Analysis: Has oil gone M.A.D?

Economic mutually assured destruction? What do trends in high oil prices
mean for global geopolitical stability? Who can afford to disrupt oil
production or supplies? Importers cannot sustain higher prices and fear the
pain, exporters cannot afford the damage higher prices would do to their
export markets and inevitable demand side adjustment.

Given the mutual
interdependence of Russian and European markets, rumoured threats published today (Kommersant and the Telegraph in the UK) that Russia could cut some oil supplies to Europe as soon as Monday in response to European threats of sanctions seem unlikely to materialise, as do the sanctions themselves. Since August 8th and the outbreak of the current Georgia conflict, un-surprisingly there has been a Westward flight of money from Russia. Renaissance Capital suggest US$8-20bn has left the country August 8th to 15th and the flight continues in response to geopolitical destabilisation.
What do trends in high oil prices mean for geopolitical stability?

The world has witnessed a string of "oil wars" as concerns over energy
security rise and major economic powers vie to secure resources for present
and future. With oil prices now as high as they are however, and
threatening to shoot back up to their recent record levels and beyond at
the slightest provocation, the geopolitical situation seems to have grown
increasingly precarious, precarious to the point perhaps, where it is not
unreasonable to speculate that where oil has precipitated conflict, at
current prices oil may have a certain geopolitical stabilising affect -
after all with oil prices already at nose-bleed levels, the pain that would
inevitably be induced by any conflict in an oil region and the consequent
disruption to supply/production, seems likely to have an inhibiting effect
(not least of course for a major oil importing economy such as the US).
This is not a happy or a comfortable equilibrium however, since it is an
order bound together only by a principle of mutually assured destruction
(M.A.D) and increasing competition for resources will increasingly stress
this balance.

With ever more fractious power manoeuvres in eastern Europe, and the Arctic
increasingly crowded with a buzz of survey ships and submarines from all
sides of the circle fighting over where continental shelves begin and end
etc. it seems clear that, current bickering over who is starting the new
cold war aside, we are clearly returning to a cold war type geopolitics.
While things have clearly been brewing for some time, it is sobering to
speculate on the significance of the latest developments in the Georgia
conflict which apparently marks a clear aggressive shift in Russian foreign
policy: an ever more confident and assertive Russia has declared itself
"not afraid of another cold war" and Russia's representative to NATO Dmitri
Rogozin declaring that "There are two dates that have changed the world in
recent years: September 11, 2001, and August 8, 2008," Mr Rogozin explained
that the West has not fully grasped how the Georgia conflict has heightened
Russians' fears about being surrounded by NATO. "They are basically
identical in terms of significance. September 11 motivated the United
States to behave really differently in the world," he said. "That is to
say, Americans realised that even in their homes, they could not feel safe.
They had to protect their interests, outside the boundaries of the US. For
Russia, it is the same thing."

The undeniable economic interdependence of Russia and the west as suppliers
and markets is bound we must expect, to keep this a cold war and to keep
the situation from escalating beyond certain bounds, but given the shift in
Russian sentiment and confidence, there seems to be something of a question
mark over what to expect next from Russia which cannot be good for business
relations and this incident may well demonstrate how tied, in many ways,
Europe's hands are as they are forced to accept the situation.

Event: Commodity Prices, Capital Flows and the Financing of Investment

Secretary General of UNCTAD Supachai Panitchpakdi, will present The Trade and Development Report 2008, subtitled "Commodity Prices, Capital Flows and the Financing of Investment.”

Tuesday 2nd September 2008, 18.30-20:00
Key Speaker: Supachai Panitchpakdi
LSE, New Theatre, East Building
Discussants: Heiner Flassbeck and Professor Robert Wade
Chair: Professor Stuart Corbridge

The report, which is under embargo until 4 September 2008, highlights the implications of commodity price volatility and one of the major paradoxes of globalization, namely that the “capital poor” developing world is exporting capital to the “capital rich” developed countries. Moreover, those developing countries that are the largest capital exporters tend to invest more domestically and to grow faster than those that still depend on capital imports. These facts create serious puzzles for mainstream economic models and reject most of their predictions. The report calls for a fresh approach to development financing that focuses less on the mobilization of savings and more on the direct stimulation of investment. UNCTAD also makes an important contribution in the report to the Doha Conference to review the implementation of the Monterrey Consensus on financing for development (Qatar, 29 November - 2 December 2008).

Supachai Panitchpakdi began his four-year term as Secretary-General of UNCTAD on 1 September 2005, following his appointment by the UN General Assembly. Dr. Supachai previously served as Director-General of the World Trade Organization (September 2002 to August 2005). He is a former Deputy Prime Minister of Thailand who was entrusted with oversight of the country´s economic and trade policy making. In this role, he was actively involved in international trade policy and represented Thailand at the signing ceremony in Marrakech of the Uruguay Round Agreement in 1994. He was also active in shaping regional agreements, including Asia Pacific Economic Cooperation (APEC), the Association of Southeast Asian Nations (ASEAN) and the Asia Europe Meeting (ASEM).

Heiner Flassbeck is UNCTAD Director of Division of Globalization and Development Strategies. Robert Wade is Professor of International Political Economy at LSE.

The United Nations Conference on Trade and Development was established in 1964. UNTAD promotes the development-friendly integration of developing countries into the world economy. It has evolved into an authoritative knowledge-based institution whose work aims to shape policy debates and thinking on development, with a particular focus on ensuring that domestic policies and international action are mutually supportive in bringing about sustainable development.

The event is free and open to all with no ticket required. Entry is on a first come, first served basis. For more information, email events@lse.ac.uk or phone 020 7955 6043.

http://www.lse.ac.uk/collections/LSEPublicLecturesAndEvents/events/2008/20080728t1155z001.htm

Analysis: Reversal of globalisation?

How flat is the world of the future?

Rising oil prices; US$ devaluation; currency re-valuation and upward pressure on labour costs in emerging markets etc. - what are the implications for global supply chains, global trade and economy?

I sense that globalisation's forward momentum has been taken for granted, has even seemed irresistible, but how robust are the mechanisms which have driven it and could we potentially currently be witnessing some reverse momentum? While much progress has been made on liberalising global trade over the last few decades, record high oil prices, the failure of WTO talks and the re-assertion of state interventionism - driven in part by increasing resource scarcity and competition - all have major implications for global trade. An interesting report I read by Canadian investment bank CIBC World Markets back in May (see link below) says that “The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today,” and concludes that as a result “has effectively offset all the trade liberalization efforts of the last three decades.” Russia meanwhile has declared its intentions to revise trade policies and tariffs it was pressurised into by WTO talks which are disadvantageous to Russia; scarcity and price hikes in agro-commodities meanwhile provoked a rash of dramatic market interventions etc.

It seems hard to avoid the conclusion that globalisation has been fueled by cheap oil and energy prices generally. If oil prices remain high, and especially if they go higher, the efficiency/practicality of the long and complex supply chains circling the globe which we have come to take for granted may come under considerable pressure. The Wal-Marts and the Tesco´s of this world and many many other industries have highly fuel-intensive business models (especially for example where they rely on air-freight), but there long supply chains are becoming bloated as costs are inflated at every stage. While there is a general presumption that as emerging economies develop and the differential in cost of labour is eroded, production will be shifted to less developed countries (the rush to outsource to Eastern Europe has already cooled) there is little escaping the cost of oil.

With inflation of costs at every stage of supply chains, and transport costs rising, it may increasingly make sense to shorten supply chains and move production closer to home. The implications are inevitably complicated, but there already seems to be a visible trend for US companies for example to look more towards Mexico and less to wards Asia for production, a tendency for outsourced services to be brought back onshore, and for Asia to turn more to Asian markets for trade volumes as US trade declines etc. A major question is how this will effect developing markets that have grown on the back of globalisation and US over consumption and we seem to find ourselves in the absurd situation where the world is hoping for the US, already over consuming, to keep up consumption in order to support the other economies of the world.

CIBC Report
http://research.cibcwm.com/economic_public/download/smay08.pdf

Shipping Costs Start to Crimp Globalization
http://www.nytimes.com/2008/08/03/business/worldbusiness/03global.html?_r=1&hp&oref=slogin

Event: The Price of Food: Hunger or Hope for Africa?

16 July, 2008 - 18.00 - Portcullis House, Westminster - London

Speakers
Dr Monty Jones
Executive Director, Forum for Agricultural Research in Africa

Dr Camilla Toulmin
Director, International Institute for Environment and Development

Professor Lawrence Haddad
Director, Institute of Development Studies

Chair
Hugh Bayley MP
Chair, Africa All Party Parliamentary Group

This forthcoming Royal African Society event will address some really key and really topical issues and is very much in line with the themes I have been pursuing and writing about here at InformationOthewise. I encourage anyone interested to come along and anyone who is unable to attend but has questions they would like to put to the panel, to get in touch as FreeHouse representatives will be attending.

The world food crisis threatens to destroy years, if not decades, of economic progress, and may push millions back into abject poverty, stated Kofi Annan recently. But others see the crisis as an opportunity to reform global agriculture and increase longer-term productivity in Africa.

The discussion will look at the implications of the food crisis for Africa – both the opportunities and the threats – as well as possible interventions. It will discuss the possibility of a Green Revolution for Africa. It will also critically assess the role of bioenergy in the current crisis and in the future of sustainable agricultural production in Africa.

Space is limited. RSVP essential: ras_research@soas.ac.uk

Please arrive 15 minutes prior the meeting to clear security. http://www.parliament.uk/documents/upload/faxmap.pdf

Emerging land grab: investment for the future or the birth of a new food Imperialism?

A new rush to invest in agricultural production and the new land grab for Africa: Driver for agricultural development or the birth of a new food imperialism? Maneuvering to assure security of supply in the new global trade economy of "starve thy neighbour"

By the end of the 20th century commodity prices were depressed, mainly because of sluggish demand growth in relation to supply. Their value had been on a downward trend in real terms since the 1980's. Since 2002 however, commodity prices have rebounded, driven largely by growing demand in newly industrialising developing countries. If the cycle of growth and industrialization in these emergent economies continues, the current commodity boom may mark the beginning of a changed commodity economy in the twenty-first century characterized by a long-term demand growth for, and consequent resurgent value of, primary commodities in world trade. (See recent post: "Changing Commodity Economy").

The emergent economies driving this demand growth (China, India etc.) and increasingly competing with the developed world for global resources are inevitably maneuvering to secure their current and expanding long term commodity needs. This has led to a general resource "grab", or rush to secure access/rights to commodity resources principally concentrated in the developing world. Commodity rich Africa has inevitably become a major focus of this scramble for resources, and rising commodity demand has driven economic growth in the continent which has outpaced the developed world (though not developing Asia). This indecorous and at times unscrupulous rush to secure a share of Africa's resources however, has inevitably invited comparison to the "scramble for Africa" by western colonial powers at the end of the 19th century.

While the scramble for mineral and oil resources is a widely acknowledged geo-political phenomenon, with recent hikes in agro-commodity prices, there has emerged a new trend: a scramble for food supplies by direct purchase of agricultural land and investment in agricultural production, mostly in the developing world. Recent record food staple prices left big net food importers and big emergent markets like China and Saudi struggling to secure supply as well as provoking the slashing of import tariffs across the developing world - succeeding almost overnight where WTO talks had failed - but also provoking countries across Asia to impose export restrictions or bans on certain food products.

Apparently as a reaction to this environment, a number of countries are clearly maneuvering to secure food supply and price: Under a recently announced policy proposal being considered by Beijing, Chinese companies will be encouraged to buy farmland abroad, particularly in Africa and South America, to help guarantee food security. Saudi Arabia meanwhile, is looking at plans to establish joint ventures in Thailand, the world's largest exporter of rice, which guarantee the product to to Saudi and any surplus to other GCC countries in a bid to improve long-term food security. The UAE have been investing in agricultural land and production in Pakistan over the last year. Etc.

China already runs an agricultural trade deficit, and, while they are investing increasingly in rural development domestically, demand growth outstrips supply growth. Saudi meanwhile, while rich in oil, is unable to produce domestically the food crops it requires and in fact is scaling back what agricultural production it has in order to conserve on diminishing water resources. Faced with the prospect of higher global food commodity prices and increased price volatility, countries then, like China whose growing consumption outstrips growth in supply and oil rich but otherwise resource impoverished middle eastern countries like Saudi are clearly looking to bypass global commodity markets in order to secure directly affordable long term food supplies.

Saudi officials, apparently without appreciating the irony of this, have declared the necessity of purchasing, for example, rice supply, since they cannot be expected to remain at the mercy of price setting major exporters like India. These comments are thrown in an even more interesting light when considered against current proposals by Vietnam for the development of an OPEC style cartel of rice producers. Jiang Wenlai of the China Agricultural Science institute meanwhile was quoted as saying “China must ‘go out’ because our land resources are limited".

What though will these sort of policies mean for developing countries? Jiang Wenlai is quoted as saying "It will be a win-win solution that will benefit both parties by making the maximum use of the advantages of both sides.” It is not especially clear from this in what sense the developing countries China invests in will benefit, and Jiang Wenlai could not be reached for further comment. It is I suppose suggested however, that foreign investment in agricultural development and improved productivity etc. will benefit the target countries. The situation however, is undoubtedly not this simple, what are we witnessing: new investment in agricultural production? Or the emergence of a new food imperialism and "starve thy neighbour" trade economy?

The Changing Commodity Economy: Prices still a problem for Developing Countries?

Opportunities and challenges for trade and development, and the need for apporpriate policy responses.


Where developing countries, with economies heavily dependent on commodity production and export, have long suffered from the structural decline in the real price of commodities, what are the opportunities and challenges presented for developing countries by dramatic rises in commodity prices of the last few years?

By the end of the 20th century commodity prices were in the doldrums, mainly because of sluggish demand growth in relation to supply. They had been on the downward trend in real terms since the 1980's. However, since 2002, commodity prices have rebounded, driven largely by growing demand in newly industrialising developing countries. If the cycle of growth and industrialization in developing countries continues, the current commodity boom may mark the beginning of a changed commodity economy in the twenty-first century characterized by a long-term resurgence in the demand for, and concequently value of, primary commodities in world trade.

For commodity exporters, the rise in the unit price of exports, all else being equal, results in a positive development in the terms of trade (that is, the relative value of a country's exports to imports). This, in turn, results in a short-term improvement in the trade balance. One would expect then, the commodities production and export dominated economies of Sub-Saharan Africa to benefit from currently bouyant commodity prices. In practice, however, this is far from the case.

Only a few sub-Saharan countries have experienced an improvement in their terms of trade since 2003: (the Federal Republic of Nigeria, the Republic of Mozambique, Cameroon, and, to a lesser extent, Benin). The rest have faced a downturn, with Burkina Faso, the Republic of Ghana, and the Republic of Madagascar experiencing the worst deterioration.

This is at least partly down to the asymetrical impact high commodity prices are inclined to have on developing economies: this is because while on the one hand they are big commodity exporters, they are also often heavily relient on commodity imports, especially in many cases oil, as well as many African agro commodity exporters for example, also being net importers of food, and so the real income increase from rising comodity prices must be calculated against rises in the cost of imports. When price trends are unequal for different commodities, the impact on economies importing and exporting the wrong commodities can be acute. The fact that African oil exporters have done OK from the commodity price boom, while the majority of African states (who are generally high importers of oil - averaging some 16% of imports in 2004) have suffered, seems to support this analysis.










Questions to address:

How to take advantage of high commodity prices?

Who has benefited? Why?

Who has not benefited? Why?

Tendency for economic gains from improved commodity prices to be short lived? How do countries take advantage of and lock in gains from commodity pice boom? Policy? Investment?

Challenges for countries not benefiting? How to overcome/deal with these challenges?

Nature of changing commodity price economy?

Role of Asia (especially China) in shift in commodity economy and its effect on Africa (partly see answers to above, also China driven growth in African commodity exports).


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