Mon May 26th, 2008 at 06:04:37 PM EST
In yesterday's open thread, Francois in Paris wrote
Developing countries have historically a much larger demand elasticity than developed countries and likely still have [but] don't see it as a superior "virtue" that "poor, frugal countries" would hold against "rich, wasteful countries". It doesn't mean that poor countries are more adaptable to high oil prices, quite the contrary.
It means that they are far more dependent on oil, oil purchases representing a much larger share of their GDP, and that, as a consequence, prices have a much larger effect on their activity, a rise creating a much larger demand destruction aka recession. They don't have a output "surplus" they can reallocate to oil purchases that would allow them to weather a price increase for a long time while they switch to other sources by infrastructure changes as developed countries can do.
If oil prices stay high, we must expect a very, very deep recession in the bottom half of the world economic ladder. We'll hurt too but it'll be nothing compared to them.
This is related to a discussion I was having with kcurie the other day off-site, in which I was wondering about where the immediate impact of Peak Oil
would be strongest. My impression was that the countries now undergoing a strong bout of oil-fuelled industrialization should be the ones most vulnerable to an oil shock, because of the disproportionate fraction of GDP taken up by oil imports. This would include most countries in South-East Asia. I noted the fact that recently Indonesia announced its intention to quit OPEC
as it is becoming a net oil importer. On the other hand, China is known to be swimming in currency reserves, and so could buy oil in the international markets if necessary (which would drive prices up for everyone, including them, but at least initially they could buy their way out of a pinch).
But this is the kind of question that cannot be answered from first principles and where received ideas about various countries' economic structure can be dangerously misleading, especially as they get out of date and out of line with the evolving reality. So, I got ahold of the IEA's 2007 key statistics [PDF] (2005 data), imported the summary table at the end of the document into R, and made supplemented them with Wikipedia's data on world currency reserves (2007-8 data from the IMF). The result is in three charts, below the fold, with some unexpected conclusions.
The first chart is a log-log plot of net energy imports against GDP. I have added a line representing direct proportionality between the two variables at a level where only a few countries are left above it:
Apart from two microstates (Gibraltar and NL Antilles), the four most vulnerable countries by this measure - in the sense that an oil price increase will eat a larger fraction of their GDP - are all former soviet republics without indigenous energy resources. JakeS wisely warns:
Now, as anyone who has ever played poker will know, being on the unfortunate end of the statistical noise can be rather painful, so in that sense that observation is relevant. But I think that there are more convincing arguments to be made than a bad roll of the demographic dice, if we want to draw geopolitical conclusions.
So, the next step is looking at countries' currency reserves to see how much oil they can buy in the international markets in a pinch. The result is
We see one country from the Horn of Africa, a number of countries from the EU15 (Italy and Germany are not far below that dotted line), the USA, and again Belarus and Tayikistan. These are countries with precious little in the way of currency reseves that they can bring to bear to buy oil. However, at least for the EU15 and the USA, oil does not represent a huge fraction of GDP. However, Belarus and Tajikistan are vulnerable on both counts. As for Eritrea, it's an example of a poor country which cannot afford to buy more oil with its reserves, but as it is barely industrialised it doesn't have much use for oil either.
Finally, I divide by net imports throughout (thus removing from the data set the "size of the economy", which is the main direction of spead of the points in the previous two charts) and I plot the two ratios measuring vulnerability and reserve cushion against each other, with the following result.
I plot import dependence (defined as the ratio of net oil imports to GDP) and reserve cushion (defined as the ratio of currency reserves to net oil imports). I have removed the axes since the units are complicated ratios.
The upper-left corner contains countries spending an unusually large fraction of GDP on energy imports, and having relatively small currency reserves. These countries are not only exposed to the higher oil price risk but also don't have the hard currency to buy oil in the open market in an emergency. This category includes Moldova, Tajikistan, Eritrea and Luxembourg.
At the opposite end of the spectrum are countries with a relatively small fraction of GDP spent on energy imports, as well as relatively high currency reserves. These countries not only have a low economic exposure to oil prices but they have the reserves to shield the blow if necessary. This category includes China, Peru, Brazil and the UK (though I think since 2005 the UK has become more dependent on oil imports because of the decline in Scottish North Sea production, so it has moved up in the chart).
My tentative conclusions are as follows:
- China is unexpectedly well placed to withstand the coming oil price shock, both in terms of the GDP impact of oil prices and the availability of foreign reserves. The US and Europe will be forced to change course before China. However, see Jerome's latest High oil prices causing oil companies to go bankrupt featuring cash-strapped Chinese and Indian oil refiners.
- The group of nations that seems most vulnerable is that of former Soviet Republics without developed energy resources. In particular Belarus and Tajikistan, but all the way to Georgia and Armenia (among the Caucasian republics Azerbaijan actually is a net exporter). In the meantime, Russia is a net exporter, has built its foreign reserves and had increased its GDP substantially. It looks as if events might give Russia a lot of leverage in its old sphere of influence.
Apart from an unenviable political and human rights situation, Tajikistan seems to be hurting already:
After independence, Tajikistan suffered from a devastating civil war which lasted from 1992 to 1997. Since the end of the war, newly-established political stability and foreign aid have allowed the country's economy to grow. Its natural resources such as cotton and aluminium have contributed greatly to this steady improvement, although observers have characterized the country as having few natural resources besides hydroelectric power and its strategic location.
In 2008, the harshest winter in a quarter century caused financial losses of $850 million. Russia pledged $1 billion in aid. Saudi Arabia sent about 10 planes carrying 80 tons of relief and emergency supplies in February and another 11 tons in March. (wikipedia)
As for Belarus, it should be a concern to all of Europe as it is the only country not in the Council of Europe, with again a dubious human rights record and little political freedom. It would seem that merging back into Russia would be an improvement, as much as it would give a hissy fit to other former Soviet Republics such as Ukraine or Georgia or to Poland, which is a neighbour of Belarus to the West.
This should of course all be taken with a grain of salt, based as it is on very few and very coarse economic indicators. As ThatBritGuy put it yesterday:
[The impact] would depend on how essential the industrialisation is.
Also, I wouldn't expect it to be a linear relationship. Beyond a certain point essential services stop working, so catastrophic social failure is more likely than linear degradation.
So a more realistic model would look at critical paths in the economy, rather than GDP as a whole.
I'd guess that's going to reveal some essential dependencies which aren't being considered seriously yet.
I guess what I would say is that I am considering a linear measure not of the effect (which, indeed, is nonlinear and probably involves a catastrophic transition point) but a measure of the stresses. And, of course, I would love to have more fine-grained data about what economic sectors each country uses its oil for.