from Follow the Money

Oil and emerging economies: the struggle to adjust policies to $70 a barrel oil continues

August 26, 2005

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Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

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It looks like Iraq is not the only emerging economy that exports crude and imports (at huge cost now) refined diesel and gasoline that it then sells a low price.   Nigeria is in the same position.   Strange.   The national oil company of an oil exporter facing financial problems when oil is almost at $70.   I guess that is what happens if you import refined gasoline and sell it too cheaply.

Malaysia is far better managed than Nigeria, but it too has extensive (and costly) fuel subsidies.  

And China's state oil companies are fighting (bureaucratic) war with the rest of the Chinese state ...   State cannot get on with Defense here in the US.   Treasury looks down on Commerce.  So forth and so on.  And it seems that the National Development and Reform Commission sets retail oil prices in China, while the State-owned Assets Supervision and Administration Commission actually owns Sinopec and PetroChina.    I guess they don't quite see eye-to-eye. ( Check out the Peking Duck ).  

Steve Roach highlight the results of China's energy policy - gas lines and an energy inefficient economy.   The US, alas, is not the only country that has failed to take the policy steps needed to reduce its vulnerability to (further) oil price shocks.

There seem to be three fundamental reasons why higher oil prices have not slowed global oil demand much:

  1. Lots of countries are subsidizing oil to spare consumers the hit, with the government picking up the tab in various ways.
  2. The recycling of petrodollars into the US fixed income markets (through a ton of intermediaries) allows (at least until now) US consumers to borrow against their rising home values, supporting non-oil consumption.  By saving less, the US has been able to avoid "adjusting."  Higher oil has not forced us to spend less on everything else.
  3. The world's capital stock doesn't turnover over night.  Those who bought SUVs made a big capital investment.  In the short-run, they have to pay up to reap any benefit from that investment.   The composition of the US auto fleet changes slowly, and that same is true globally.  Moreover, Detroit now makes a lot of SUVs, and it cannot suddenly shift to making hybrids.  Capital investment and sunk costs and the like.  So it is giving the SUVs away at cost, more or less - further delaying the shift in the composition of the US fleet.

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