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Oil Price Rise Causes Global Shift in Wealth
By Steven Mufson
The Washington Post

Saturday 10 November 2007

Iran, Russia and Venezuela feel the benefits.

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 of 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 Nstor 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 Chvez. 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.