The document summarizes the findings of a policy study on the impacts of rising oil prices on developing countries and implications for achieving the Millennium Development Goals. Key findings include: 1) oil price increases have had relatively moderate macroeconomic impacts so far but future impacts are uncertain and risks are tilted upward; 2) impacts vary significantly across regions and countries depending on their energy and economic profiles; 3) at the national level in India, impacts have been modest on GDP but inflation has increased moderately and trade deficits have risen; 4) however, sectoral and household impacts have been more significant through higher transportation, fertilizer and energy costs negatively impacting poor communities. The study calls for further research and consultation to improve assessments.

1. Policy Study on Impacts of Rising Oil
Prices on the Poor and Implications
for the MDGs
Presented to:
UNDP Technical Review Committee
23-24 March 2006, Bangkok
Rekha Krishnan & Team
TERI

2. Study Objectives
 Assess overall economic and social impacts of oil price increases on
developing countries of the region, and their specific impacts on the
poor’s access to modern energy services.
 Assess impacts on key economic and social sectors, e.g.,
agriculture, transport, industry (especially SMEs), commerce,
physical infrastructure, health and education.
 Assess impacts on various components of MDGs and relate the
outcomes to progress made towards meeting the MDGs.
 Assess effectiveness of energy strategies, policies and mechanisms
to enhance the poor’s access to modern energy services against oil
price increases and continued volatility in global markets.
 Identify strategic directions and policy options for regional
governments to cope with future oil price uncertainties, with special
reference to options to safeguard the interests of the poor.

3. Coverage of Interim Reports
 Global assessment
— overall macro-economic impacts at international
level based on secondary data
 Regional assessment
— region-specific impacts, accounting for sub-
regional diversities, based on secondary data
 National assessment
— macro level assessment based on secondary
data, combined with micro level survey of poor
communities in 2 villages in India

4. Key Findings of Global Assessment:
Highlights of recent oil price trends
 Rise in prices, though persistent, has been relatively gradual in
comparison to some previous spikes.
 In real terms, current oil prices are still below the all-time highs
reached in 1979.
 Recent rise in prices due to a combination of strong demand
against tight supply and rising marginal costs less rather than a
consequence of supply disruptions as such.
 Oil price rise coincides with a period of dollar instability.
 Marked growth in demand for transportation fuels – gasoline
and diesel.

5. Key Findings of Global Assessment:
Average nominal oil prices: 1990-2005
Average Nominal Prices of Crude ($/barrel)
average of Brent, WTI and OPEC
60.00
50.00
basket ($/barrel)
40.00
Average of Nominal
Prices of Brent, WTI and
30.00
OPEC Basket ($ per
barrel)
20.00
10.00
0.00 04
0
2
4
6
8
0
2
9
9
9
9
9
0
0
20
19
19
19
19
19
20
20
year

6. Key Findings of Global Assessment:
Nominal and Inflation-Adjusted Monthly
Oil Prices: 1946-2005
Source: Financial Trend Forecaster, 2006

7. Key Findings of Global Assessment:
Major factors underlying oil price
increases
 Substantial growth in world oil demand concentrated in Asian
developing countries, particularly China, and the United States.
 Declining excess supply capacity, oil companies’ rationalization and
cost-cutting efforts, and concentration of excess capacity in a few
countries — leading to increased vulnerability of world oil market.
 Unstable Middle-East situation and oil supply insecurity elsewhere in
Russia, Nigeria and Mexican Gulf coast
 Low levels of investment in exploration in Mexico and OECD Europe.
 Inflow of speculative money and risk premium’s emergence which
may have caused excessive price hikes.
 Underinvestment in the sector, particularly in exploration.
 Environmental regulations resulting in reduced capacity to
manufacture transportation fuels, such as gasoline, diesel and jet fuel.

8. Key Findings of Global Assessment:
Potential macro-economic impacts based
on past experience
 Contraction of economic output — 0.25 to 0.50% per $10/barrel of increase in
oil prices.
 Rise in cost of production of goods and services, depending on ‘oil intensity’ of
sectors/activities.
 Trade deficits due to higher cost of exports.
 Higher general price levels/inflation, with possible wage-price spirals as
experienced during first oil price shocks of 1970s.
 Unemployment triggered by cost-cutting measures by manufacturers/service
providers.
 Volatility in equity and bond valuations, and in currency exchange rates due to
changes in economic activity, corporate earnings, inflation and monetary
policy.
 Incentives for energy suppliers to increase production (to the extent there is
scope for it) and investment, including investment in non-oil energy options.
 Reduction in oil demand where prices are passed through to consumers.

9. Key Findings of Global Assessment:
Actual macro-economic impacts observed
so far
 Decline in world GDP growth by about 0.7% during 2004-2005,
when oil prices rose steeply.
 Stable aggregate consumer price indices for developing and
developed nations.
 Consistent decline in oil intensity of GDP irrespective of oil price
trends.
 No marked change in per capita oil consumption.

10. Key Findings of Global Assessment:
Reasons for lack of dramatic impacts
 Oil price rise coincides with economic revival and low inflation
where firms and governments are less able to pass on higher
energy costs to prices of goods and services because of strong
competition and consumer pressures.
 Rapid economic growth in some developing countries, notably
China and India.
 Weakening of US$ since 2002, partly offsetting impact of higher
oil prices in many countries, especially in the Euro zone and
Japan.
 Relatively low interest rates, though this trend is being reversed.
 Question of time-lag, depending on how sustained oil price
trends will be.

11. Key Findings of Global Assessment:
Outlook for future
 Up till 2010, oil markets may remain broadly balanced, with
incremental oil demand being met mostly by higher non-OPEC
production.
 However, prospects for higher spare capacity are unfavourable, so
market will likely remain tight and vulnerable to risk of large,
unexpected price changes.
 From 2010 onward, OPEC supply may increase significantly as
non-OPEC production peaks while global demand continues to rise.
However, there would be growing upside risks to prices due to:
o strong demand side pressures from Asian countries, particularly
China,
o continued tightness in North American gasoline markets
o political instability, especially in the Middle East
o long lead times and high costs of establishing new refining
capacity
o underinvestment in supply infrastructure in various countries.

12. Key Findings of Regional Assessment:
Macroeconomic impacts of oil price rise
 Real GDP growth: Asian sub-regions not adversely impacted so far
due to economic revival in OECD economies which has spurred demand
for Asian exports. GDP growth flat in Pacific Island Countries since 1990.
 Inflation: No significant inflationary impact so far in South-East Asia,
average inflation rates in North-East Asia and Mekong, moderate
increase in South and West Asia since 2000. Relatively low inflationary
impacts linked to moderate pass-through in most economies with
administered prices for petroleum products. Pacific Island Countries with
market-determined pricing report increases in inflation, particularly
transportation costs.
 Foreign exchange reserves : Increase in all sub-regions since 2001,
faster than growth in current account surplus due to capital inflows into
the region.
 Trade balance: No major adverse impact in Asia sub-regions.
Significant negative impact in Pacific Island Countries.

13. Key Findings of Regional Assessment:
Economic profiles of sub-regions
 North-East Asia and Mekong
- Relatively health GDP growth rates
- High inflation in Lao PDR, followed by Mongolia and Vietnam
- Low openness of Cambodia and Lao PDR economies
- China’s high foreign exchange reserves
 South-East Asia
- Negative GDP growth in Timor Lese
- High inflation in Myanmar
- Stable GDP growth and control over inflation in Malaysia and Thailand
- High trade deficit of Philippines
 South and West Asia
- Healthy GDP growth rates in all countries
- High inflation in Iran and Sri Lanka
- India’s high foreign exchange reserves
 Pacific Island Countries
- High dependence on imports
- Narrow range of exports, dependence on tourism
- Fiji and Papua New Guinea with greatest diversity of economic activities
- Overall, low dependence on/potential for domestic growth

14. Key Findings of Regional Assessment:
Energy profiles of sub-regions
 North-East Asia and Mekong
All economies, except Vietnam, are oil importers. Cambodia and Lao
PDR are heavily dependent on traditional fuels.
 South-East Asia
Malaysia is the only net oil exporter, with Indonesia’s status reversed in
2004. Energy use patterns differ significantly between nations with
Myanmar using the least energy per capita and largely dependent on
traditional fuels.
 South and West Asia
All economies, except Iran, are net oil importers. Afghanistan, Bhutan,
Maldives, Nepal and Sri Lanka do not produce any oil. Bhutan, Nepal
and Bangladesh have high dependence on traditional fuels.
 Pacific Island Countries
None of the economies, except Papua New Guinea, produce oil.
Considerable interest in renewable energy sources, though overall
shares in energy supplies remain low.

15. Overall Conclusions of Global and
Regional Assessments
 Eventual impacts of oil price likely to affect oil-
importing developing countries most severely
 Countries with weak policy frameworks, low foreign
exchange reserves and limited access to international
capital markets will be worst-affected
 Policy action favouring price pass-through (subsidy
removal) needed to trigger demand side responses
 Technological responses will be crucial — e.g., new
transport infrastructure, non-conventional oil
production, renewable energy, efficient energy
production/use processes/equipment

16. Key Findings of National Assessment:
India: Macroeconomic impacts of oil price
rise
 No decline in consumption of crude and petroleum products.
 No impact on GDP, including agricultural and industrial GDP.
 Only a modes impact on Inflation, partly due to partial pass-through of
oil price increases to consumers and partly due to low weightage given
to petroleum products in consumer price index.
 Increase in trade deficit.
 No effect on public spending on physical infrastructure and social
sectors (education, health and poverty alleviation).
 Increase in public spending on renewable energy development.
 Electricity pricing unlikely to be impacted since only 10% of electricity
generation is oil-based and tariff setting is influenced by several
economic, social and political concerns.
 Natural gas prices increased 12% for the power and fertilizer sectors,
and 136% for other industrial consumers. No increase in prices for
small-scale industries and transport sectors.

17. Key Findings of National Assessment:
India: Sectoral impacts of oil price rise
 Petroleum sector : Oil marketing companies, which bear 85-
90% of subsidies on kerosene and LPG, now recover one-third
of their loss from upstream oil companies.
 Transport sector : Since 2002, prices of petrol increased by
60-70% and of diesel by 80-90%, with important repercussions
for industry due to higher costs on account of transportation.
Higher transportation costs will also impact on people’s access
to workplace, markets, and education and health centres.
 Fertilizer sector : Prices unchanged since 2002 despite
growth in international prices. 25% increase in government
subsidy per tonne of urea since 2000.

18. Key Findings of National Assessment:
India: Microeconomic and poverty impacts of oil
price rise — community-wide impacts
 Income patterns : Increase of 25% among poor households (income
< or =Rs 3,000 per month) and by about 61% in non-poor households.
No change in employment pattern, which continues to depend on
agriculture.
 Expenditure patterns : No change in share of energy expenditure in
total household spending on necessities (including food, energy, water
and public transport). However, if expenditure on diesel is included,
energy expenditure has declined, possibly due to reduced diesel
consumption of diesel.
 Impact on major economic activity (agriculture) : Only 3 out of
the 11 farming families surveyed owned diesel pump sets, others used
electric pump sets. All farmers travelled 8-14 kms for various activities
such as buying seeds, fertilizers, etc., and for taking produce to market.
Expenditure on transportation increased by about 50%. There has also
been an increase in fertilizer costs of about 25% and pesticide costs by
over 30%.

19. Key Findings of National Assessment:
India: Microeconomic and poverty impacts of oil
price rise — direct impacts on households
 Changes in energy expenditure : 45% increase among poor
households and 59% increase among non-poor households, mainly due
to higher prices of kerosene, LPG and diesel.
 Changes in energy consumption : 39% of households have
stopped using LPG/kerosene for cooking while 44% have reduced
consumption of these fuels to less than 50%. Resultant increase in
biomass fuel consumption stated to have increased health hazards and
time expenditure on fuel gathering. Many households stay in darkness
for longer hours due to reduced use of kerosene for lighting.
 Transportation costs: Cost per trip by public transport to school,
health centre and marketplace have nearly doubled. Health care
affected the most due to 8 kms. distance to nearest hospital. Some
families have withdrawn children from better quality schools to lower
quality schools closer to villages. Poor households affected more due to
longer travel distance and higher reliance on public transport.

20. Comments for Follow-Up
 Global Assessment
o Generally benign assessment of impacts so far and outlook due to
reliance on limited secondary data sources — need for further
research and live consultations to present more conservative view
as an alternative future
o Time lag factor not fully addressed, with inadequate coverage of
longer term impacts
o Basic assumption of cyclical trend in oil prices debatable as there
is an emerging school of opinion suggesting prices may have
entered a secular trend
o Importance of US Dollar’s future and its potential adverse impacts
on world economy and oil prices not fully understood/addressed
o Related to above, potential implications of emerging barter trade in
oil (e.g., Venezuela) and Euro bourse for oil not addressed

21. Comments for Follow-Up
 Regional Assessment
o Geophysical and geopolitical informative but not very useful
to assess vulnerability of sub-regions
o Poverty and inequality profiles useful, but need to be
correlated to energy profiles
o Need for live consultations with different stakeholders
 National/micro assessment
o Longer term impacts not adequately covered
o Contradicting results of micro level assessment need
reconciliation
o Some data, e.g., reversion to biomass due to LPG/kerosene
price increase, questionable as these are not common
cooking fuels, especially by poor.