Fluctuating oil price: should we be concerned?
Back in the early 1970s, the OPEC oil producers’ cartel reached an agreement to limit the global supply of oil. This implacable decision, duly complied with by its members, resulted in an abrupt quadrupling of international oil prices.
The impact of this sharp price increase was dramatic for Mauritius since oil occupies an important share, about a fifth, of our total imports. Our economy hardly exported anything significant beyond sugar at that time. We had to pay up the high price from whatever little foreign exchange we could lay our hands on. Our external balance of payments was thus thrown into a structural deficit. It means all our exports were barely sufficient to pay for our now much higher imports, as far as eye could see.
To cope with the situation, we tried to bridge the gap with extensive foreign exchange borrowings, paid high interest on them, devalued the rupee successively which produced high local rates of inflation, obtained foreign funding facilities from the IMF and the World Bank which gave the money to us provided we adopted harsh austerity measures. Living standards were suddenly severely affected, the effect of which was to fuel up serial popular protests and riots.
The good upshot from this situation was that we ultimately ended up diversifying and increasing our exports of both goods and services. This kind of evolution of the economy brought back serenity and it may be said that we’ve insulated ourselves fairly well from subsequent sharp increases in the international price of oil. So far.
Since such a risk of fuel import prices shooting up again has always been around – recall the severe consequences of fairly recent hedging against fuel price rises on the finances of the STC and Air Mauritius – our response to it should have been to go on adding ever more performing and suitably adapted sectors of export activity to the economy, of which not much has seen the light of the day of late. Another response would have been to produce local renewable energy substitutes for imported oil, coal and gas to insulate ourselves from sharp international oil price rises as it happened in the early 1970s.
After adding some export activities in past years, we currently appear to be stalling on this chapter. We have to do much more but we can’t do it without first grooming up significantly the specialised resources we need for making appropriate breakthroughs in this respect. It will take time.
No ground breaking initiative
Some effort was also put to expand the local renewable energy sector. It cannot be said however that we have achieved something on the required scale to avert the negative impact another wave of rising oil process could have on the country. We spoke much about harnessing wind energy but the turbines are taking too many years to be installed, God knows why.
We contemplated production of solar, wave and hydroelectric power to reduce our reliance on (imported) thermal power. Solar is here but we have no idea how much our potential in this domain is currently tapped and what more we should target for it as the feasible objective for the medium to long terms and how the goal towards greater energy self-sufficiency will be achieved. No ground breaking initiative has really seen the light of the day, as far as tapping wave and hydropower are concerned, on the other hand.
It must be said that the adverse past price increases of oil are pointers to the economic dangers we face and to the extent of efforts we should put in to insulate ourselves from serious economic catastrophe. For, it should not be forgotten, we depend for almost the totality of our electricity supply (for households, offices and industry) on imported coal and oil. Our transport system grinds to a sudden halt without the imported oil. Indeed, imported oil has become an essential lifeblood for the entire range of our economic activities. Dependency of the sort can prove very costly.
The international price of oil dipped as from mid-2014 due to a situation of over-supply on the international oil market. While it was heading towards $150-200 a barrel, it suddenly went down to $110 in September 2014. Accelerated Canadian and American shale gas production accentuated the over-supply, causing oil to dive to $27 a barrel by January 2016.
At the level of the OPEC today, Saudi Arabia, the largest global oil producer, which accounts for 13% of global supply, decided not to curtail its supply of oil to firm up falling international prices, perhaps apprehending loss of market share to rival Iran or to the next biggest producer, Russia. The effect of this decision was to maintain oil in the $30- $40 range a good part of this year.
No doubt, importing countries are having a good time. Our total mineral fuel imports came down to Rs 25.4 billion in 2015, from Rs 32.9 billion in 2014, due to the oil price fall effect. But the strain on our balance of payments will pop up again if the oil price escalated sky-high for one reason or other. Is there such a risk? Perhaps not immediately.
But consider the goings-on the past few days. Nigeria is facing a situation of disruption of supply due to militants targeting its pipelines. Its supply outage has, as a consequence of this, caused it to reduce production from 1.3 million barrels a day to 1 million as pipelines were burst open by bombing militants last week. This marginal reduction in global daily supply of oil has nevertheless proved enough to take the oil price from $40 or less the past weeks to a 10-month high of $50 a barrel on Monday 6th June. Already, despite continuing oversupply, immediate expectations are that the oil price may go up to $65 in the near term. Such is the nature of price volatility on the oil market.
Price taker, not price maker
We in Mauritius remain vulnerable to sudden market variations of the sort as a price taker, not a price maker, on the oil market. We have two immediate options: (i) expand our substitute renewable energy supply as much as we sustainably can, and, (ii) make a more economic use of imported oil. The first of these options has been obvious ever since we were struck down by unilaterally decided soaring oil prices in the 1970s.
As regards the second option, it cannot be said we have rationally coordinated the efficient running of even our transport system, let alone keeping under check the waste of energy from its inefficient employment in different activities. The National Transport Authority reports that, over the four months from December 2015 to April 2016, the fleet of our registered vehicles has further increased by 6,937 vehicles to the total of 493,091. Had we employed an alternative efficient public transport system, we wouldn’t have been saddled with so many polluting individual vehicles on our roads and the growing fuel import bill they imply for the country now and in years to come.
Experience has taught us not to be complacent when the going is temporarily good. Once the situation goes out of gear – which is what frequently happens with prices that get fixed according to global supply and demand conditions and market uncertainties — our lack of preparedness can make us reel under the oppressive weight of high and increasing oil prices again. One doesn’t have to wait for bad times to befall upon us to take the right initiatives.
All it requires is a strong dose of foresighted economic planning and implementation. Politicians who help implement strategies to which suit the country’s economic conditions, may contribute positively by not interfering in the objective decisions required to be taken to protect us from a potential soaring oil import bill. But, surely, we need first to have the energy master plan to steer a coordinated, safe and result-oriented objective, safe from the tyranny of external dependence and volatile international price movements.
* Published in print edition on 10 June 2016
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