This month, even as the Russian cabinet approved the Kyoto Protocol and sent it on to parliament for ratification, the price of oil crossed US $50 per barrel -- a 60 per cent increase in the price of this all-crucial commodity, in this year itself. I would have thought that, for climate change buffs, oil prices would have been even bigger news than the delightful Russian move. After all, it has always been argued that an increase in the price of oil will check demand, slow down the pace of emissions and possibly even lead to an impetus for alternative energy technologies which do not destroy the world's climate system.
But this does not seem to be the case. The International Monetary Fund (IMF) expects that, at current oil price levels, the impact on global growth will be moderate, reducing global gross domestic product by just about half a percentage point in 2005. Therefore, instead of 5 per cent growth in 2004 -- incidentally the hottest year the world has experienced in 30 years -- the world will grow by 4.3 per cent in 2005. In other words, the high price has not, as yet, limited the world's hunger for oil.
In fact, the International Energy Agency (IEA) says demand for oil has grown by 3.4 per cent over last year. However, it has trimmed its outlook for growth for 2005, expecting a slight economic downturn. But nothing devastating. Nothing like the oil shock of the 1970s that brought the world to a stop. Nothing big enough to stop the sales of gas-guzzling SUVs. And, certainly, nothing to compromise the American (increasingly, the global) way of life.
But I suspect there is much more to this price burp. I suspect it will really hurt us, more than we currently know or can fathom. Where? Where the world is hurt most: the climate system. The oil price rise will not mitigate adverse impacts of climate change. It will do the exact reverse: exacerbate the situation. How? The cost of growth in the developing and energy-intensive South will increase. This cost will leave them with even lesser economic space to make the transition towards efficient technologies, which are less polluting. In fact, the price rise will leave an already-compromised South even more devastated, even less capable of dealing with the adverse impacts of climate change that will hit -- really hit -- its poor and vulnerable populations. The South needs to invest in ensuring it can provide food and water security to the marginalised so that the impacts of climate change are reduced. We know that. But with higher costs of growth, will it have the capacity to invest where it hurts most?
Why do I say this? Let us be clear that India and China, and the rest of the newly industrialising world, are at a stage when they are becoming big consumers of fossil fuels to run their economies. Growth is much higher here than in the already industrialised world. The latter has already guzzled its oil. Today, it is a big, but more or less efficient, user of this resource. If one looks at the growth of carbon dioxide emissions by sectors in the rich world, one will find that the highest increase is in the travel and freight sectors, while manufacturing has become much more efficient in its use of fossil fuels; it emits much less today than it did in 1973.
Conversely, in the developing world, manufacturing is still extremely energy-inefficient. We use much more oil per unit output than any part of the rich world. While Thailand and China consume more than double the oil per unit of output than rich countries, India burns more than three times as much. At the same time, we are expanding our use of fossil fuels in the transport sector. Demand is galloping. China consumes one of out of every 12 barrels in the world and its imports have increased by 40 per cent in this year itself. India and China combined add up to 12 per cent of the global consumption of oil, up from 5 per cent in 1990.
Therefore, it can be argued that we will definitely see a recession, even if the rich world mostly escapes. The estimates vary. As yet, the IMF does not expect oil prices to hit economic growth in the fast growing regions of Asia. Even after adjustments, it says China is projected to expand at 9 per cent, India at 6.4 per cent and the rest of Asia at 5.5 per cent. But there are other economists that expect the cost on GDP growth to be any where between 2 to 3 per cent in India and China.
I believe it is ridiculous to argue that we will not be hit by high oil prices. The question is: where will the hit affect most? As yet, most governments of the developing world are fighting hard to find ways to soften the price hike. The Thai government, for instance, has fixed the retail price of diesel at below market prices, at its own expense. India is already draining itself on subsidising kerosene and LPG. Now, it is also foregoing tax revenues on other fuels. It sees no option, as an increase in prices will increase inflation and slow growth.
The problem with this option is it will leave governments of the South bankrupt. Not being able to spend where they need to, most of all. Firstly, they need economic space to invest into tempering the adverse impacts of growth through public investments and subsidies in public sectors like livelihood, food and water. Secondly, they need funds to invest in improving technologies; to reduce local and global emissions. The rich made these investments when the cost of oil was cheaper. How will the poor and polluted South do so, in the increasingly costly world of oil? And what of growth? There will be a hit. Climate change will deliver it. The question is: why should the poor bear it?
Whatever happens, it is the poor that will end up as the losers. It is they who have done the least to create the problem. It is they who are most vulnerable to its impacts. This is not a myth. It is a shame.
-- Sunita Narain
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