investment in renewables. Abdoulaye Wade, Senegal’s President, has helped to launch the Pan-African Non-Petroleum Producers Association (PANPP), an alliance of 13 nations which seeks to serve as a “green version of OPEC.” The association aspires to become a leader in the field of biofuels and alternative energy strategies.
           
But the transition won’t be without costs, and many wonder how impoverished countries will afford it. In many developing countries, oil is used not just for transport, but for electricity generation. Overcoming oil dependence will require creating alternative power sources.

The role of oil in generating developing country indebtedness is not new, and heavily indebted countries are not a new story. Indeed, it is difficult to tell the story of the international debt crisis without considering the impact of oil.
           
No single event or cause is responsible for the modern Third World debt crisis, but the relationship between oil and debt is well established. Three decades ago, the world was rocked by a series of “oil shocks” that sent the price of oil through the roof and triggered a global recession. The world’s most impoverished countries scrambled to find resources to cover the mushrooming cost of oil imports, “petrodollars” flooded the international banking sector — as oil exporters deposited money in U.S. and rich country banks — and lenders went on an irresponsible lending binge. There were a lot of other factors at work, including fluctuating interest rates, diminishing terms of trade, and a host of issues related to historical and ongoing injustices in the global economy, but it is clear that the oil shocks of the 1970s played a key role in triggering the modern debt crisis.
           
While impoverished oil importing nations felt the brunt of the debt crisis in the 1980s and continue to do so today, many oil exporting nations have, surprisingly, not fared much better.
           
In 2005, Oil Change International, the Jubilee USA Network, the Institute for Public Policy Research, Milieu Defensie and Amazon Watch co-published “Drilling into Debt.” It was the first study to rigorously examine the relationship between oil and debt. The authors collected data on 161 countries for the period 1991-2002, and collected further data on 80 developing countries for the period 1970-2000 for use in a statistical model of debt burdens.
           
One of the many findings was there is a strong and positive relationship between oil production and debt burdens. The more oil a country produces, regardless of oil’s share of the country’s total economy, the more debt it tends to generate. A positive correlation was also discovered between oil exporters and increasing debt burdens.
           
The short explanation is what is known as the “resource curse.” Although natural resources should hypothetically be a source of foreign currency and a base for economic development, in practice things have rarely worked so well for developing countries. Instead, foreign companies have been able to extract massive profits; narrow elite interests have captured much of the income remaining in countries — and then sent much of it overseas to offshore banks; resource development has trashed natural environments and undermined communities that rely on them; and little if any linkages are made between resource extraction and the rest of the economy, for example through processing raw materials.
           
Oil and gas-producing countries in Latin America governed by leftist governments are now trying to break the pattern, but with the partial exception of the oil-rich Middle East, these generalizations have proved applicable through broad swaths of the developing world.
           
In Escaping the Resource Curse, Columbia University professors Macartan Humphreys, Jeffrey Sachs and Joseph Stiglitz identify a vast array of contributing causes to the resource curse. Corruption is among the most severe, they conclude. “The short run availability of large financial assets increases the opportunity for the theft of such assets by political leaders. Those who control these assets can use that wealth to maintain themselves in power, either through legal means (e.g., spending in political campaigns) or coercive ones (e.g., funding militias).” Local corruption, they note, is often aided and abetted by international companies. “International mining and oil companies that seek to maximize profits find that they can lower the costs of obtaining resources more easily by obtaining the resources at below market value — by bribing government officials — than by figuring out how to extract the resources more efficiently.”

High oil prices have a clear economic effect. But for highly indebted, impoverished countries, climate change, fueled significantly by CO2 emissions from cars and other gas-guzzling vehicles in the North, will have serious ecological, social and economic impacts as well.
           
Global warming is already starting to make natural disasters worse, causing more droughts in dry areas and more floods in wet tropical areas. Already, 97 percent of natural disaster deaths occur in developing countries.
           
“Poor people are the ones who suffer the most when extreme weather strikes,” explains Christian Aid in its May 2006 “Climate of Poverty” report. “They may not have access to formal information networks that could alert them that a storm is coming; they tend to live on land that is more susceptible to storms and flooding because they cannot afford to live anywhere else; and they often depend on the land for their livelihoods, land vulnerable to severe weather.”
           
But climate change is not just a specter on the future horizon.
           
“We are already seeing the impacts of climate change because desertification is increasing in Africa,” says Elizabeth Bast, an international policy analyst specializing in climate at Friends of the Earth. “Seventy percent of desertification is a result of climate change. We are already seeing increased flooding and droughts, and stronger storms.”
           
In the Sahelian region of Africa, warmer and drier conditions have led to a reduced length of growing season with detrimental effects on crops. In southern Africa, longer dry seasons and more uncertain rainfall are prompting adaption measures.
           
Increases in the frequency of droughts and floods are projected to affect local crop production negatively, especially in subsistence sectors at low latitudes. The most vulnerable industries, settlements and societies are generally those in coastal and river flood plains, those whose economies are closely linked with climate-sensitive resources, and those in areas prone to extreme weather events, especially where rapid urbanization is occurring.
           
Climate change will also quicken the spread of deadly disease, increase poverty and slow economic growth in poor countries. The areas where malaria is prevalent will grow. Flooding which results from climate change will spread waterborne diseases.
           
Christian Aid predicts that 185 million people in sub-Saharan Africa alone could die of disease directly attributable to global warming by the end of the century.
           
“Africa is one of the most vulnerable continents to climate variability and change because of multiple stresses and low adaptive capacity,” concludes the Intergovernmental Panel on Climate Change (IPCC), winner of the 2007 Nobel Peace Prize.
           
The IPCC, a collaboration of hundreds of the world’s leading climate scientists, always presents its findings in the most cautious and restrained language, but its predictions for Africa are unbearably dire, with very severe effects predicted to occur soon:

• By 2020, between 75 million and 250 million people are projected to be exposed to increased water stress due to climate change. If coupled with increased demand, this will adversely affect livelihoods and exacerbate water-related problems.
• Agricultural production, including access to food, in many African countries and regions is projected to be severely compromised by climate variability and change. The area suitable for agriculture, the length of growing seasons and yield potential, particularly along the margins of semi-arid and arid areas, are expected to decrease. This would further adversely affect food security and exacerbate malnutrition in the continent. In some countries, yields from rain-fed agriculture could be reduced by up to 50 percent by 2020.
• Local food supplies are projected to be negatively affected by decreasing fisheries resources in large lakes due to rising water temperatures, which may be exacerbated by continued overfishing.
• Toward the end of the 21st century, projected sea-level rise will affect low-lying coastal areas with large populations. The cost of adaptation could amount to at least 5 to 10 percent of gross domestic product (GDP). Mangroves and coral reefs are projected to be further degraded, with additional consequences for fisheries and tourism.

While a relative handful of energy-rich developing countries are building foreign-exchange reserves from skyrocketing oil prices, the convergence of high oil prices and global warming is fueling a growing movement — increasingly including developing country governments — to demand change.
           
On climate, there is growing agreement on one thing: It is time for the United States and other major polluters to set caps on emissions.
           
“With the United States accounting for 25 percent of the world’s CO2 emissions, we need to above all make sure our government takes action to set a target to reduce emissions by 80 percent from 1990 levels by 2050,” says Friends of the Earth’s Bast.
           
These emissions caps should be combined with energy efficiency measures, better gas mileage in cars and a shift from fossil fuel power plants to wind and solar power, say environmentalists.
           
A new public interest coalition has formed focused on “Ending oil aid.” The coalition’s website describes “oil aid” as the government’s practice of diverting taxpayer money, intended for poverty alleviation, to instead subsidize the international oil industry. Government and official bodies should not be supporting more oil development with tax dollars, the groups argue.
           
EndOilAid.org reports: “In subsidies to the oil industry, America’s misguided policies have fueled global warming, encouraged oil dependence, led to increased conflict, and increased poverty and debt.”
           
“Foreign aid money needs to be shifted from fossil fuel subsidies to clean energy subsidies emphasizing energy efficiency and renewable power,” says Bast.
           
“Historically, international institutions have acted more like representatives for big oil and debt collectors than they have as champions for development and people in impoverished countries,” says Climate Action Network Canada’s Saul. “The idea that international financial institutions should use public development funds to subsidize big oil companies is an example of development assistance not being used well. Foreign assistance should not be used to subsidize one of the most profitable industries in the world.”
           
Campaigners are also focused on the need for broader and deeper debt cancellation to help impoverished countries make the transition from fossil fuels to renewables.
           
Says Saul, “A key way to transition away from dependence on oil is through debt cancellation. Countries need fiscal space in order to invest in the post-fossil fuel economy — but the debt trap keeps countries from meeting a wide variety of social needs.”
           

Neil Watkins is national coordinator of Jubilee USA Network, a network of 80 faith-based, development, environment and human rights organizations working for definitive debt cancellation and economic justice for countries in Asia, Africa and Latin America.