Oil and Gas Extraordinary Revenues: Consumers Paying the Price

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DESPARDES Report: The oil and gas supply crisis unleashed by geopolitical conditions represents new business opportunities for the oil-producing countries of the developing South, both traditional and emerging, and also for accelerating the global transition to green forms of energy. “The countries with the most positive economic effects are the net exporters that depend on hydrocarbon revenues for a large portion of their budget, economic activity and foreign exchange,” Nate Graham, head of energy at the Washington-based think tank Inter-American Dialogue, told IPS. In Latin America this is the case, Graham said, for “countries such as Colombia, Ecuador and Venezuela, while on the other hand, countries in the Caribbean, Central America and Chile, which import oil and gas, will suffer the opposite effect.”

Graham’s observation of the opposite effect in countries which import oil and gas holds true for South Asia also: India, Pakistan, Bangladesh, Sri Lanka, etc., Irshad Salim of DesPardes.com who’s based in Karachi, says. The government in Pakistan is selling petroleum products at lower prices than the purchase price. “Difficult decisions will have to be made to manage the economy and only then the situation will change for the better,” senior PML-N leader Shahid Khaqan Abbasi Wednesday said and warned of an increase in petrol price…to address the worsening situation. The economic experts have also advised the government to end the subsidy as it would cost the national exchequer dearly, while the International Monetary Fund (IMF) has also opposed the move. Finance Minister Miftah Ismail has said that his PMLN-led government in the center will have to increase the price of gasoline to get Pakistan’s economy back on track and to revive the stalled bailout program with IMF. A US financial wire, Bloomberg reported that almost a fifth of electricity generation capacity was offline because Islamabad “cannot afford to buy coal or natural gas from overseas to fuel its power plants.” Pakistan’s energy costs more than doubled to $15 billion in nine months, and it isn’t able to spend more on additional shipments. “A relatively poor nation that’s highly dependent on energy imports, Pakistan has been hit specially hard by rising fuel costs,” the report added.

Oil and gas producers in the South “are (however) enjoying extraordinary revenues,” Venezuelan oil geopolitics expert Kenneth Ramirez told IPS, “but those who are not producers have higher energy bills and are suffering from higher prices for food, of which Russia and Ukraine are major suppliers.” Graham said: “Even in oil-producing countries, rising consumer fuel prices put pressure on governments to provide subsidies, which can then be politically difficult to reverse when prices fall again.” But it seems that it is not yet time to heed all the warnings, given the new “(black) gold rush” unleashed in a world dependent on fossil fuel energy and aware that it will continue to be so for several more decades.

Illustration by Irshad Salim

Iran, a long-time oil producer, is again flexing with the crisis: it maintains energy alliances with Russia while the tug-of-war with the United States – which has sanctioned it for more than 40 years – continues over its nuclear program, whose redefinition may free it from some sanctions. Tehran, which produces 2.5 million b/d, is preparing to increase its crude oil exports from 1.2 to 1.4 million b/d, and has a long-term plan to return to a production level of four million b/d.

Among the major beneficiaries of the crisis are the Gulf Arab exporters and in general the partners of the Organization of Petroleum Exporting Countries (OPEC), which act in alliance with 10 other producers in the OPEC+ group. Saudi Arabia’s Aramco alone already recorded pre-war profits of 110 billion dollars in 2021 (compared to 49 billion dollars in 2020). Both the kingdom and the neighboring United Arab Emirates have been asked by Washington to increase oil production in order to avoid a price spike. OPEC+ rejected the request of large consumers, considering that the price increase is not due to market fundamentals but to the conflict in Ukraine, and agreed to add only 432,000 b/d to the group’s supply, starting in May. Global demand for crude oil is approximately 100 million b/d, of which OPEC contributes 32 million b/d, plus another 14 million b/d from the 10 OPEC+ allies, including Russia, Kazakhstan and Mexico. Among the winners, according to IPS, oil companies will earn the most, and this year the 25 largest could make profits between 100 and 120 billion dollars higher than in 2021, when, according to the U.S. organization Accountable.US, they made record profits of 237 billion dollars. Consumers, meanwhile, will pay the price.

Path to greener energy

In Europe, “the majority are now betting on a pragmatic and possibilist vision, which continues to focus on renewable energies and energy efficiency, but a debate is opening up about the use of nuclear energy and even coal, which would make a better balance between energy security and climate change,” said Ramírez. Graham believes that “the present crisis underscores the geopolitical risks of dependence on foreign oil and gas and the importance of reducing it for security reasons, which can be an accelerating factor for the transition to renewable technologies and green hydrogen (obtained from clean energy sources).” But “on the other hand, some may interpret the present crisis as a reason to increase domestic and regional hydrocarbon production in the short term, which may extend dependence on fossil fuels, while companies recover the costs of new investments,” he said. In addition, there is pressure on governments to provide fuel subsidies to lessen the impact of the crisis on consumers, which may be politically difficult to reverse and might thus generate the opposite effect to what is needed to drive the energy transition, Graham said.

The International Energy Agency (IEA), made up of major industrialized consumers, recognized at its Mar. 24 meeting held to assess measures to address the crisis “the importance to energy security and clean energy transitions of ensuring clean, affordable, reliable, resilient, and secure energy infrastructure.” Energy security and the transition to clean energies are “inextricably linked” in the view of the IEA, and its executive director, Fatih Birol, stated that “the response to this energy crisis will be an acceleration of the transition to clean energy,” not necessarily for climate reasons, but for energy security.