Hugo Chavez wants to impoverish the developing world

Venezuelan President Hugo Chavez wants OPEC to join his anti-American bandwagon. The Financial Times' Carola Hoyos reports that he hasn't been all that successful: Ministers of the Organisation of the Petroleum Exporting Countries, the oil cartel, on Thursday united against Venezuela to reject its call to cut the group?s production. The vast majority of the 11 delegates meeting in Caracas on Thursday said they were set to agree to keep pumping at nearly maximum capacity. Opec produces 30m barrels a day of oil, about 40 per cent of the world?s total. Saudi Arabia, the world?s biggest oil producer, led the cartel?s efforts to counter Venezuela and Iran?s attempts to use Opec as a tool against the US. Oil prices are at near record highs and a reduction in Opec?s production would have led to a further rally, analysts said. They warned that this could have undermined world economic growth and pushed up inflation. Hugo Ch?vez, Venezuela?s populist president, has tried to use Opec to spread his anti-Washington message and to push energy nationalism. One way he has done this is to back Bolivia to join Opec as an observer and Ecuador, which was a member of the group from 1973-1992, to rejoin as a full member. Both countries have recently moved to wrest more control of their energy assets from international companies. Bolivia in March sent its military to take over its gas fields. Mr Ch?vez, in addressing Opec ministers, said: ?We are third world countries, countries that for years and years have suffered colonialism, countries that are condemned by much more powerful states.? He added: ?The life of our organisation has not been easy. We are under an unfair way of exploitation. Oil is the reason of the permanent aggression of the US empire. Oil did not benefit the Venezuelan people while the US empire was drinking our oil,? Mr Ch?vez said. Like a tenor reaching the climax of his aria, Mr Chavez grew more and more animated: ?Opec is a liberator of countries in Asia, Africa, Latin America and the Middle East,? he concluded. The faces of other Opec ministers revealed their unease with such inflammatory rhetoric. Saudi Arabia, especially, has tried to stop Venezeula from hijacking the meeting to push its nationalist cause and its spread its criticism of the US, Opec?s biggest customer. Many Opec countries do not consider themselves third world nations. (emphasis added) Read the whole thing, because there's some interesting bits of info about the possible expansion of OPEC's membership. For now, however, let's focus on Chavez's bolded statement, because it's pretty much the opposite of the truth. If one posits that the cartel's reason for existence is to keep the price of oil at artificially high levels, then OPEC does little for the third world except to impoverish countries in Asia, Africa, Latin America and the Middle East that are not members of OPEC. How is Africa fairing with past year's rise in oil prices? Let's check with the African Development Bank: According to the African Development Bank (ADB), current oil prices will certainly translate into a higher average inflation of 2.6 percentage point for oil-importing African countries in 2006. High oil prices will exert a heavy toll on the finances of many oil-importing African countries. Increasing oil prices spell real economic danger for these countries as many companies faced with higher energy bills may attempt to cut down on cost and one way of achieving this is to lay off some workers. In the event of such a situation, governments of affected countries will see their tax bases eroded. Lay-offs in one sector of the economy could have huge and devastating effects on the entire economy and many African countries already caught up in the throes of an economic crisis, may have to deal with more complex economic and political situations. Lower employment prospects and higher inflation rates will obviously lower the purchasing power of the poor and this will have a ripple effect on the entire economy. Clearly, higher petroleum cost will increase commuting cost, and in the case of agricultural economies, ? which many African economies are ? the cost of getting the harvest to the markets will rise, pushing therefore the cost of food up and making it well beyond the means of the underprivileged who, prior to the escalating oil prices, were already living in very straightened financial circumstances. Similarly, another danger that escalating oil prices pose to many African economies stems from the fact that even development banks such as the ADB, which finances many projects on the continent, will be affected. Firstly, many ongoing thermal power production projects which are being implemented on the basis that oil, the main input in those power plants, will be affordable. Secondly, higher energy prices will certainly affect a number of other key inputs which affect both the rate of return of existing projects and the choice of future ones. Infrastructure programs will cost more because construction materials are energy-intensive and this will reduce the Bank?s ability to handle many development projects on the continent. This situation is certainly bad news for many struggling African economies which have benefited from projects financed by ADB. The financial injections that ADB-financed projects bring to their economies may reduce or even dry up if world oil prices remain a huge challenge to the global economy. Hmmm.... what about Asia? Well, the Asian Development Bank is not as sanguine as Mr. Chavez: The region of developing Asia and the Pacific is potentially vulnerable to high oil prices. It is a large net importer of oil (in this section oil is taken to include petroleum energy products excluding natural gas) and much of its rapidly expanding energy needs are met by oil. Developing Asia produces about 11% of the world's crude oil, but consumes more than 20% of it, and this gap is widening. Economies in developing Asia are nearly as oil intensive in energy consumption and much less energy efficient than most industrial countries. For each unit of gross domestic product (GDP), measured at market exchange rates, developing Asia consumes nearly five times as much energy as Japan and nearly three times as much as the United States (US). Despite its dependency on oil and a threefold increase in nominal oil prices since 2003, the region has performed well economically. But past resilience does not mean that developing Asia is immune to high oil prices. Signs of stress are indeed starting to surface: inflation is creeping up; fuel subsidies are beginning to cast a large shadow over fiscal prospects in some places; and high oil prices may become a prominent factor that will further prolong the region's generally anemic investment demand--outside the People's Republic of China (PRC)--that has prevailed since the Asian crisis. Click here to see a more in-depth analysis by the ADB of the effect of higher oil prices on the region. In fact, let's just excerpt this 2004 International Energy Agency report to see the effect of high oil prices on the non-OPC members of the developing world as a whole: The adverse economic impact of higher oil prices on oil-importing developing countries is generally even more severe than for OECD countries. This is because their economies are more dependent on imported oil and more energy-intensive, and because energy is used less efficiently. On average, oil-importing developing countries use more than twice as much oil to produce a unit of economic output as do OECD countries. Developing countries are also less able to weather the financial turmoil wrought by higher oil-import costs. India spent $15 billion, equivalent to 3% of its GDP, on oil imports in 2003. This is 16% higher than its 2001 oil-import bill. It is estimated that the loss of GDP averages 0.8% in Asia and 1.6% in very poor highly indebted countries in the year following a $10 oil-price increase. The loss of GDP in the Sub-Saharan African countries would be more than 3%. [Surely Chavez is correct about the Middle East, right?--ed. Er, no. According to this UN Development Program table, the Arab states have actually seen their energy efficiecy per unit of output decline by close to 50% in the past 25 years. Countries like Egypt and Jordan would get hammered as well.] Hugo Chavez has zero interest in helping the countries of the developing world. And it's a good thing for the developing world that the rest of OPEC chooses to ignore him.