Another recession?
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As the political upheaval in the oil-producing countries of the Middle East and North Africa unfolds, market analysts have warned that the price of Brent crude could hit US $220 a barrel.
Such an exorbitant spike in oil prices will make another recession, and the pain associated with it, inevitable.
If the upheaval continues for several weeks, the world might have to relive the horrors of 1973/74 oil-shock all over again. For starters, Egypt and Syria mounted a surprise attack on Israel on Oct. 6, 1973 to recover Sinai Peninsula and Golan Heights they had lost in the 1967 war. In response, the US began to airlift weapons and equipment to Israel.
Angered by this, Arab members of the Organisation of Petroleum Exporting Countries (OPEC) cut the production and raised the price. When US President Nixon asked Congress for massive aid to Israel, they announced an oil embargo against America and the Netherlands. Although the war ended on Oct. 26, the Arab countries cut the production and extended the embargo further.
The embargo pushed the oil prices from under US $3 to US $12 a barrel. Western countries had to ration gasoline. The US stock market and economy crashed; other countries also suffered from the deep recession. Although Israel withdrew its forces from the west of Suez Canal and Arab countries lifted the oil embargo in March 1974, the pernicious impact of the oil-shock lingered for many years to come.
What the embargo did then, the political turmoil is doing it now. The turmoil has cut Libya’s oil production by one-fourth, 400,000 million barrels a day. The ongoing protests in Bahrain and Algeria might take a similar toll on oil production. The Saudi king’s US $35 billion package of benefits might not be enough to buy off calm in Saudi Arabia, which has 20 percent global oil deposits.
Nomura’s commodity team has said oil prices risk vaulting to uncharted highs over coming weeks if political turmoil spreads to Algeria as well, reducing global spare capacity to the wafer-thin margins seen just before the first Gulf War. According to UBS, an increase in oil prices by US $10 a barrel reduces global growth by 0.3 percent. If the oil price hits US $200 a barrel, it will wipe out the current fragile recovery from the worst recession since the Great Depression and throw the world back into the abyss of another deep recession.
Nepal is already feeling the impact of the upheaval in the oil-producing regions. For instance, the people are angry with the government for failing to evacuate its nationals from Libya and for the rise in oil prices. If the instability widens, Nepal might have to rescue a large chunk of the two million Nepalis working in those regions. It will be a logistical, financial and political nightmare.
The government does not have the logistics—plan, planes and ships—to bring home so many people; neither does it have the financial resources to undertake such a massive task. When these people are brought home with external help, as was done during the second Gulf War, the returnees will ask for jobs and economic opportunities that might lead to unrest and even revolt. The impact of the rising oil prices on the economy will be equally devastating. Though petroleum products constitute only 11 percent of the country’s energy mix, Nepal’s vehicular traffic and trucking will come to a halt. Her oil reserve of 71.5 thousand kilolitres will be barely enough for 15 days. Hoarding and speculation will make the reserve last shorter.
It will be naïve to believe that Indian Oil Corporation will keep its pledge to supply petroleum products uninterrupted until March 2012, under the current agreement. India herself is an oil-deficit country. China is in the same boat, further encumbered by the huge geographical barrier dividing the two nations. Our economy will go down the hill.
Evidently, while the rest of the world learned valuable lessons from the oil-shock of 1973/74, Nepal did not. For instance, developed countries reduced their dependence on oil down to 32 percent. In sharp contrast, Nepal continued to splurge on oil, as the annual rise in demand by 20 percent demonstrates.
If Nepal had learned anything from the shock, she would have been producing at least 6,000 MW hydropower, not just puny 600 MW, by now. Worse still, rather than developing more electricity-operated trolleybus service, the government allowed corruption and mismanagement to destroy the only trolleybus service in Kathmandu constructed with Chinese assistance.
More than anyone else, political leaders are to blame for this plight of Nepal. Engaged in perpetual power games, they have no time to think about the Nepalis living at home and working abroad; no contingency plan to maintain the regular flow of petroleum products; and no vision to reduce Nepal’s dependency on foreign oil. This frightens me.
A reader commented on my recent article saying that I should share the blame for “championing” to bring such leaders to power. He has a point. However, people like me fought for democracy and freedom and not for selfish and corrupt leaders. I am happy that the Nepali people now have the power to throw the rotten apples out through the ballot, without facing the bullet from the likes of Colonel Gaddafi in Libya.
That said, this is what the leaders need to do in the face of the current Middle East crisis. First, they should prepare a contingency plan to rescue Nepali nationals from the troubled countries and to increase petroleum reserves. Second, they must prepare a crash programme to implement a number of hydropower projects to create jobs and reduce dependence on foreign oil, which is going to run out after being incredibly expensive.
The upheaval in the oil-rich countries, we all hope, will subside. It might; but hope is not a policy. Leaders do not have the luxury of blaming the king or panchayat system for their failure anymore. If they wake up to this reality and act, Nepal will escape many recessions triggered by the shortage of petroleum products in the future and become a prosperous nation.
Sharma is former ambassador to the United Nations and the United Kingdom
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