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Oil Price Rise Causes Global Shift in Wealth

Iran, Rus­sia and Venezuela Feel the Ben­e­fits

By Steven Muf­son

High oil prices are fuel­ing one of the biggest trans­fers of wealth in his­to­ry. Oil con­sumers are pay­ing $4 bil­lion to $5 bil­lion more for crude oil every day than they did just five years ago, pump­ing more than $2 tril­lion into the cof­fers of oil com­pa­nies and oil-pro­duc­ing nations this year alone.

The con­se­quences are evi­dent in minds and mor­tar: anger at Chi­nese motor-fuel pumps and inflat­ed con­fi­dence in the Krem­lin; new weapons in Chad and new petro­chem­i­cal plants in Sau­di Ara­bia; no-dri­ving cam­paigns in South Korea and big­ger sales for Toy­ota hybrid cars; a fis­cal bur­den in Sene­gal and a bonan­za in Brazil. In Bur­ma, recent demon­stra­tions were trig­gered by a gov­ern­ment deci­sion to raise fuel prices.

In the Unit­ed States, the ris­ing bill for import­ed petro­le­um low­ers already ane­mic con­sumer sav­ings rates, adds to infla­tion, wors­ens the trade deficit, under­mines the dol­lar and makes it more dif­fi­cult for the Fed­er­al Reserve to bal­ance its com­pet­ing goals of fight­ing infla­tion and sus­tain­ing growth.

High prices have giv­en a boost to oil-rich Alas­ka, which in Sep­tem­ber raised the annu­al oil div­i­dend paid to every man, woman and child liv­ing there for a year to $1,654, an increase of $547 from last year. In oth­er states, high prices cre­ate greater incen­tives for pur­su­ing non-oil ener­gy projects that once might have looked too expen­sive and hurt earn­ings at ener­gy-inten­sive com­pa­nies like air­lines and chem­i­cal mak­ers. Even Kel­log­g’s cit­ed high­er ener­gy costs as a drag on its third-quar­ter earn­ings.

With crude oil prices near­ing $100 a bar­rel, there is no end in sight to the redis­tri­b­u­tion of more than 1 per­cent of the world’s gross domes­tic prod­uct. Ear­li­er oil shocks gen­er­at­ed giant shifts in wealth and pools of petrodol­lars, but they even­tu­al­ly fad­ed and economies adjust­ed. This new high point in petro­le­um prices has arrived over four years, and many believe it will rep­re­sent a new plateau even if prices drop back some­what in com­ing months.

“There’s nev­er been any­thing like this on a sus­tained basis the way we’ve seen the last cou­ple of years,” said Ken­neth Rogoff, a Har­vard Uni­ver­si­ty eco­nom­ics pro­fes­sor and for­mer chief econ­o­mist at the Inter­na­tion­al Mon­e­tary Fund. Oil prices “are not spik­ing; they’re just ris­ing,” he added.

The ben­e­fits, to the tune of $700 bil­lion a year, are flow­ing to the world’s oil-export­ing coun­tries.

Two of those nations — Iran and Venezuela — may be bet­ter able to defy the Bush admin­is­tra­tion because of swelling oil rev­enue. Venezuela has used its oil wealth to dis­pense patron­age around South Amer­i­ca, vying for influ­ence even with long­time U.S. allies. And Iran could be less vul­ner­a­ble to sanc­tions designed to pres­sure it into giv­ing up its nuclear pro­gram or open­ing it to inspec­tion.

The world’s biggest oil exporter, Sau­di Ara­bia, is using its reju­ve­nat­ed oil rich­es to build four cities. Projects like these are designed to bur­nish the coun­try’s image, devel­op a non-oil econ­o­my and gen­er­ate enough employ­ment to main­tain social sta­bil­i­ty.

One is King Abdul­lah Eco­nom­ic City, a mega-project on the king­dom’s west coast. Accord­ing to Emaar, a real estate devel­op­ment firm in Dubai, the city will cost $27 bil­lion and be spread across an area three times the size of Man­hat­tan. A con­trac­tor who works there said a wide, palm tree-lined boule­vard cuts a dozen miles across an ocean of sand and ends at the Red Sea. Con­struc­tion work­ers in hard hats are nav­i­gat­ing exca­va­tors, dredg­ing land and dig­ging foun­da­tions for a pow­er plant, a desalin­iza­tion plant and a port. The project will even­tu­al­ly include an indus­tri­al dis­trict, a finan­cial island, a uni­ver­si­ty and a res­i­den­tial area, and is expect­ed to house 2 mil­lion peo­ple.

Despite mega-projects like this, Sau­di Ara­bia is run­ning a bud­get sur­plus. It has paid down much of the for­eign debt it accu­mu­lat­ed in the late 1990s and is adding to its for­eign-exchange reserves.

Rus­sia, the world’s No. 2 oil exporter, shows oil’s trans­for­ma­tion­al impact in the polit­i­cal as well as the eco­nom­ic realm. When Vladimir Putin came to pow­er in 2000, less than two years after the col­lapse of the ruble and Rus­si­a’s default on its inter­na­tion­al debt, the coun­try’s pol­i­cy­mak­ers wor­ried that 2003 could bring anoth­er finan­cial cri­sis. The coun­try’s for­eign-debt repay­ments were sched­uled to peak at $17 bil­lion that year.

Inside the Krem­lin, with Putin near­ing the end of his sec­ond and final term as pres­i­dent, that sum now looks like peanuts. Rus­si­a’s gold and for­eign-cur­ren­cy reserves have risen by more than that amount just since July. The soar­ing price of oil has helped Rus­sia increase the fed­er­al bud­get ten­fold since 1999 while pay­ing off its for­eign debt and build­ing the third-largest gold and hard-cur­ren­cy reserves in the world, about $425 bil­lion.

“The gov­ern­ment is much stronger, much more self-assured and self-con­fi­dent,” said Vladimir Milov, head of the Insti­tute of Ener­gy Pol­i­cy in Moscow and a for­mer deputy min­is­ter of ener­gy. “It believes it can cope with any eco­nom­ic cri­sis at home.”

With good rea­son. Using ener­gy rev­enue, the gov­ern­ment has built up a $150 bil­lion rainy-day account called the Sta­bi­liza­tion Fund.

“This finan­cial inde­pen­dence has con­tributed to more assertive actions by Rus­sia in the inter­na­tion­al are­na,” Milov said. “There is a strong dri­ve with­in part of the elite to show that we are off our knees.”

The result: Rus­sia is try­ing to reclaim for­mer Sovi­et republics as part of its sphere o
f influ­ence. Freed of the need to cur­ry favor with for­eign oil com­pa­nies and West­ern bankers, Rus­sia can resist what it views as Amer­i­can expan­sion­ism, par­tic­u­lar­ly regard­ing NATO enlarge­ment and U.S. mis­sile defense in East­ern Europe, and forge an inde­pen­dent approach to con­tentious issues like Iran’s nuclear pro­gram.

The abun­dance of petrodol­lars has also led to a con­sumer boom evi­dent in the sprawl­ing malls, 24-hour hyper-mar­kets, new apart­ment and office build­ings, and for­eign cars that have become com­mon­place not just in Moscow and St. Peters­burg but in provin­cial cities. Aver­age income has dou­bled under Putin, and the num­ber of peo­ple liv­ing below the pover­ty line has been cut in half.

But many econ­o­mists have called petro­le­um reserves a bane, say­ing they enable oil-rich coun­tries to avoid tak­ing steps that would diver­si­fy their economies and spread wealth more equal­ly. Rus­sia, for exam­ple, has ris­ing infla­tion, soar­ing imports and a lack of new invest­ment in the very indus­try that is fuel­ing the boom.

‘Our Oil Wealth Is a Curse’

The prob­lems are worse in Nige­ria, which is bat­tling an insur­gency that has cur­tailed out­put in the oil-rich Niger Riv­er Delta. The cen­tral gov­ern­ment has been dis­burs­ing its remain­ing oil rev­enue, though cor­rup­tion has under­mined the pro­gram’s effec­tive­ness. The gov­ern­ment has also cut domes­tic gas sub­si­dies, rais­ing prices sev­er­al times over in the name of improv­ing health, edu­ca­tion and infra­struc­ture.

“Our oil wealth is a curse rather than a bless­ing for our coun­try,” said Hal­i­ma Dahiru, a 36-year-old house­wife, as she wait­ed for a bus near a Tex­a­co sta­tion in Kano, the com­mer­cial cap­i­tal of north­ern Nige­ria. Bil­lows of dust enveloped the gas sta­tion as vehi­cles fre­net­i­cal­ly cruised along the lat­erite-cov­ered road, adding to the har­mat­tan haze that blan­kets the city.

“You go to bed and wake up the next morn­ing to hear the gov­ern­ment has increased the price of petrol, and you have to live with it,” she said. “The only sen­si­ble thing to do is to adjust to the new real­i­ty because noth­ing will make the gov­ern­ment lis­ten to pub­lic out­cry.”

New­ly oil-export­ing coun­tries such as Sudan and Chad and the com­pa­nies oper­at­ing there — includ­ing Malaysia’s Petronas and France’s Total — are win­ners. Sudan’s cap­i­tal, Khar­toum, is boom­ing, with new sky­scrap­ers and five-star lux­u­ry hotels, despite U.S. and Euro­pean sanc­tions aimed at pres­sur­ing the coun­try to halt attacks against peo­ple in the west­ern Dar­fur region.

Chad’s gov­ern­ment has used some of its oil rev­enue to buy weapons rather than devel­op the coun­try’s econ­o­my. In east­ern Chad, there are hard­ly any gas sta­tions; peo­ple buy their gas — often for motor­cy­cles, not cars — from road­side stands that sell it out of glass bot­tles.

Oil-import­ing coun­tries face their own chal­lenges. The hard­est hit are the poor­est. Last year, Sene­gal’s bud­get deficit dou­bled, infla­tion quick­ened and growth slowed. The cash-strapped state-owned petro­chem­i­cal busi­ness had to shut down for long peri­ods.

In Chi­na, the gov­ern­ment increased domes­tic pump prices on Oct. 31 by near­ly 10 per­cent with short­ages, rationing and long lines through­out the coun­try. Vio­lence broke out at some gas sta­tions, includ­ing an inci­dent last week in Henan province in which one man killed anoth­er who had chas­tised him for jump­ing to the front of a line for gas.

A scarci­ty of diesel fuel even hit Chi­na’s rich­est cities — Bei­jing, Shang­hai and trad­ing ports on the east coast — which in the past have been kept well sup­plied. In Ning­bo, a city south of Shang­hai, the wait at some gas sta­tions this week was more than three hours, and lines stretched more than 200 yards.

Rumors cir­cu­lat­ed that gas sta­tions or the gov­ern­ment was hoard­ing fuel in antic­i­pa­tion of fur­ther price increas­es, prompt­ing the offi­cial New Chi­na News Agency to warn that any­one caught spread­ing rumors about fuel-price increas­es will be “severe­ly pun­ished.”

Li Lei­jun, 37, a taxi dri­ver, said he was so angry that he was unable to buy fuel that he argued with gas sta­tion atten­dants and called the police. “I still did­n’t get any diesel,” he said.

Since shed­ding ortho­dox Maoist eco­nom­ic poli­cies, Chi­na’s lead­ers have unleashed decades of pent-up demand. Chi­na con­sumes 9 per­cent of world oil out­put, up from 6.4 per­cent five years ago, accord­ing to the Inter­na­tion­al Ener­gy Agency. Yet it still sub­si­dizes fuel. As a result, con­sump­tion this decade has sky­rock­et­ed at an 8.7 per­cent annu­al rate despite soar­ing prices and con­cerns about the envi­ron­men­tal impact of prof­li­gate fuel use.

Con­sump­tion in South Africa is also defy­ing high prices as long-impov­er­ished blacks join the mid­dle and upper class­es. Cars are a sta­tus sym­bol, and gaso­line con­sump­tion jumped 39 per­cent in the decade after the end of apartheid in 1994. New-vehi­cle sales last year rose 15.7 per­cent over 2005.

High­ly devel­oped con­sumer nations have been bet­ter able to adapt. In Japan, which relies on imports for near­ly 100 per­cent of its fuel, near­ly every­one is a los­er — with the big excep­tion of Toy­ota.

Yet Japan has been wean­ing itself off oil for years. It now imports 16 per­cent less oil than it did in 1973, although the econ­o­my has more than dou­bled. Bil­lions of dol­lars were invest­ed to con­vert oil-reliant elec­tric­i­ty-gen­er­a­tion sys­tems into ones pow­ered by nat­ur­al gas, coal, nuclear ener­gy or alter­na­tive fuels. Japan accounts for 48 per­cent of the globe’s solar-pow­er gen­er­a­tion — com­pared with 15 per­cent in the Unit­ed States. The adop­tion rate for flu­o­res­cent light bulbs is 80 per­cent, com­pared with 6 per­cent in the Unit­ed States.

Still, ris­ing fuel prices are push­ing up the prices of raw and indus­tri­al mate­ri­als, as well as food, which relies on fer­til­iz­ers and trans­porta­tion. Because of ris­ing wheat prices, Nissin Food Prod­ucts, the instant-noo­dle indus­try leader, will increase prices 7 to 11 per­cent in Jan­u­ary, the first price hike in 17 years.

Greas­ing Toy­ota’s Gears

A win­ner is Toy­ota. Soar­ing gaso­line prices have buffed the image of the hybrid Prius and Toy­ota’s oth­er fuel-effi­cient mod­els, such as the Cam­ry and Corol­la. Although stag­nant in Japan, sales were strong in North Amer­i­ca, Europe, Asia and emerg­ing mar­kets. In Octo­ber, Prius sales stood at 13,158 vehi­cles, up 51 per­cent from 8,733 in Octo­ber last year. World­wide, the num­ber of hybrid cars sold by Toy­ota sur­passed 1 mil­lion in May.

Britain’s nation­al aver­age gaso­line price topped 1 pound per liter, or about $8 a gal­lon, for the first time this week because of record oil prices.

“But there is very lit­tle pub­lic­i­ty about it — you don’t see many head­lines say­ing, ‘Oil at all-time record high,’ ” said Chris Skre­bows­ki, edi­tor of Petro­le­um Review, a pub­lished by the Ener­gy Insti­tute in Lon­don. “It’s dif­fer­ent from the Unit­ed States. Here, every­one has just accept­ed that it is expen­sive.”

While British dri­vers are feel­ing the pinch, the gov­ern­ment is gain­ing rev­enue, Skre­bows­ki said, because about 80 per­cent of the cost of gas is tax. Because Britain pro­duces almost all the oil it con­sumes, its econ­o­my has been cush­ioned against increas­ing oil prices, Skre­bows­ki said.

But Britain’s North Sea oil pro­duc­tion is dwin­dling, hav­ing peaked in 1999 at 2.6 mil­lion bar­rels per day. Today, pro­duc­tion is 1.4 mil­lion to 1.6 mil­lion bar­rels per day, Skre­bows­ki said, while domes­tic oil con­sump­tion is about 1.7 mil­lion bar­rels a day. Prime Min­is­ter Gor­don Brown, who took office in June, has made ener­gy inde­pen­dence a pri­or­i­ty.

Mean­while, ana­lysts said, Euro­peans buy­ing oil priced in dol­lars are find­ing the ris­ing prices some­what cush­ioned by the strength of their cur­ren­cy. The val­ue of the dol­lar has been slid­ing to record lows against the euro and the British pound.

Argenti­na has tried to keep fuel prices for con­sumers at arti­fi­cial­ly low lev­els.

Pres­i­dent N¿stor Kirch­n­er in recent years has leaned heav­i­ly on ener­gy com­pa­nies to keep prices down, going so far as to call for a pub­lic boy­cott of Roy­al Dutch Shell when the com­pa­ny raised pump prices. Indi­vid­ual sup­pli­ers — wary of attract­ing the ire of the gov­ern­ment — have adopt­ed a pol­i­cy of rais­ing prices grad­u­al­ly and by small amounts.

As the mar­ket pres­sures have mount­ed, Kirch­n­er has signed a series of agree­ments with Venezue­lan Pres­i­dent Hugo Ch¿vez. This year, the two cre­at­ed a project called Pet­ro­suramer­i­ca, a joint ven­ture designed to pro­mote coop­er­a­tive ener­gy projects and pro­vide ener­gy secu­ri­ty to Argenti­na.

In Brazil, the region’s largest econ­o­my, high oil prices have had a dif­fer­ent polit­i­cal effect. Last year, the coun­try became a net oil exporter, thanks to major increas­es in domes­tic oil explo­ration and the coun­try’s broad use of sug­ar-based ethanol as a trans­port fuel.

But new oil wealth can trick­le away even more eas­i­ly than it comes. Last month, Stan­dard & Poor’s down­grad­ed Kaza­khstan’s cred­it rat­ing after the coun­try’s banks lost bil­lions on pur­chas­es of sub­prime mort­gages.

Cor­re­spon­dents Peter Finn in Moscow, Blaine Hard­en in Tokyo, Ari­ana Eun­jung Cha in Shang­hai, Kevin Sul­li­van in Lon­don, Craig Tim­berg in Johan­nes­burg, Stephanie McCrum­men in Nairo­bi, Monte Reel in Buenos Aires and Faiza Saleh Ambah in Jid­dah, Sau­di Ara­bia, and spe­cial cor­re­spon­dents Aminu Abubakar in Kano, Nige­ria, and Alia Ibrahim in Beirut con­tributed to this report.


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