What the oil spike means for development

by | Mar 18, 2011


ODI have some new research out this week on this, looking at the potential impacts of a one third increase in oil prices over the next two years (which they argue is a reasonable projection, given historical experience of the effects of MENA region conflicts on oil prices):

The study suggests that some of the poorest countries could lose up to 4% of their GDP. Those likely to lose more than 3% of GDP as a result of a one-third increase in oil prices include Ghana, Honduras, Lesotho, Swaziland, Togo, Moldova and Nicaragua. Those likely to lose more than 1% of GDP include Burkina Faso, Burundi, Ethiopia, Malawi, Mali, Mozambique, Nepal and Niger. This is assuming that there are no market or policy interventions.

At national level, government balances could worsen in countries where oil prices are controlled, and changes in oil price structures may lead to protests as seen in Indonesia (1998), Nigeria (2000) and Yemen (2005). For example, there are already question marks surrounding the affordability of oil price subsidies in Thailand, where oil products constitute around 10% of the consumer basket. Fortunately, the fiscal position in some developing countries that have been growing is fine, but this certainly not the case for others that have seen the fiscal balances worsen due to a number of shocks.

At the household level our review of the evidence finds that both rich and poor households suffer as a result of oil price increases, but the poor tend to suffer more. There are direct effects, with the poor spending a large share of their small incomes on oil and oil products. In Ghana,x Guatemala, India, Nepal, South Africa and Vietnam, the poorest households may spend as much as 3-4% of their income on kerosene, compared to little more than 1% of the richest households. There are also indirect effects, with rising transport costs affecting the poor more than the rich.

The evidence suggests that rising oil prices and falling GDP have a direct impact on the most vulnerable people. A drop of 1% in African GDP could increase the number of infant deaths by 5,000 each year, and child deaths by around 10,000. In countries that are more sensitive to falling incomes the impact could be worse.

Author

  • Alex Evans is founder of Larger Us, which explores how we can use psychology to reduce political tribalism and polarisation, a senior fellow at New York University, and author of The Myth Gap: What Happens When Evidence and Arguments Aren’t Enough? (Penguin, 2017). He is a former Campaign Director of the 50 million member global citizen’s movement Avaaz, special adviser to two UK Cabinet Ministers, climate expert in the UN Secretary-General’s office, and was Research Director for the Business Commission on Sustainable Development. Alex lives with his wife and two children in Yorkshire.


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