The global economy has recently hit a turning point, where the environment and a massive rise in oil prices sets to change the way we live, trade and do business. Not since the 1970s has such trauma in oil prices pushed policymakers into emergency mode, scurrying to satisfy the electorate which is convinced of a future environmental disaster by balancing policymaker's inability to alter oil prices with the ever rising inflation and food prices. The major debates on how to handle the environment and the oil shock however have differed in policy and approach outside of the US and Europe, where many oil producing nations and developing nations feel the immediate effect, either by the dominant nature of the energy industry in their country or massive food shortages due to high levels of poverty in their streets and shantytowns. While no country can claim a victory over inflation in the current global economy, some strategies might work better than others in oil producing and developing nations.
In the FT.com article Latin America pays the price for fuel subsidy by writer Richard Lapper, the author details the pros and cons of fuel subsidy policies in the region. In the Americas there are three main types of countries to note in this latest oil crisis. The first types are those like Venezuela and Mexico, who are for the most part oil producers. These countries have a benefit to some degree in this crisis, as they have what everyone wants. Hugo Chavez and Venezuela has gone from $US 7 billion in oil revenues in the last two years to nearly $US 54 billion. The result of this is that Venezuela subsidizes its fuel to keep it at 4 cents a litre, but also loses an approximate $11US billion in export revenue because of their subsidization of fuel in the country. Mexico, while a net exporter of fuels also is paying an approximate $19US billion to re-import refined fuel product so it can also maintain a fuel subsidy inside the country. The result however is that the state is taking these costs as opposed to the citizens and industry themselves. At 4 cents a litre and 69 cents a litre at face value, oil exporting nations can likely keep their fuel prices low for some time and avoid the political turmoil that is overtaking many of their neighbors. In Asia, many countries who are also sensitive to inflationary pressures have given up subsidies altogether, allowing their reserved to remain stable while inflation and poverty rise dramaticallya lose-lose situation with few options.
The second type of countries in the Americas are those developing countries which require fuel to be imported and set their fuel prices with subsidies to ease pressure to its citizens from world fuel prices. The most notable country is Chile, importing almost all of its oil, Chile also added $US 1 billion to its energy stabilization fund and reduced the price of fuel via subsidies to 10 cents less a litre. While this has resulted in an immediate reduction in inflationary prices for Chileans, it also costs the state much in reserves which is never a good sign in the Latin American context. Argentina and Ecuador are following suit, raising fuel subsidies to $US 11 billion and $US 1.46 billion respectively. Colombia, which plans to tax oil companies to ease pressure on its own subsidies, hopes to create $US 3 billion in revenues from these taxes, but still plans to subsidize energy on its own in the process for at least the next year. Peru stands out, as its subsidies are being slowly reduced, but at the loss of its citizens who have already incurred a 4 cent per litre increase in prices.
The reasons for diverse policy on fuel prices in the Americas are a result of the chaos that fell over the region from the oil crisis in the 1970s. Many countries like Mexico and Brazil, who are net energy exporters, took the initiative in the 1970s and 80s to borrow funds at very low rates to fund the expansion of their oil industry and take advantage of high fuel costs at the time. When the price of oil dropped, and their loans were recalled, it left not only Mexico and Brazil in shambles well into the 1990s, but turned the entire region into a case study for economic collapse and record high levels of inflation and inequality. Brazil, with its recent step by step anti inflation policy has boosted investor confidence, aided by recent discoveries of massive oil fields in Brazilian waters and a stable growth rate, spurred on by the growth of good economic policy and political responsibility. This has occurred in the last few years however, after inflation and economic collapse from the 1980s until the new millennium. Unlike Venezuela, Brazil has sought growth through political cooperation, economic diversity and an opening up of trade and social policies, allowing it to remove itself from becoming a nation dependent on one major energy export and avoid future political chaos by trying to be inclusive to all elements in society. A fruitful result in Brazil is the popular use of sugar cane based Ethanol fuels being used in the country in autos and industry, with a policy balance being created so food prices are not strongly affected. Part of much of the food crisis is that oil raises the costs of shipping and new unstudied environmental policies have created a strong reaction to the global rise in corn prices, a possible Ethanol fuel source which has not run any cars yet, but have put many of the world impoverished into starvation. With inflation being the curse of Latin America, and oil often becoming the root cause of much of the regions economic collapse, even in oil producing countries, Latin America needs to find a proper balance between taking advantage of oil and reducing poverty, and subsidies their nations with clever fuel policy and maintaining national reserves. There is no definitive answer to the modern oil crisis, there are just policy options to keep nations afloat.
The third type of countries in the Americas which have a diverse fuel strategy are those developed countries which are feeling the effect of the rise in oil prices. While many are already familiar with the US position on the issue, a country such as Canada needs to be examined as well. Canada, unlike the US is a major oil exporting nation with massive reserves in the province of Alberta, which is thought to have as many untapped oil resources amounting to that of Saudi Arabia by some speculators. Canada's fuel policy however does not subsidize its local retail petrol stations, but charges similar world prices to many other developed nations who do not have a large fuel resource. While the Canadian Government has no plan for a fuel subsidy, there are some measures taking place to move its large auto industry into more environmentally friendly technologies. Short term pains affect many in the country as automobiles in such a large country are a necessity, and transport is a requirement for Canadians to maintain itself and allow for economic opportunities for all people across the country. Fuel policy has elicited some reactions however, where in the Province of British Columbia, a energy surcharge has been places on residents of the province to raise energy prices to the benefit of the environment, and the detriment of small and medium sized companies that are being exterminated by high fuel prices and will no doubt be gravely hurt by extra taxes which will raise the cost of all functions of society. With nearly 70% of Canadians working for small and medium sized enterprises, the government in the province has done nothing but to aggravate many in the process. In reality the best motivator of environmental technologies are high fuel prices, but when there is a natural rise in the price of fuel, adding an energy tax on top of it produces minimal environmental gains at the hands of citizens who not only are at a loss from the market price, but are in competition with others who also suffer from high energy prices but do not have the burden of an extra tax. This strategy has been adopted by the Opposition leader of Canada's Liberal Party, Stephane Dion (sse above picture), who wishes to place a Carbon Tax on top of Canada's industry during the fuel crisis, creating higher fuel prices in Canada, likely to go above any other country in the world. While the environmental technologies will benefit from higher fuel prices, taxing a country in the middle of it for the benefit that has already been achieved is simply absurd. With the current party leader having a poor record on environmental policy when he held the position of Environment Minister in the last government, it may be that Canada becomes the country that has the largest number of oil reserves in the developed world with the highest fuel prices in the developed world if Dion is elected based on his energy policy for Canada. At the moment, Canada has one of the most stable economies in the world, which could easily become history with poor policy making by whoever claims the leadership in the next few months.
While predicting fuel policy for the future is a gamble for many policy makers in the Americas, they must be accountable in their actions not to overcompensate via fuel subsidies at the expense of national reserves, as inflationary pressures do not simply result from the cost of living, but also from currency fluctuations and national reserves. Balanced policy may make the oil burden less dramatic, but it is important to address the issue with a policy that does not only address the environment and commerce, but also food prices and poverty as people should always be a priority above ethanol and environmental policy theories in forming energy policies in the Americas. While all countries have learned a lot from the crisis of the 1970s, not every country will escape possible damages from this most recent bout of oil shocks. Sound Policy is the key, but offers no assurances to the fragile economies of Latin America.
