Oil Price Rise Causes Global Shift in Wealth
Iran, Russia and Venezuela Feel the Benefits
By Steven Mufson
Washington Post Staff Writer
Saturday, November 10, 2007; A01
oil prices are fueling one of the biggest transfers of wealth in
history. Oil consumers are paying $4 billion to $5 billion more for
crude oil every day than they did just five years ago, pumping more
than $2 trillion into the coffers of oil companies and oil-producing
nations this year alone.
The consequences are evident in minds and mortar: anger at Chinese motor-fuel pumps and inflated confidence in the Kremlin; new weapons in Chad and new petrochemical plants in Saudi Arabia; no-driving campaigns in South Korea and bigger sales for Toyota hybrid cars; a fiscal burden in Senegal and a bonanza in Brazil. In Burma, recent demonstrations were triggered by a government decision to raise fuel prices.
the United States, the rising bill for imported petroleum lowers
already anemic consumer savings rates, adds to inflation, worsens the
trade deficit, undermines the dollar and makes it more difficult for
the Federal Reserve to balance its competing goals of fighting inflation and sustaining growth.
High prices have given a boost to oil-rich Alaska,
which in September raised the annual oil dividend paid to every man,
woman and child living there for a year to $1,654, an increase of $547
from last year. In other states, high prices create greater incentives
for pursuing non-oil energy projects that once might have looked too
expensive and hurt earnings at energy-intensive companies like airlines
and chemical makers. Even Kellogg's cited higher energy costs as a drag on its third-quarter earnings.
crude oil prices nearing $100 a barrel, there is no end in sight to the
redistribution of more than 1 percent of the world's gross domestic
product. Earlier oil shocks generated giant shifts in wealth and pools
of petrodollars, but they eventually faded and economies adjusted. This
new high point in petroleum prices has arrived over four years, and
many believe it will represent a new plateau even if prices drop back
somewhat in coming months.
"There's never been anything like this
on a sustained basis the way we've seen the last couple of years," said
Kenneth Rogoff, a Harvard University economics professor and former chief economist at the International Monetary Fund. Oil prices "are not spiking; they're just rising," he added.
The benefits, to the tune of $700 billion a year, are flowing to the world's oil-exporting countries.
Two of those nations -- Iran and Venezuela
-- may be better able to defy the Bush administration because of
swelling oil revenue. Venezuela has used its oil wealth to dispense
patronage around South America,
vying for influence even with longtime U.S. allies. And Iran could be
less vulnerable to sanctions designed to pressure it into giving up its
nuclear program or opening it to inspection.
The world's biggest
oil exporter, Saudi Arabia, is using its rejuvenated oil riches to
build four cities. Projects like these are designed to burnish the
country's image, develop a non-oil economy and generate enough
employment to maintain social stability.
One is King Abdullah
Economic City, a mega-project on the kingdom's west coast. According to
Emaar, a real estate development firm in Dubai, the city will cost $27 billion and be spread across an area three times the size of Manhattan.
A contractor who works there said a wide, palm tree-lined boulevard
cuts a dozen miles across an ocean of sand and ends at the Red Sea.
Construction workers in hard hats are navigating excavators, dredging
land and digging foundations for a power plant, a desalinization plant
and a port. The project will eventually include an industrial district,
a financial island, a university and a residential area, and is
expected to house 2 million people.
Despite mega-projects like
this, Saudi Arabia is running a budget surplus. It has paid down much
of the foreign debt it accumulated in the late 1990s and is adding to
its foreign-exchange reserves.
Russia, the world's No. 2 oil exporter, shows oil's transformational impact in the political as well as the economic realm. When Vladimir Putin
came to power in 2000, less than two years after the collapse of the
ruble and Russia's default on its international debt, the country's
policymakers worried that 2003 could bring another financial crisis.
The country's foreign-debt repayments were scheduled to peak at $17
billion that year.
Inside the Kremlin, with Putin nearing the end
of his second and final term as president, that sum now looks like
peanuts. Russia's gold and foreign-currency reserves have risen by more
than that amount just since July. The soaring price of oil has helped
Russia increase the federal budget tenfold since 1999 while paying off
its foreign debt and building the third-largest gold and hard-currency
reserves in the world, about $425 billion.
"The government is
much stronger, much more self-assured and self-confident," said
Vladimir Milov, head of the Institute of Energy Policy in Moscow and a former deputy minister of energy. "It believes it can cope with any economic crisis at home."
good reason. Using energy revenue, the government has built up a $150
billion rainy-day account called the Stabilization Fund.
financial independence has contributed to more assertive actions by
Russia in the international arena," Milov said. "There is a strong
drive within part of the elite to show that we are off our knees."
result: Russia is trying to reclaim former Soviet republics as part of
its sphere of influence. Freed of the need to curry favor with foreign
oil companies and Western bankers, Russia can resist what it views as
American expansionism, particularly regarding NATO enlargement and U.S. missile defense in Eastern Europe, and forge an independent approach to contentious issues like Iran's nuclear program.
abundance of petrodollars has also led to a consumer boom evident in
the sprawling malls, 24-hour hyper-markets, new apartment and office
buildings, and foreign cars that have become commonplace not just in
Moscow and St. Petersburg
but in provincial cities. Average income has doubled under Putin, and
the number of people living below the poverty line has been cut in half.
many economists have called petroleum reserves a bane, saying they
enable oil-rich countries to avoid taking steps that would diversify
their economies and spread wealth more equally. Russia, for example,
has rising inflation, soaring imports and a lack of new investment in
the very industry that is fueling the boom.
The problems are worse in Nigeria,
which is battling an insurgency that has curtailed output in the
oil-rich Niger River Delta. The central government has been disbursing
its remaining oil revenue, though corruption has undermined the
program's effectiveness. The government has also cut domestic gas
subsidies, raising prices several times over in the name of improving
health, education and infrastructure.
"Our oil wealth is a curse
rather than a blessing for our country," said Halima Dahiru, a
36-year-old housewife, as she waited for a bus near a Texaco station in Kano,
the commercial capital of northern Nigeria. Billows of dust enveloped
the gas station as vehicles frenetically cruised along the
laterite-covered road, adding to the harmattan haze that blankets the
"You go to bed and wake up the next morning to hear the
government has increased the price of petrol, and you have to live with
it," she said. "The only sensible thing to do is to adjust to the new
reality because nothing will make the government listen to public
Newly oil-exporting countries such as Sudan and Chad and the companies operating there -- including Malaysia's Petronas and France's Total -- are winners. Sudan's capital, Khartoum,
is booming, with new skyscrapers and five-star luxury hotels, despite
U.S. and European sanctions aimed at pressuring the country to halt
attacks against people in the western Darfur region.
government has used some of its oil revenue to buy weapons rather than
develop the country's economy. In eastern Chad, there are hardly any
gas stations; people buy their gas -- often for motorcycles, not cars
-- from roadside stands that sell it out of glass bottles.
countries face their own challenges. The hardest hit are the poorest.
Last year, Senegal's budget deficit doubled, inflation quickened and
growth slowed. The cash-strapped state-owned petrochemical business had
to shut down for long periods.
the government increased domestic pump prices on Oct. 31 by nearly 10
percent with shortages, rationing and long lines throughout the
country. Violence broke out at some gas stations, including an incident
last week in Henan province in which one man killed another who had chastised him for jumping to the front of a line for gas.
A scarcity of diesel fuel even hit China's richest cities -- Beijing, Shanghai
and trading ports on the east coast -- which in the past have been kept
well supplied. In Ningbo, a city south of Shanghai, the wait at some
gas stations this week was more than three hours, and lines stretched
more than 200 yards.
Rumors circulated that gas stations or the
government was hoarding fuel in anticipation of further price
increases, prompting the official New China News Agency to warn that anyone caught spreading rumors about fuel-price increases will be "severely punished."
Leijun, 37, a taxi driver, said he was so angry that he was unable to
buy fuel that he argued with gas station attendants and called the
police. "I still didn't get any diesel," he said.
orthodox Maoist economic policies, China's leaders have unleashed
decades of pent-up demand. China consumes 9 percent of world oil
output, up from 6.4 percent five years ago, according to the International Energy
Agency. Yet it still subsidizes fuel. As a result, consumption this
decade has skyrocketed at an 8.7 percent annual rate despite soaring
prices and concerns about the environmental impact of profligate fuel
Consumption in South Africa
is also defying high prices as long-impoverished blacks join the middle
and upper classes. Cars are a status symbol, and gasoline consumption
jumped 39 percent in the decade after the end of apartheid in 1994.
New-vehicle sales last year rose 15.7 percent over 2005.
Highly developed consumer nations have been better able to adapt. In Japan, which relies on imports for nearly 100 percent of its fuel, nearly everyone is a loser -- with the big exception of Toyota.
Japan has been weaning itself off oil for years. It now imports 16
percent less oil than it did in 1973, although the economy has more
than doubled. Billions of dollars were invested to convert oil-reliant
electricity-generation systems into ones powered by natural gas, coal,
nuclear energy or alternative fuels. Japan accounts for 48 percent of
the globe's solar-power generation -- compared with 15 percent in the
United States. The adoption rate for fluorescent light bulbs is 80
percent, compared with 6 percent in the United States.
rising fuel prices are pushing up the prices of raw and industrial
materials, as well as food, which relies on fertilizers and
transportation. Because of rising wheat prices, Nissin Food Products,
the instant-noodle industry leader, will increase prices 7 to 11
percent in January, the first price hike in 17 years.
A winner is Toyota. Soaring gasoline prices have buffed the image of the hybrid Prius and Toyota's other fuel-efficient models, such as the Camry and Corolla. Although stagnant in Japan, sales were strong in North America, Europe, Asia
and emerging markets. In October, Prius sales stood at 13,158 vehicles,
up 51 percent from 8,733 in October last year. Worldwide, the number of
hybrid cars sold by Toyota surpassed 1 million in May.
national average gasoline price topped 1 pound per liter, or about $8 a
gallon, for the first time this week because of record oil prices.
there is very little publicity about it -- you don't see many headlines
saying, 'Oil at all-time record high,' " said Chris Skrebowski, editor
of Petroleum Review, a published by the Energy Institute in London. "It's different from the United States. Here, everyone has just accepted that it is expensive."
British drivers are feeling the pinch, the government is gaining
revenue, Skrebowski said, because about 80 percent of the cost of gas
is tax. Because Britain produces almost all the oil it consumes, its
economy has been cushioned against increasing oil prices, Skrebowski
But Britain's North Sea
oil production is dwindling, having peaked in 1999 at 2.6 million
barrels per day. Today, production is 1.4 million to 1.6 million
barrels per day, Skrebowski said, while domestic oil consumption is
about 1.7 million barrels a day. Prime Minister Gordon Brown, who took office in June, has made energy independence a priority.
analysts said, Europeans buying oil priced in dollars are finding the
rising prices somewhat cushioned by the strength of their currency. The
value of the dollar has been sliding to record lows against the euro
and the British pound.
Argentina has tried to keep fuel prices for consumers at artificially low levels.
NÂ¿stor Kirchner in recent years has leaned heavily on energy companies
to keep prices down, going so far as to call for a public boycott of Royal Dutch Shell
when the company raised pump prices. Individual suppliers -- wary of
attracting the ire of the government -- have adopted a policy of
raising prices gradually and by small amounts.
As the market
pressures have mounted, Kirchner has signed a series of agreements with
Venezuelan President Hugo ChÂ¿vez. This year, the two created a project
called Petrosuramerica, a joint venture designed to promote cooperative
energy projects and provide energy security to Argentina.
Brazil, the region's largest economy, high oil prices have had a
different political effect. Last year, the country became a net oil
exporter, thanks to major increases in domestic oil exploration and the
country's broad use of sugar-based ethanol as a transport fuel.
But new oil wealth can trickle away even more easily than it comes. Last month, Standard & Poor's downgraded Kazakhstan's credit rating after the country's banks lost billions on purchases of subprime mortgages.
Peter Finn in Moscow, Blaine Harden in Tokyo, Ariana Eunjung Cha in
Shanghai, Kevin Sullivan in London, Craig Timberg in Johannesburg,
Stephanie McCrummen in Nairobi, Monte Reel in Buenos Aires and Faiza
Saleh Ambah in Jiddah, Saudi Arabia, and special correspondents Aminu
Abubakar in Kano, Nigeria, and Alia Ibrahim in Beirut contributed to
Powered by ScribeFire.