Recent developments on climate change and crude oil production

The U.S. Embassy in Kenya has suspended approximately US$21 million in assistance to Ministry of Health because of concerns about corruption. Late last year, the country’s anti-corruption commission started an investigation in the Ministry over the alleged diversion of more than US$50 million based on an audit by the National Treasury. The funds were meant to provide free maternity care. There were also reports of weak accounting procedures at the Ministry. Reuters had reported the head of Kenya’s anti-corruption commission as having stated that a third of the national budget was lost to corruption every year. The government disputed the figure, citing poor paperwork. The President, however, stated that his hands were tied and criticised the judiciary and other agencies for not doing more about the problem.

In last week’s column, we referred to a new BBC documentary to be aired this summer in which world-renowned physicist Stephen Hawking asserted that human beings are running out of time on planet Earth mainly because of climate change, the effects of nuclear war and genetically engineered virus. His new prediction, down from 1,000 years, is that unless we colonise another planet we will perish in the next 100 years!  In an earlier column, we had stated that: (a) today, carbon dioxide (CO2) levels are at its highest in recorded history at more than 400 parts per million; (b) the average motor car emits about six tons of CO2 every year which works out 20 pounds for every one gallon of gas used; (c) ice is melting at an ever increasing rate at the earth’s poles, especially in Antarctica where a 400-foot waterfall has been found; (d) in just a matter of time, an iceberg of the size of Delaware will break off from the Antarctica’s continental shelf; and (e) last March was assessed the second hottest month in recorded history.

In today’s article, we discuss some recent developments on two related topics: climate change; and the production of crude oil.

The United Nations meeting in Bonn

The United Nations Framework Convention on Climate Change (UNFCCC) is currently meeting in Bonn, Germany, to discuss climate change issues and more particularly how to implement the technical aspects of the Paris Agreement. A meeting was to be held last Tuesday to determine whether the United States would withdraw from the Agreement, especially in the light of its withdrawal of financial support for climate bodies, including the UNFCCC Secretariat hosting the annual negotiations. U.S. President Donald Trump had proposed an unspecified reduction in funding for the UN and its agencies, as well as enforcement of a 25 percent cap on U.S. funding for Peacekeeping Operations. Current U.S. funding for the UN Secretariat is 22% of the Secretariat’s budget of US$5.4 billion and 28.5% of Peacekeeping budget of US$7.9 billion, based on assessed contributions agreed by the General Assembly. Agencies such as the UNICEF, World Food Programme and UNHCR are funded voluntarily by governments, with the United States being the top contributor. The European Union has urged the United States to continue its financial support for the UN agencies and to remain committed to the Paris Agreement.

The U.S. Senate did not ratify the Paris Agreement and therefore there is no binding treaty. This means that the United States could withdraw from the deal without legal penalty. The Tuesday meeting was postponed at the request of the United States because it was yet to decide on the way forward. The U.S. President had indicated during the election campaign that, if elected, the United States would withdraw from the Agreement, citing climate change as a hoax perpetuated by China. The latter is the world’s biggest emitter of greenhouse gases from burning coal, oil and gas with about 25 percent of the global total, followed by the United States with around 15 percent. Under President Obama, the United States had pledged to cut emissions by 26-28% from 2005 levels by 2025.

The Paris Agreement was entered into in 2015 by 195 countries to curb planet-harming fossil fuel. According to the UNFCCC, the Agreement brings together all nations for the first time into a common cause to undertake ambitious efforts to combat climate change and adapt to its effects, with enhanced support to assist developing countries to do so. The Agreement aims to strengthen the global response to the threat of climate change by keeping a global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.

Additionally, the Paris Agreement aims to strengthen the ability of countries to deal with the impact of climate change by putting in place appropriate financial flows, a new technology framework and an enhanced capacity building framework, thus supporting action by developing countries and the most vulnerable countries, in line with their own national objectives. It also provides for enhanced transparency of action and support through a more robust transparency framework. All Parties to the Agreement are required to put forward their best efforts through “nationally determined contributions” and to strengthen these efforts in the years ahead. This includes reporting regularly on their emissions and on their implementation efforts. In 2018, the collective efforts will be assessed in relation to progress towards the goal set in the Agreement. Thereafter, such efforts will be assessed every five years.

This year’s Bonn meeting aims to start the design of a “rulebook” for implementing the Paris Agreement in terms of limiting average global warming as set out in the Agreement. Scientists believe worst-case-scenario climate change impacts — rising seas, harsher droughts, more intense storms, disease-spread and conflict over dwindling natural resources – are likely to be kept in check if there is adherence to measures set.

Crude oil production

In May 2015, ExxonMobil announced an oil and gas discovery in Guyana and confirmed some 18 months later “a world-class resource discovery of 1 billion oil-equivalent barrels”. This is good news. However, it is unclear what implications the restriction in oil production by Organisation of Petroleum Exporting Countries (OPEC) as well as the increase in production by the United States and Russia, will have on Guyana. OPEC has agreed to cut production of crude oil during the first half of this year by almost 1.8 billion barrels per day (bpd) and has pledged to continue doing so well into 2018. This action was taken in the light of oversupply of crude oil over the last two years which saw prices falling below US$50 per barrel. Last Monday, Saudi Arabia, the top exporter of crude oil, announced that it would do whatever it takes to rebalance the market. On the other hand, the United States has upped its production by over 10 per cent since mid-2016 to 9.3 billion bpd, almost near to the output of Russia and Saudi Arabia.

Here in Guyana, there is no publicly available information as to the likely cost of production for a barrel of crude oil and whether ExxonMobil will begin production if the price remains depressed. Nor do we, as members of the public, know the exact extent of oil revenues that will accrue to Guyana. In the circumstances, we need to be guarded when making pronouncements in relation to such revenues without providing citizens with the necessary information to enable them to make their own judgement on the matter.

That apart, we also need to be extremely careful in not becoming over-dependent on oil revenues and falling into the trap of the “Dutch disease”. Dutch disease is defined as “the negative impact on an economy of anything that gives rise to a sharp inflow of foreign currency, such as the discovery of large oil reserves. The currency inflows lead to currency appreciation, making the country’s other products less price competitive on the export market. In economics, Dutch disease is the apparent causal relationship between the increase in the economic development of a specific sector (for example natural resources) and a decline in other sectors (like the manufacturing sector or agriculture)”.

Linked to the Dutch disease is what has been described as the “resource curse”, also known as the paradox of plenty. Countries with an abundance of natural resources, specifically non-renewable resources like minerals and fuels, tend to have less economic growth, less democracy, and worse development outcomes than countries with fewer such resources. The term was coined by British economist Richard M. Auty in 1993 after he considered how countries with rich resources “often develop more slowly, more corruptly, more violently and with more authoritarian governments than others”. In 2010, for example, the Time Magazine reported that an estimated US$1 trillion worth of minerals, including copper, iron, cobalt and gold was discovered in Afghanistan. The then presidential spokesperson claimed the discovery would “benefit all Afghans in the long run”. The magazine continues as follows:

Think oil in Nigeria, blood diamonds in Sierra Leone and Angola, tin in Bolivia … There are as many examples as there are elements on earth. What should be a blessing turns out to be an incentive for conflict and corruption and, in the wrong hands, a source of ruin. A subset of the curse, Dutch disease, describes how, even if governments behave themselves, their countries can still suffer, as happened to the Netherlands when it developed North Sea gas in the 1970s. That pushed up wages and exchange rates, making other products more expensive to produce and sell abroad.

Only very good (and lucky) governments seem to avoid the curse. Norway used North Sea oil to transform itself from an economy based on fish, trees and boats into a diverse and equitable place by virtue of careful macroeconomic management, strong institutions and a commitment to fairly distributing the wealth. The curse began to bite in the 1990s, but by then Norway had other, bigger problems, like the worsening climate change its hydrocarbons had helped bring about. No one escapes the curse forever.

While we are awaiting oil revenues to flow in the next four or five years, we must not be neglectful of our responsibilities to exploit and develop the potential of other sectors of the economy. We must consider oil revenues as a “bird in the bush” because of so many uncertainties in the coming years, especially the possibility of nuclear war arising from the stand-off between the U.S. and North Korea; the conflict between India and Pakistan over Kashmir; the war against ISIS; and issues relating to global warming and climate change and the thrust towards renewable energy in the form of hydroelectricity, solar energy, and wind power.

 

 

 

 

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