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Analysis of oil export dependency of MENA countries: Drivers, trends and prospects
ARTICLE IN PRESS Energy Policy 38 (2010) 1098–1107
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Analysis of oil export dependency of MENA countries: Drivers, trends and prospects Subhes C. Bhattacharyya n, Andon Blake CEPMLP, University of Dundee, Dundee DD1 4HN, Scotland, UK
a r t i c l e in f o
a b s t r a c t
Article history: Received 4 August 2009 Accepted 29 October 2009
The purpose of this paper is to analyse how oil export dependencies of Middle East and North African (MENA) oil producers have evolved over the past two decades and to identify the main driving factors from an energy policy perspective. The paper expresses the oil export dependency of each economy in terms of a multiplicative identity that captures effective export price, export to primary oil supply ratio, oil dependency and oil export intensity of the country. Using the data for 1980–2006, the evolution in these factors is investigated for seven MENA countries and the influence of the above factors is decomposed using the Laspeyres index. The analysis shows that energy price and increasing energy intensity in the MENA countries have influenced the overall oil export dependency. Reducing the energy intensity can improve oil export revenue share to GDP by 5–10% in most of the countries while Iran can gain significantly by increasing its export volume. & 2009 Elsevier Ltd. All rights reserved.
Keywords: Oil export dependency MENA Decomposition analysis
1. Introduction In the present fossil-fuel dominated world, the importance of oil and gas exporting Middle East and North African (MENA) countries needs no special mention. Although about 40% of the present oil supply comes from this region (BP Statistical Review of World Energy, 2009), it is generally believed that the share will increase in the future as other producing regions see production downturns in the coming two decades. For example, IEA (2008) indicates that about 58% of oil supply would be coming from these countries by 2030. However, such a transformation clearly depends on how the present oil export revenue is utilised and whether these countries are able to maintain substantial surpluses in the future. Yet, these countries face a number of challenges: the high volatility of oil price in the international market makes the investment decision difficult – especially during low oil prices. Given the captive market for oil in the transport sector and because there is a limited likelihood of loss of this market in the foreseeable future, it may make sense to leave the oil in the ground when prices are low. The price volatility also affects the export revenue of these countries and because of the resource curse issue that is associated with the export dependence of a high-value natural resource like oil, the producing countries would always be worried about the misuse of windfall gains from the volatile n
Corresponding author. Tel: + 44 1382 388876; fax: + 44 1382 385854. E-mail addresses: [email protected], [email protected] (S.C. Bhattacharyya), [email protected], [email protected] (A. Blake). 0301-4215/$ - see front matter & 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2009.10.062
market. At the same time, the domestic energy use may not be as efficient as in other countries and with higher income, there may be a larger tendency of wasting more energy, which in turn can put pressure on the oil export surplus. Clearly then an efficient domestic energy utilisation policy will leave more exportable surplus and improve the export revenue in the future. Our understanding of oil-exporting MENA countries remains limited despite their importance and significance in the global energy scene. While studies focusing on the oil production issues (e.g. IEA 2008, 2005), resource curse and macro-economic aspects (e.g. Davis et al., 2003; Eifert et al. 2002; Barnett and Ossowski, 2002) exist, they do not analyse the export dependence and its drivers in a way that could facilitate energy policy developments. Similarly, there are studies on vulnerability of importing countries due to high oil prices (e.g. ESMAP, 2005a, 2005b; Gupta 2008; World Bank, 2005; World Energy Council (WEC), 2008; APERC, 2007; Bacon and Kojima, 2008; UNDP, 2007; Percebois, 2007), or the effect of such high prices on other fuels (e.g. Bhattacharyya, 2009; Thanawat and Bhattacharyya, 2008). However, we are not aware of any study where the effects of oil price volatility on the exporters have been considered. The objective of this paper is to analyse the oil export dependency of seven MENA countries and to analyse how their oil export dependency has evolved over the past two decades or so. We also investigate the linkage of oil export dependence by relating it to effective export price, oil export importance, oil dependence of the economy and primary energy intensity of these economies and identify if any improvements are possible by cross-learning from one another. The paper is organised as follows: Section 2 introduces the methodology used in the paper and discusses the data, Section 3
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presents an overview of the oil export dependence in MENA countries, Section 4 presents the decomposition analysis of the oil dependence factors while Section 5 presents a what-if analysis of selected driver. Finally some concluding remarks are presented.
2. Methodology The methodology used in this work follows the general approach used in the vulnerability analyses proposed in ESMAP (2005a, 2005b) and Bacon and Kojima (2008). While those studies considered the effect of oil imports on the gross domestic product, here for exporters we focus on oil export revenues as a ratio of GDP. This ratio can be calculated using data in local currency or in a common currency depending on the data. The higher the oil prices, export revenue is also expected to increase and consequently, an oil exporter is likely to become more dependent on oil export revenue for its GDP. The first task of this paper is to thus analyse the oil export dependency of MENA countries. While a number of alternative volatility indicators are available (such as standard deviation, coefficient of variation, Parkinson’s measure of volatility, etc.), in our case it is easier to use the log-normal returns formulation to see the effect of change in the price on the volatility index as we have relied on the annual averages of prices and other variables in the analysis. This will be calculated as follows: Returns ¼ lnðVariable in time t=Variable in time t 1Þ
ð1Þ
where variable will be either price or export revenue. The log-normal form is appropriate for a skewed distribution of price data. The components of this oil export dependence can then be identified using a Kaya (1990) type identity as follows: OER OER OEV POS PEC ¼ GDP OEV POS PEC GDP
ð2Þ
where OER is the oil export revenue (in constant US dollar terms, million); GDP the Gross Domestic Product, (in constant US dollar terms, million); OEV the oil export volume, Mtoe; POS the primary oil supply (Mtoe); and PEC the primary energy consumption (supply) (Mtoe). Eq. (2) identifies four drivers of oil export dependency (oil export/GDP) as follows: The first term (oil export revenue to oil export volume) captures the effective export price, on average in constant US dollar per toe of export. The second term (oil export volume to primary oil supply) captures the importance of oil export compared to domestic oil use. Normally exporters are expected to have a high ratio, implying a greater importance of exports compared to oil use in the economy. The third term (primary oil supply to primary energy supply) refers to oil dependency of the economy (toe/toe). High oil dependence is likely to be inversely related to the second term, thereby affecting the overall export revenue potential. The last term (primary energy supply as a ratio of GDP) indicates the primary energy intensity of the economy (toe/$). This, being a measure of effectiveness of energy utilisation in the economy, influences the overall local demand and thereby affects the volume of exportable oil. Accordingly, Oil export dependency ¼ ðEffective priceÞ ðOil export importanceÞ ðOil dependencyÞ ðPrimary energy intensityÞ
ð3Þ
1099
By considering these components and performing a crosscountry comparison, it is possible to identify the best practices for each factor and to analyse the effect of adopting the best-practice policies on other countries using a what-if type analysis. In addition, changes in the oil export dependencies between two periods can be explained using the decomposition analysis framework. While a number of alternative approaches are available in the literature (see Ang, 2004), in this analysis, we shall rely on the Laspeyres index for its simplicity. Thus, Change in oil export dependency ¼ Price change effect þ Effect of change in export importance þ Effect of change in oil dependency þ Effect of change in energy intensity
ð4Þ
For each effect, all the other variables are kept at their initial values. Thus, the effect of each variable is captured independently. The objective of this analysis is to consider if only one variable had undergone a change, what would be the effect on export dependency. Although a residue remains after summating the effects, we have not attempted to artificially adjust the residue (as is suggested in some of the literature on perfect decomposition) for then the method loses intuitive appeal.
2.1. Data sources and preparations The export value of petroleum (in US dollars) was obtained from the OPEC Annual Statistical Bulletin 2007. This avoids the underestimation bias introduced by simply multiplying benchmark crude prices by volume.1 Since petroleum products, aside from fuel oil, fetch a higher price than crude, the multiplication is an underestimate. In order to ensure the consistency of the exchange rate conversions, as well as to set 2000 as the base year, we transformed the data as described next. First, the values of petroleum exports are converted to the national currencies using the IMF official rates (period averages). Then the data are converted to constant (2000) values using GDP deflators (national currencies) from the IMF World Economic Outlook Database (2008). The indices in Eq. 2 can be calculated using the data transformed up to this point. However, for ease of interpretation and comparison, the petroleum export values are re-converted to US dollars at the base year by using the (2000) IMF official exchange rates. GDP data (national currencies) are taken from the IMF World Economic Outlook Database (2008). Again, we converted this data to constant (2000) values by using the IMF GDP deflators and converted to US dollars by using the base year (2000) IMF official rates. The oil export volume, primary oil supply and primary energy supply data were taken from the International Energy Agency databases (Energy Balances of Non-OECD Countries 2008 Edition).
3. MENA oil export dependency 3.1. General overview The oil export revenue of seven MENA countries show a clear pattern (see Fig. 1) of close links with oil price movements. Three periods can be easily identified: 1 This is a common approximation. See, for example, ESMAP (2005b), Bacon and Kojima (2008) and Gupta (2008).
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50 Oil export revenue (Billion $ 2000)
Algeria
Kuwait
Libya
Qatar
1990
1995 Year
2000
UAE
45 40 35 30 25 20 15 10 5 0 1980
1985
2005
2010
Oil export revenue (Bilion $ 2000)
140 Iran
Saudi Arabia
1985
1990
120 100 80 60 40 20 0 1980
1995 Year
2000
2005
2010
Fig. 1. Evolution of oil export revenue (USD billion constant 2000): (a) for five countries and (b) for Iran and Saudi Arabia.
the sharp revenue fall up to 1986; an extended trough between 1986 and 2000 where a minor revenue recovery is observed; and finally
income growth after 2000 that continued to 2006, our last data point (this period effectively ended in the price collapse of 2008). Two countries in the sample dominate the picture – Saudi Arabia and Iran – each having almost similar levels of oil export revenue in 2006, although in 1980 Iran had less than a quarter of Saudi revenues (because of Iran–Iraq conflicts). Clearly, the effect of revenue fluctuation is more evident in bigger economies – especially in Saudi Arabia, which was in line with its leadership role in OPEC. The growth in export revenue has also been significantly higher for Iran since 2000 compared to all countries in the sample. However, the GDP did not show such volatility in most of the countries in constant dollar terms (see Fig. 2). No sharp decline in GDP is seen in the 1980s but the growth stagnated in this decade. However, since early 1990s, all the economies under consideration have started to grow.
In terms of export dependency, the picture changes quite significantly (Fig. 3). Iran turns out to be least dependent on its oil export revenue – practically for the entire period of our study.2 The diversified structure of Iranian economy and higher role of non-oil exports explain this. Algeria comes next after Iran – due to its reliance on natural gas export and the limited size of its oil reserves. For the rest, oil export dependency remained high – between 30% and 70% of the GDP. All the countries have seen a significant level of volatility in the oil export revenue dependence during the period – as oil price fluctuated. The trend follows a pattern similar to that of oil export revenue. The volatility of oil export revenue and oil price can be compared to see if there is any similarity between the two. It is clear from Fig. 4 that the volatility in oil export revenue is directly related to oil price fluctuations in all countries of our sample – only Kuwait and Iran show some divergences. The fall in revenue in 1991 in Kuwait was related to it being invaded by Iraq in that
2 An IMF staff report also confirms a similar level of oil export dependence of Iran. See IMF (2008).
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GDP (Billion USD 2000)
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Saudi Arabia
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1995 Year
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Fig. 2. GDP trend of selected MENA countries: (a) for five countries and (b) for Iran and Saudi Arabia.
70.00%
Oil export dependency
60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 1980
1985
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Fig. 3. Trend of oil export revenue as a share of GDP.
Volality measure
3 2 1 0 -1 -2 -3 1980
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1995 Year
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2005
oil price
OER-Algeria
OER-Iran
OER - Kuwait
OER-Libya
OER-Qatar
OER-Saudi Arabia
OER-UAE
2010
Fig. 4. Volatility in crude oil price and oil export revenue in MENA countries.
year. The volatility of the Iranian data had to do with the unification of the multiple exchange rate regimes in March 2002. The official exchange rate data from the IMF reflects this as a significant depreciation in the official rates. Thus by setting the base year for the currency conversion calculations in our data preparation at the year 2000, this volatility is introduced. However, the unaltered current dollar values of Iranian exports show a similar volatility profile as the current crude price.
3.2. Analysis of components of export revenue dependence Following Eq. 2, we shall now consider the elements of oil export dependence.
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19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06
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UAE
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Qatar
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19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06
export to primary oil supply ratio
Fig. 5. Effective oil export price.
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Iran
Kuwait
Libya
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Saudi Arabia
UAE
Fig. 6. Importance of oil export.
The first term provides the effect rate of export in constant price terms (see Fig. 5). Clearly, the trend follows the oil price trend generally3 but there is some variation in the price level for each country. This difference arises due to the quality of oil, contractual arrangements and discounts allowed on price by the countries for exporting oil. The trends for Iran and Libya show much divergence compared to the other countries, especially in the late 1980s to early 1990s as well as in recent years. The quality of data reported in the sources and the prevalence of multiple exchange rates in Iran for a certain period could explain such anomalies. The importance of oil export as compared to primary oil supply (see Fig. 6) is however not uniform across the region. On one hand, Iran sets the lower bound for the region with a relatively low export to primary oil supply ratio. The size of the Iranian economy and domestic demand for oil is responsible for such a low level of oil export importance. On the other, Qatar sets the upper bound with a very high export to local use ratio. The diversified energy mix of Qatar and reliance on gas for domestic use makes this possible, although in terms of reserves Qatar does not figure favourably. It is generally noticed that smaller economies have a higher oil export to primary oil supply ratio. Similarly, for the OPEC members in the sample the trend is fairly
3 As a rule of thumb, the price of crude in toe is about 7 times the price per barrel.
stable over the entire range of our study period. This is likely to have arisen from the requirements of production quota allocations to members, lock-in effects in upstream oil development, production and consumption, and proportional increases in domestic demand. For others, while the lock-in effects remain valid, the possibility of higher or lower exports due to changes in the market conditions can lead to some volatility in the ratio. Most of the MENA exporters recorded a relatively high level of growth in energy demand during the period – ranging between 5% and 13% per year on average – except for Kuwait, which had a lower rate of about 2.7%. The prevalence of low energy prices for local consumption, and windfall gains in export revenue in the previous decade, promoted such extravagant use of energy. As MENA countries rely to a large extent on oil and gas for their domestic use, a higher growth in domestic energy demand reduces the volume of exportable hydrocarbons. This stresses the importance of policy measures that could encourage them to contain the diversion of exportable energies, especially during the periods of weak oil prices in the international market, so that the export intensity can be maintained at a desirable level and the required export revenue can be generated through international trade. Clearly any improvement in the importance of oil export with respect to its domestic oil demand improves the oil export income for a given price of oil. However, such improvements are not automatic and an increase in export from non-marginal exporters
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Oil dependency in PEC
can depress the price, thereby making the effect on overall export income ambiguous. Another key area of focus in this respect is the oil dependency of the economy for fuelling its energy needs. It is evident from Fig. 7 that MENA countries in general tend to depend heavily on oil for their domestic energy needs. Four countries (namely, Iran, Kuwait, Libya and Saudi Arabia) in our sample are more than 50% dependent on oil. Algeria and UAE depend about 30% on oil while Qatar has the lowest level of oil dependency in the sample (about 20%). Three countries (namely, Algeria, Iran and UAE) have recorded some reduction in oil dependency – most notable is the case of Iran. In 1980, Iran depended on oil to the extent of 85% of its energy needs but by 2006, it has reached a dependency level of 46%. On the other hand, Kuwait shows a completely different trajectory of dependence: in 1980, 60% of its domestic energy needs were met from oil, and in 2006 it is back to the same situation after much fluctuation. Similarly, Libya, Saudi Arabia and Qatar also do not show any major changes in their respective oil dependency levels during this period. Low oil dependency of Qatar and a declining share of oil in the primary energy consumption of the UAE is the key to their success in retaining a relatively high level of oil export importance. On the other hand, Iran and Saudi Arabia are occupying the lowest positions in terms of oil export importance in recent times due to their high growth in primary energy consumption compared to export income growth. Evidently, a related concern is the efficiency of domestic energy use in the hydrocarbon-exporting countries. The higher the efficiency, the lower is the energy requirement. Similarly, a systematic decline in energy intensity can improve the potential for oil export intensity, and vice versa. An interesting observation of this is the increasing energy intensity of MENA oil-exporting countries (see Fig. 8). All the countries of our sample have
1103
recorded increases in the overall energy intensity of their economies. The trend is also quite clear:
during the 1980s when oil prices were low, all the countries recorded a high level of energy intensity growth. The UAE recorded the highest rate of energy intensity growth within the sample – with an annual average of 16% between 1980 and 1988. A number of other countries, including Saudi Arabia, recorded a high level of energy-intensity growth during this period. Some sort of stagnation in energy-intensity growth during the 1990s. A minor fall in energy intensity in recent times as oil prices in the international market hardened. Clearly, oil price influences the energy intensity quite appreciably in these countries. In recent times, the spread of intensity has shrunk, thereby indicating a convergence of some sort in the energy systems and energy utilisation in these countries.
Our analysis clearly suggests that two factors have influenced the evolution of oil export dependence of MENA countries considered in the study:
the effective export price is a key factor that has shaped the overall export revenue in a country;
increasing energy intensity of the countries under study has adversely affected the exportable surplus of oil. The other two factors, namely the importance of oil export compared to primary oil supply and oil dependence of the economy, had a limited influence due to the limited volatility of these variables. However, a high oil dependence of
1 0.8 0.6 0.4 0.2 0 1980
1985
1990
1995 Year
Algeria
Iran
Kuwait
Qatar
Saudi Arabia
UAE
2000
2005
2010
Libya
Energy intensity (toe/'000$ US2000)
Fig. 7. Oil dependency in MENA countries.
1 0.8 0.6 0.4 0.2 0 1980
1985
1990
1995 Year
Algeria
Iran
Kuwait
Qatar
Saudi Arabia
UAE
2000
Fig. 8. Trend of energy efficiency in MENA countries.
2005 Libya
2010
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4. Decomposition analysis of export revenue dependence Using a simple Laspeyres decomposition approach, we find the effects of changes in one of the four factors – average export price, oil export importance, oil dependency and energy intensity of the economy – on changes in export revenue during three periods: 1980–1988, 1989–2000, and 2001–2006. These periods correspond to three main phases of export revenue evolution in these countries: declining revenue, stagnation and growth. The analysis is presented for each factor and at the overall level in the following paragraphs. 4.1. Influence of export price on export revenue dependence If the effect of change in the ratio of export revenue to export volume (the effective export price) is considered in isolation, keeping all other factors at their initial values, we find that the price effect has the most dominant influence during the entire 26-year period considered (see Annex 1). The first period (1980– 1988) shows the effect of decline in oil price while the last period (2001–2006) captures the effect of rising oil prices (see Fig. 9). The price stability during 1989 and 2000 was responsible for the timid effect during the stagnant period. Kuwait and the UAE appeared to have suffered more during the price decline phase, while Libya and Iran gained more in the rising price phase. Although the effective export price reached the lowest level in Iran at the end of the first period, it does not suffer as much as Kuwait and Qatar because of its low oil export importance. The UAE and Kuwait experienced more pronounced price effects due to the relatively high levels of oil export reliance of their economies. Conversely, at the time of rising oil prices, Libya and Iran gained the most due to a relatively higher level of price growth.
20.00 10.00 0.00 -10.00 -20.00 -30.00 -40.00
1980-88
1989-2000
2001-06
-50.00 Algeria
Iran
Kuwait
Libya
Qatar
Saudi Arabia
UAE
Saudi Arabia
UAE
Saudi Arabia
UAE
Fig. 10. Oil export importance effect.
Oil dependency effect (%)
these economies clearly affects their exportable surplus and suggests the possibility of diversification of primary energy supply. Section 4 further analyses the factors by decomposition analysis.
Export importance effect (%)
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15.00 1980-88
1989-2000
2001-06
10.00 5.00 0.00 -5.00 -10.00 -15.00 Algeria
Iran
Kuwait
Libya
Qatar
Fig. 11. Oil dependence effect.
Energy Intensity effect (%)
1104
160.00 140.00 120.00
1980-88
1989-2000
2001-06
100.00 80.00 60.00 40.00 20.00 0.00 -20.00 Algeria
Iran
Kuwait
Libya
Qatar
4.2. Influence of change in the oil export importance Fig. 12. Energy-intensity effect.
Price effect (%)
If oil export importance changes alone, how would country’s oil export income change? This is analysed in Fig. 10. It is found that this affects four countries (namely, the UAE, Saudi Arabia, Qatar and Libya) in the sample disproportionately during the first period, but the effect is insignificant in the other two periods for all countries. A significant fall in the export volume compared to domestic oil supply, coupled with a declining oil price environment, caused this adverse effect. The effect is most pronounced for the UAE and Saudi Arabia. This is as a result of the disproportionate increases in energy intensity (Fig. 11). However, as the importance of export stabilises subsequently, 40.00 30.00 20.00 10.00 0.00 -10.00 -20.00 -30.00 -40.00
1980-88
1989-2000
2001-06
its effect on the overall export dependence of these countries became less important. 4.3. Influence of changes in oil dependence Changes in oil dependence for domestic energy use in each country (see Fig. 11) indicated that, compared to the other factors, these changes did not affect the export revenues significantly. This is simply due to the modest changes in the oil dependence in each period (i.e. the differences in dependence between the base years and terminal years are minor). Iran shows the smallest change in every period. Qatar exhibits 5–10% changes in export dependency in each period. 4.4. Energy-intensity effect
Algeria
Iran
Kuwait
Libya
Qatar
Fig. 9. Price effect on oil export revenue.
Saudi Arabia
UAE
The last element captures the effect of changes in energy intensity, while keeping the other two factors at their base levels. The results here (Fig. 12) show that in the first period when oil prices were declining, and export revenues were falling, the
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400.00% 1982
1988
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2006
% change
300.00% 200.00% 100.00% 0.00% -100.00% Algeria
Iran
Kuwait
Libya
Qatar
Saudi Arabia
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Fig. 13. Effect of the sample mean export importance level on export dependency of GDP.
Effect of change in energy intensity
intensity effect has been working in the opposite direction. This would have increased the oil export dependency significantly.4 The effect is quite strong compared to the other two factors during the first period in the UAE, Saudi Arabia and Qatar. Energy intensity increased appreciably in the case of the UAE in the first period, while Iran and Algeria did not see any significant development in this respect. The energy-intensity effect did not play any major role in the other two periods. Thus the decomposition analysis confirms our finding in the previous section that the effective export price and energy intensity were the most influential factors in the oil export dependency of MENA countries. Clearly, the overall change in the export dependency has been affected in different ways by different factors. The juxtaposition of individual effects as done above is but one depiction of the overall effects of the change (see Annex 1). However, in reality all the factors have influenced the export dependence simultaneously and accordingly the above decomposition leaves some residues when compared with the actual changes. We did not try to adjust the residue since our objective, to describe each effect in isolation, was not furthered by these artificial adjustments.
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25 20 15 10 5 0 1980 Algeria
5. What-if scenario analysis
1985 Kuwait
1990
1995 Year Qatar
2000 Saudi Arabia
2005
2010 UAE
Fig. 14. Energy intensity – low case.
Given that each country in the sample has performed differently, there is possibility of cross-learning within the group. While a number of scenarios can be considered for such an analysis, we concentrate on two factors – export importance of oil and energy intensity – given their significant influence on the overall oil export dependency. We have not considered oil export price because countries may not have much flexibility in influencing the price individually. As the two factors have worked in the opposite direction, we consider a number of scenarios in respect of the above two factors to gain some insight about the changes that could have happened if such scenarios developed. The results are presented as a percentage change compared to the original outcome. In each case, only the factor under consideration is changed while the other factors are kept in their original values. 5.1. Oil export importance For oil export importance, the scenario verifies what would have happened if each country had the same level of oil export importance as measured by the mean level of the sample in each year. The result is presented in Fig. 13 for a selected number of years. This captures the overall pattern quite well as the trend has been similar within the phases we have considered before. Clearly, Iran dominates the result – because the change in the case of Iran is very significant in all the years due its very low export importance level. Iran gains from such a change while Qatar and the UAE loses in all the years because of their high level of oil exports compared to domestic oil use. Similarly, if the lowest level of export importance in the sample is considered for all countries, clearly the export dependency of all countries, except Iran, will be eroded due to the huge change compared to the present situation. This shows that Iran could benefit from any initiative towards improving its oil export level compared to its domestic use. Countries with a 4 The interpretation of the energy-intensity effect in the case of an exporter is not straightforward. While for an importer an increase in energy intensity directly affects the import volume, in the case of an exporter, the effect is passed through the exportable volume. Therefore, this factor needs to be considered along with the second factor, the importance of export.
high level of export importance are likely to be negatively affected if they fail to maintain their historic level of exports. These countries can be more vulnerable to changes in the export environment. However, it is not our intention to suggest that drastic changes in the export level are possible or feasible. Such an analysis is beyond the scope of this paper. 5.2. Energy intensity For all of the 1980s Libya displayed the lowest energy intensity. Then from 1990 to 2005 Iran achieved the lowest energy intensity until 2006 where Libya again had the lowest. If all countries in the sample could achieve the energy intensity as displayed by Libya or Iran, how would the export dependency change? To capture this effect, a slight modification of the approach is required. This is because the change in intensity would affect the exportable volume and the export to domestic oil consumption ratio. A mechanical application of Eq. 2 cannot capture this change. Accordingly, we have recalculated relevant energy requirements for each country considering the lowest energy intensity assuming that the price and oil dependency of the economy do not change. The changed domestic oil requirement is then subtracted from the overall oil availability5 to determine the revised exportable oil volume. The revised export volume is then used to calculate the export dependency in the low energy-intensity case and the result is compared with the original export dependency to find out the effect. Fig. 14 presents the results (excluding Iran and Libya – because of their low intensity in the study period). Most of the countries could have improved their oil export revenue share with respect to GDP by 5–10% during the entire period. The range was around 10% in the 1980s and reduced to 5% in the 1990s. The general rise in intensity in the 1990s has reduced the margin for potential benefits. Even a 5–10% increase in the export income share can bring additional revenue to the countries. Moreover, we assumed that the oil dependence ratio does not change but in reality this could also change – making room for additional export potential. 5
Oil availability= oil production+ imports 7stock change.
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However, an increase in the export could also affect the oil price internationally – this was not considered in the above analysis.
6. Conclusion Our analysis reveals the differences in the oil export dependence of MENA countries. Iran and Saudi Arabia dominate in terms of oil export revenues but Iran has the lowest dependence on oil export revenue per unit of GDP in our sample. The export dependence generally follows the same trend of volatility as that of oil price. Similarly, the effective oil export price also follows the general oil price trend but differences in the contractual arrangements and quality of oil lead to some price variations for individual countries. Although exporters have a high oil export to domestic consumption ratios, the difference within our sample was quite striking. Iran has the lowest level of export importance while Qatar has the highest oil export to domestic use ratio. Qatar has been successful in maintaining a low level of oil dependence of its economy while Iran continues to depend heavily on oil for its domestic energy supply. Clearly, Iran can gain significantly by increasing its exportable volume. MENA countries are generally highly dependent on oil for their domestic energy needs. Four countries in the sample met more than 60% of their primary energy needs through oil. This clearly shows the possibility for diversification of primary energy supply. Algeria and Qatar provide such examples of diversification where natural gas has been used for domestic purposes to maximise oil export. MENA countries can surely learn from these
experiences to initiate a transition to a less oil-dependent economic future. Moreover, the overall primary energy intensity has been increasing in these economies. Clearly, these factors are adversely affecting their oil export volumes. Through a what-if analysis we find that most of the countries could improve the share of oil export revenue to GDP by 5–10% if the primary energy intensity can be improved to the level achieved by the best performer in the sample. Energy efficiency improvements coupled with a reduction in oil dependency of these economies can surely make more oil available for exports. While an extra supply of oil can depress the price if the demand does not pick-up, the end of the recession in the developed economies, and lower than expected economic down-turn in Asian economies, do not support such adverse risks for exporters. On the contrary, efficient energy use and diversification away from oil provide a cheaper alternative to investments in oil exploration and field development in the shorter term. There are obvious environmental benefits as well from such a policy and MENA countries should consider these alternatives seriously. We are not suggesting that the road ahead is easy or smooth. Our earlier analysis has suggested that domestic oil pricing does not play a major role in influencing the demand (Bhattacharyya and Blake, 2009). In such a case, reducing energy intensity has to depend on non-price-based policy instruments. Changing the energy mix of a country is a long-term process and depends on the availability of alternative resources, infrastructure and financial resources for managing such a transition. Each country would have to search for its low-oil economy path, for which further additional research at the country level is required.
Acknowledgement The data used in this paper have been accessed through Economic and Social Data Service, UK.
Annex 1. Details of decomposition analysis (unit =%).
Price effect
Algeria Iran Kuwait Libya Qatar Saudi Arabia UAE
Export importance
1980– 1988
1989– 2000
2001– 2006
1980– 1988
1989– 2000
2001– 2006
1980– 1988
18.84 10.64 32.91 17.16 24.21 18.83
11.86 7.78 0.16 0.52 4.52 8.13
11.53 24.23 20.21 34.47 9.86 22.24
8.21 3.87 24.80 36.63 38.19 44.71
0.15 0.33 9.53 8.68 4.24 3.81
0.85 0.05 1.38 13.31 10.09 0.93
7.37 0.74 4.14 1.11 9.11 8.72
33.65
12.62
19.67
43.58
8.71
2.37
6.92
Total effect explained 1980–1988 19.54 3.91 19.90 11.33 2.89 5.38 67.61
Oil dependency 1989– 2000
Energy intensity effect 2001– 2006
1980– 1988
1989– 2000
2001– 2006
0.40 0.96 0.55 4.59 4.90 2.98
0.57 0.78 0.17 1.68 11.52 2.29
14.87 3.61 33.67 41.35 68.62 77.65
1.18 0.30 3.09 17.72 3.68 4.67
0.28 0.13 7.56 7.89 4.18 2.13
10.61
1.14
151.76
5.09
4.98
Real change
Residue
1989–2000
2001–2006
1980–1988
1989–2000
2001–2006
1980–1988
1989–2000
2001–2006
12.80 6.79 6.04 13.10 7.54 11.97 5.63
11.53 23.64 14.20 38.20 7.11 21.15 13.46
20.89 9.57 32.86 32.11 34.46 38.80 33.92
13.64 4.42 5.30 7.25 7.14 12.30 0.65
11.48 20.94 10.97 35.16 2.97 20.18 9.90
1.35 5.66 12.96 20.77 31.57 44.18 101.53
0.84 2.37 0.74 5.86 0.40 0.33 4.98
0.04 2.70 3.23 3.04 4.14 0.98 3.55
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References Ang, B.W., 2004. Decomposition analysis for policymaking in energy: which is the preferred method? Energy Policy 32 (2004), 1131–1139. APERC, 2007, A Quest for Energy Security in the 21st Century: Resources and Constraints. Asia Pacific Energy Research Centre, Tokyo, Japan (see http: http:// www.ieej.or.jp/aperc/2007pdf/2007_Reports/APERC_2007_A_Quest_for_Energy_ Security.pdf. Bacon, R., Kojima, M., 2008. In: Oil Price Risks: Measuring the Vulnerability of Oil Importers, Viewpoint 320. World Bank, Washington, DC. Barnett Steve, Ossowski Rolando, 2002, Operational Aspects of Fiscal Policy in OilProducing Countries. IMF WP/02/177, Washington, DC. Bhattacharyya, S.C., 2009. Fossil-fuel dependence and vulnerability of electricity generation: case of selected European countries. Energy Policy 37, 2411–2420. Bhattacharyya, S.C., Blake, A., 2009. Domestic demand for petroleum products in MENA countries. Energy Policy 37 (4), 1552–1560. BP Statistical Review of World Energy, 2009, BP, London. Davis, J.M., Ossowski, R., Fedelino, A. (Eds.), 2003. IMF. Eifert Benn, Gelb Alan, Tallroth Nils Borje, 2002. The Political Economy of Fiscal Policy and Economic Management in Oil-Exporting Countries. Policy Research Working Paper 2899. World Bank, Washington, DC. ESMAP, 2005a. The impact of higher oil prices on low income countries and the poor. Report 299/05, Energy Sector Management Assistance Programme. World Bank, Washington, DC.
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Energy Policy journal homepage: www.elsevier.com/locate/enpol
Analysis of oil export dependency of MENA countries: Drivers, trends and prospects Subhes C. Bhattacharyya n, Andon Blake CEPMLP, University of Dundee, Dundee DD1 4HN, Scotland, UK
a r t i c l e in f o
a b s t r a c t
Article history: Received 4 August 2009 Accepted 29 October 2009
The purpose of this paper is to analyse how oil export dependencies of Middle East and North African (MENA) oil producers have evolved over the past two decades and to identify the main driving factors from an energy policy perspective. The paper expresses the oil export dependency of each economy in terms of a multiplicative identity that captures effective export price, export to primary oil supply ratio, oil dependency and oil export intensity of the country. Using the data for 1980–2006, the evolution in these factors is investigated for seven MENA countries and the influence of the above factors is decomposed using the Laspeyres index. The analysis shows that energy price and increasing energy intensity in the MENA countries have influenced the overall oil export dependency. Reducing the energy intensity can improve oil export revenue share to GDP by 5–10% in most of the countries while Iran can gain significantly by increasing its export volume. & 2009 Elsevier Ltd. All rights reserved.
Keywords: Oil export dependency MENA Decomposition analysis
1. Introduction In the present fossil-fuel dominated world, the importance of oil and gas exporting Middle East and North African (MENA) countries needs no special mention. Although about 40% of the present oil supply comes from this region (BP Statistical Review of World Energy, 2009), it is generally believed that the share will increase in the future as other producing regions see production downturns in the coming two decades. For example, IEA (2008) indicates that about 58% of oil supply would be coming from these countries by 2030. However, such a transformation clearly depends on how the present oil export revenue is utilised and whether these countries are able to maintain substantial surpluses in the future. Yet, these countries face a number of challenges: the high volatility of oil price in the international market makes the investment decision difficult – especially during low oil prices. Given the captive market for oil in the transport sector and because there is a limited likelihood of loss of this market in the foreseeable future, it may make sense to leave the oil in the ground when prices are low. The price volatility also affects the export revenue of these countries and because of the resource curse issue that is associated with the export dependence of a high-value natural resource like oil, the producing countries would always be worried about the misuse of windfall gains from the volatile n
Corresponding author. Tel: + 44 1382 388876; fax: + 44 1382 385854. E-mail addresses: [email protected], [email protected] (S.C. Bhattacharyya), [email protected], [email protected] (A. Blake). 0301-4215/$ - see front matter & 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2009.10.062
market. At the same time, the domestic energy use may not be as efficient as in other countries and with higher income, there may be a larger tendency of wasting more energy, which in turn can put pressure on the oil export surplus. Clearly then an efficient domestic energy utilisation policy will leave more exportable surplus and improve the export revenue in the future. Our understanding of oil-exporting MENA countries remains limited despite their importance and significance in the global energy scene. While studies focusing on the oil production issues (e.g. IEA 2008, 2005), resource curse and macro-economic aspects (e.g. Davis et al., 2003; Eifert et al. 2002; Barnett and Ossowski, 2002) exist, they do not analyse the export dependence and its drivers in a way that could facilitate energy policy developments. Similarly, there are studies on vulnerability of importing countries due to high oil prices (e.g. ESMAP, 2005a, 2005b; Gupta 2008; World Bank, 2005; World Energy Council (WEC), 2008; APERC, 2007; Bacon and Kojima, 2008; UNDP, 2007; Percebois, 2007), or the effect of such high prices on other fuels (e.g. Bhattacharyya, 2009; Thanawat and Bhattacharyya, 2008). However, we are not aware of any study where the effects of oil price volatility on the exporters have been considered. The objective of this paper is to analyse the oil export dependency of seven MENA countries and to analyse how their oil export dependency has evolved over the past two decades or so. We also investigate the linkage of oil export dependence by relating it to effective export price, oil export importance, oil dependence of the economy and primary energy intensity of these economies and identify if any improvements are possible by cross-learning from one another. The paper is organised as follows: Section 2 introduces the methodology used in the paper and discusses the data, Section 3
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presents an overview of the oil export dependence in MENA countries, Section 4 presents the decomposition analysis of the oil dependence factors while Section 5 presents a what-if analysis of selected driver. Finally some concluding remarks are presented.
2. Methodology The methodology used in this work follows the general approach used in the vulnerability analyses proposed in ESMAP (2005a, 2005b) and Bacon and Kojima (2008). While those studies considered the effect of oil imports on the gross domestic product, here for exporters we focus on oil export revenues as a ratio of GDP. This ratio can be calculated using data in local currency or in a common currency depending on the data. The higher the oil prices, export revenue is also expected to increase and consequently, an oil exporter is likely to become more dependent on oil export revenue for its GDP. The first task of this paper is to thus analyse the oil export dependency of MENA countries. While a number of alternative volatility indicators are available (such as standard deviation, coefficient of variation, Parkinson’s measure of volatility, etc.), in our case it is easier to use the log-normal returns formulation to see the effect of change in the price on the volatility index as we have relied on the annual averages of prices and other variables in the analysis. This will be calculated as follows: Returns ¼ lnðVariable in time t=Variable in time t 1Þ
ð1Þ
where variable will be either price or export revenue. The log-normal form is appropriate for a skewed distribution of price data. The components of this oil export dependence can then be identified using a Kaya (1990) type identity as follows: OER OER OEV POS PEC ¼ GDP OEV POS PEC GDP
ð2Þ
where OER is the oil export revenue (in constant US dollar terms, million); GDP the Gross Domestic Product, (in constant US dollar terms, million); OEV the oil export volume, Mtoe; POS the primary oil supply (Mtoe); and PEC the primary energy consumption (supply) (Mtoe). Eq. (2) identifies four drivers of oil export dependency (oil export/GDP) as follows: The first term (oil export revenue to oil export volume) captures the effective export price, on average in constant US dollar per toe of export. The second term (oil export volume to primary oil supply) captures the importance of oil export compared to domestic oil use. Normally exporters are expected to have a high ratio, implying a greater importance of exports compared to oil use in the economy. The third term (primary oil supply to primary energy supply) refers to oil dependency of the economy (toe/toe). High oil dependence is likely to be inversely related to the second term, thereby affecting the overall export revenue potential. The last term (primary energy supply as a ratio of GDP) indicates the primary energy intensity of the economy (toe/$). This, being a measure of effectiveness of energy utilisation in the economy, influences the overall local demand and thereby affects the volume of exportable oil. Accordingly, Oil export dependency ¼ ðEffective priceÞ ðOil export importanceÞ ðOil dependencyÞ ðPrimary energy intensityÞ
ð3Þ
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By considering these components and performing a crosscountry comparison, it is possible to identify the best practices for each factor and to analyse the effect of adopting the best-practice policies on other countries using a what-if type analysis. In addition, changes in the oil export dependencies between two periods can be explained using the decomposition analysis framework. While a number of alternative approaches are available in the literature (see Ang, 2004), in this analysis, we shall rely on the Laspeyres index for its simplicity. Thus, Change in oil export dependency ¼ Price change effect þ Effect of change in export importance þ Effect of change in oil dependency þ Effect of change in energy intensity
ð4Þ
For each effect, all the other variables are kept at their initial values. Thus, the effect of each variable is captured independently. The objective of this analysis is to consider if only one variable had undergone a change, what would be the effect on export dependency. Although a residue remains after summating the effects, we have not attempted to artificially adjust the residue (as is suggested in some of the literature on perfect decomposition) for then the method loses intuitive appeal.
2.1. Data sources and preparations The export value of petroleum (in US dollars) was obtained from the OPEC Annual Statistical Bulletin 2007. This avoids the underestimation bias introduced by simply multiplying benchmark crude prices by volume.1 Since petroleum products, aside from fuel oil, fetch a higher price than crude, the multiplication is an underestimate. In order to ensure the consistency of the exchange rate conversions, as well as to set 2000 as the base year, we transformed the data as described next. First, the values of petroleum exports are converted to the national currencies using the IMF official rates (period averages). Then the data are converted to constant (2000) values using GDP deflators (national currencies) from the IMF World Economic Outlook Database (2008). The indices in Eq. 2 can be calculated using the data transformed up to this point. However, for ease of interpretation and comparison, the petroleum export values are re-converted to US dollars at the base year by using the (2000) IMF official exchange rates. GDP data (national currencies) are taken from the IMF World Economic Outlook Database (2008). Again, we converted this data to constant (2000) values by using the IMF GDP deflators and converted to US dollars by using the base year (2000) IMF official rates. The oil export volume, primary oil supply and primary energy supply data were taken from the International Energy Agency databases (Energy Balances of Non-OECD Countries 2008 Edition).
3. MENA oil export dependency 3.1. General overview The oil export revenue of seven MENA countries show a clear pattern (see Fig. 1) of close links with oil price movements. Three periods can be easily identified: 1 This is a common approximation. See, for example, ESMAP (2005b), Bacon and Kojima (2008) and Gupta (2008).
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50 Oil export revenue (Billion $ 2000)
Algeria
Kuwait
Libya
Qatar
1990
1995 Year
2000
UAE
45 40 35 30 25 20 15 10 5 0 1980
1985
2005
2010
Oil export revenue (Bilion $ 2000)
140 Iran
Saudi Arabia
1985
1990
120 100 80 60 40 20 0 1980
1995 Year
2000
2005
2010
Fig. 1. Evolution of oil export revenue (USD billion constant 2000): (a) for five countries and (b) for Iran and Saudi Arabia.
the sharp revenue fall up to 1986; an extended trough between 1986 and 2000 where a minor revenue recovery is observed; and finally
income growth after 2000 that continued to 2006, our last data point (this period effectively ended in the price collapse of 2008). Two countries in the sample dominate the picture – Saudi Arabia and Iran – each having almost similar levels of oil export revenue in 2006, although in 1980 Iran had less than a quarter of Saudi revenues (because of Iran–Iraq conflicts). Clearly, the effect of revenue fluctuation is more evident in bigger economies – especially in Saudi Arabia, which was in line with its leadership role in OPEC. The growth in export revenue has also been significantly higher for Iran since 2000 compared to all countries in the sample. However, the GDP did not show such volatility in most of the countries in constant dollar terms (see Fig. 2). No sharp decline in GDP is seen in the 1980s but the growth stagnated in this decade. However, since early 1990s, all the economies under consideration have started to grow.
In terms of export dependency, the picture changes quite significantly (Fig. 3). Iran turns out to be least dependent on its oil export revenue – practically for the entire period of our study.2 The diversified structure of Iranian economy and higher role of non-oil exports explain this. Algeria comes next after Iran – due to its reliance on natural gas export and the limited size of its oil reserves. For the rest, oil export dependency remained high – between 30% and 70% of the GDP. All the countries have seen a significant level of volatility in the oil export revenue dependence during the period – as oil price fluctuated. The trend follows a pattern similar to that of oil export revenue. The volatility of oil export revenue and oil price can be compared to see if there is any similarity between the two. It is clear from Fig. 4 that the volatility in oil export revenue is directly related to oil price fluctuations in all countries of our sample – only Kuwait and Iran show some divergences. The fall in revenue in 1991 in Kuwait was related to it being invaded by Iraq in that
2 An IMF staff report also confirms a similar level of oil export dependence of Iran. See IMF (2008).
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GDP (Billion USD 2000)
GDP (Billion USD 2000)
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120 100
Algeria
Kuwait
Libya
Qatar
UAE
80 60 40 20 0 1980
1985
1990
1995 Year
2000
2005
2010
500 Iran
Saudi Arabia
400 300 200 100 0 1980
1985
1990
1995 Year
2000
2005
2010
Fig. 2. GDP trend of selected MENA countries: (a) for five countries and (b) for Iran and Saudi Arabia.
70.00%
Oil export dependency
60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 1980
1985
Algeria
Iran
1990 Kuwait
1995 Year Libya
2000 Qatar
2005 Saudi Arabia
2010 UAE
Fig. 3. Trend of oil export revenue as a share of GDP.
Volality measure
3 2 1 0 -1 -2 -3 1980
1985
1990
1995 Year
2000
2005
oil price
OER-Algeria
OER-Iran
OER - Kuwait
OER-Libya
OER-Qatar
OER-Saudi Arabia
OER-UAE
2010
Fig. 4. Volatility in crude oil price and oil export revenue in MENA countries.
year. The volatility of the Iranian data had to do with the unification of the multiple exchange rate regimes in March 2002. The official exchange rate data from the IMF reflects this as a significant depreciation in the official rates. Thus by setting the base year for the currency conversion calculations in our data preparation at the year 2000, this volatility is introduced. However, the unaltered current dollar values of Iranian exports show a similar volatility profile as the current crude price.
3.2. Analysis of components of export revenue dependence Following Eq. 2, we shall now consider the elements of oil export dependence.
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900 800 700 600 500 400 300 200 100 0
19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06
500 450 400 350 300 250 200 150 100 50 0
USD 2000/ toe for Iran
S.C. Bhattacharyya, A. Blake / Energy Policy 38 (2010) 1098–1107
USD 2000/toe
1102
Year Algeria
Kuwait
Libya
Saudi Arabia
UAE
Iran
Qatar
40 35 30 25 20 15 10 5 0
19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06
export to primary oil supply ratio
Fig. 5. Effective oil export price.
Year
Algeria
Iran
Kuwait
Libya
Qatar
Saudi Arabia
UAE
Fig. 6. Importance of oil export.
The first term provides the effect rate of export in constant price terms (see Fig. 5). Clearly, the trend follows the oil price trend generally3 but there is some variation in the price level for each country. This difference arises due to the quality of oil, contractual arrangements and discounts allowed on price by the countries for exporting oil. The trends for Iran and Libya show much divergence compared to the other countries, especially in the late 1980s to early 1990s as well as in recent years. The quality of data reported in the sources and the prevalence of multiple exchange rates in Iran for a certain period could explain such anomalies. The importance of oil export as compared to primary oil supply (see Fig. 6) is however not uniform across the region. On one hand, Iran sets the lower bound for the region with a relatively low export to primary oil supply ratio. The size of the Iranian economy and domestic demand for oil is responsible for such a low level of oil export importance. On the other, Qatar sets the upper bound with a very high export to local use ratio. The diversified energy mix of Qatar and reliance on gas for domestic use makes this possible, although in terms of reserves Qatar does not figure favourably. It is generally noticed that smaller economies have a higher oil export to primary oil supply ratio. Similarly, for the OPEC members in the sample the trend is fairly
3 As a rule of thumb, the price of crude in toe is about 7 times the price per barrel.
stable over the entire range of our study period. This is likely to have arisen from the requirements of production quota allocations to members, lock-in effects in upstream oil development, production and consumption, and proportional increases in domestic demand. For others, while the lock-in effects remain valid, the possibility of higher or lower exports due to changes in the market conditions can lead to some volatility in the ratio. Most of the MENA exporters recorded a relatively high level of growth in energy demand during the period – ranging between 5% and 13% per year on average – except for Kuwait, which had a lower rate of about 2.7%. The prevalence of low energy prices for local consumption, and windfall gains in export revenue in the previous decade, promoted such extravagant use of energy. As MENA countries rely to a large extent on oil and gas for their domestic use, a higher growth in domestic energy demand reduces the volume of exportable hydrocarbons. This stresses the importance of policy measures that could encourage them to contain the diversion of exportable energies, especially during the periods of weak oil prices in the international market, so that the export intensity can be maintained at a desirable level and the required export revenue can be generated through international trade. Clearly any improvement in the importance of oil export with respect to its domestic oil demand improves the oil export income for a given price of oil. However, such improvements are not automatic and an increase in export from non-marginal exporters
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Oil dependency in PEC
can depress the price, thereby making the effect on overall export income ambiguous. Another key area of focus in this respect is the oil dependency of the economy for fuelling its energy needs. It is evident from Fig. 7 that MENA countries in general tend to depend heavily on oil for their domestic energy needs. Four countries (namely, Iran, Kuwait, Libya and Saudi Arabia) in our sample are more than 50% dependent on oil. Algeria and UAE depend about 30% on oil while Qatar has the lowest level of oil dependency in the sample (about 20%). Three countries (namely, Algeria, Iran and UAE) have recorded some reduction in oil dependency – most notable is the case of Iran. In 1980, Iran depended on oil to the extent of 85% of its energy needs but by 2006, it has reached a dependency level of 46%. On the other hand, Kuwait shows a completely different trajectory of dependence: in 1980, 60% of its domestic energy needs were met from oil, and in 2006 it is back to the same situation after much fluctuation. Similarly, Libya, Saudi Arabia and Qatar also do not show any major changes in their respective oil dependency levels during this period. Low oil dependency of Qatar and a declining share of oil in the primary energy consumption of the UAE is the key to their success in retaining a relatively high level of oil export importance. On the other hand, Iran and Saudi Arabia are occupying the lowest positions in terms of oil export importance in recent times due to their high growth in primary energy consumption compared to export income growth. Evidently, a related concern is the efficiency of domestic energy use in the hydrocarbon-exporting countries. The higher the efficiency, the lower is the energy requirement. Similarly, a systematic decline in energy intensity can improve the potential for oil export intensity, and vice versa. An interesting observation of this is the increasing energy intensity of MENA oil-exporting countries (see Fig. 8). All the countries of our sample have
1103
recorded increases in the overall energy intensity of their economies. The trend is also quite clear:
during the 1980s when oil prices were low, all the countries recorded a high level of energy intensity growth. The UAE recorded the highest rate of energy intensity growth within the sample – with an annual average of 16% between 1980 and 1988. A number of other countries, including Saudi Arabia, recorded a high level of energy-intensity growth during this period. Some sort of stagnation in energy-intensity growth during the 1990s. A minor fall in energy intensity in recent times as oil prices in the international market hardened. Clearly, oil price influences the energy intensity quite appreciably in these countries. In recent times, the spread of intensity has shrunk, thereby indicating a convergence of some sort in the energy systems and energy utilisation in these countries.
Our analysis clearly suggests that two factors have influenced the evolution of oil export dependence of MENA countries considered in the study:
the effective export price is a key factor that has shaped the overall export revenue in a country;
increasing energy intensity of the countries under study has adversely affected the exportable surplus of oil. The other two factors, namely the importance of oil export compared to primary oil supply and oil dependence of the economy, had a limited influence due to the limited volatility of these variables. However, a high oil dependence of
1 0.8 0.6 0.4 0.2 0 1980
1985
1990
1995 Year
Algeria
Iran
Kuwait
Qatar
Saudi Arabia
UAE
2000
2005
2010
Libya
Energy intensity (toe/'000$ US2000)
Fig. 7. Oil dependency in MENA countries.
1 0.8 0.6 0.4 0.2 0 1980
1985
1990
1995 Year
Algeria
Iran
Kuwait
Qatar
Saudi Arabia
UAE
2000
Fig. 8. Trend of energy efficiency in MENA countries.
2005 Libya
2010
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4. Decomposition analysis of export revenue dependence Using a simple Laspeyres decomposition approach, we find the effects of changes in one of the four factors – average export price, oil export importance, oil dependency and energy intensity of the economy – on changes in export revenue during three periods: 1980–1988, 1989–2000, and 2001–2006. These periods correspond to three main phases of export revenue evolution in these countries: declining revenue, stagnation and growth. The analysis is presented for each factor and at the overall level in the following paragraphs. 4.1. Influence of export price on export revenue dependence If the effect of change in the ratio of export revenue to export volume (the effective export price) is considered in isolation, keeping all other factors at their initial values, we find that the price effect has the most dominant influence during the entire 26-year period considered (see Annex 1). The first period (1980– 1988) shows the effect of decline in oil price while the last period (2001–2006) captures the effect of rising oil prices (see Fig. 9). The price stability during 1989 and 2000 was responsible for the timid effect during the stagnant period. Kuwait and the UAE appeared to have suffered more during the price decline phase, while Libya and Iran gained more in the rising price phase. Although the effective export price reached the lowest level in Iran at the end of the first period, it does not suffer as much as Kuwait and Qatar because of its low oil export importance. The UAE and Kuwait experienced more pronounced price effects due to the relatively high levels of oil export reliance of their economies. Conversely, at the time of rising oil prices, Libya and Iran gained the most due to a relatively higher level of price growth.
20.00 10.00 0.00 -10.00 -20.00 -30.00 -40.00
1980-88
1989-2000
2001-06
-50.00 Algeria
Iran
Kuwait
Libya
Qatar
Saudi Arabia
UAE
Saudi Arabia
UAE
Saudi Arabia
UAE
Fig. 10. Oil export importance effect.
Oil dependency effect (%)
these economies clearly affects their exportable surplus and suggests the possibility of diversification of primary energy supply. Section 4 further analyses the factors by decomposition analysis.
Export importance effect (%)
S.C. Bhattacharyya, A. Blake / Energy Policy 38 (2010) 1098–1107
15.00 1980-88
1989-2000
2001-06
10.00 5.00 0.00 -5.00 -10.00 -15.00 Algeria
Iran
Kuwait
Libya
Qatar
Fig. 11. Oil dependence effect.
Energy Intensity effect (%)
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160.00 140.00 120.00
1980-88
1989-2000
2001-06
100.00 80.00 60.00 40.00 20.00 0.00 -20.00 Algeria
Iran
Kuwait
Libya
Qatar
4.2. Influence of change in the oil export importance Fig. 12. Energy-intensity effect.
Price effect (%)
If oil export importance changes alone, how would country’s oil export income change? This is analysed in Fig. 10. It is found that this affects four countries (namely, the UAE, Saudi Arabia, Qatar and Libya) in the sample disproportionately during the first period, but the effect is insignificant in the other two periods for all countries. A significant fall in the export volume compared to domestic oil supply, coupled with a declining oil price environment, caused this adverse effect. The effect is most pronounced for the UAE and Saudi Arabia. This is as a result of the disproportionate increases in energy intensity (Fig. 11). However, as the importance of export stabilises subsequently, 40.00 30.00 20.00 10.00 0.00 -10.00 -20.00 -30.00 -40.00
1980-88
1989-2000
2001-06
its effect on the overall export dependence of these countries became less important. 4.3. Influence of changes in oil dependence Changes in oil dependence for domestic energy use in each country (see Fig. 11) indicated that, compared to the other factors, these changes did not affect the export revenues significantly. This is simply due to the modest changes in the oil dependence in each period (i.e. the differences in dependence between the base years and terminal years are minor). Iran shows the smallest change in every period. Qatar exhibits 5–10% changes in export dependency in each period. 4.4. Energy-intensity effect
Algeria
Iran
Kuwait
Libya
Qatar
Fig. 9. Price effect on oil export revenue.
Saudi Arabia
UAE
The last element captures the effect of changes in energy intensity, while keeping the other two factors at their base levels. The results here (Fig. 12) show that in the first period when oil prices were declining, and export revenues were falling, the
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400.00% 1982
1988
2000
2006
% change
300.00% 200.00% 100.00% 0.00% -100.00% Algeria
Iran
Kuwait
Libya
Qatar
Saudi Arabia
UAE
Fig. 13. Effect of the sample mean export importance level on export dependency of GDP.
Effect of change in energy intensity
intensity effect has been working in the opposite direction. This would have increased the oil export dependency significantly.4 The effect is quite strong compared to the other two factors during the first period in the UAE, Saudi Arabia and Qatar. Energy intensity increased appreciably in the case of the UAE in the first period, while Iran and Algeria did not see any significant development in this respect. The energy-intensity effect did not play any major role in the other two periods. Thus the decomposition analysis confirms our finding in the previous section that the effective export price and energy intensity were the most influential factors in the oil export dependency of MENA countries. Clearly, the overall change in the export dependency has been affected in different ways by different factors. The juxtaposition of individual effects as done above is but one depiction of the overall effects of the change (see Annex 1). However, in reality all the factors have influenced the export dependence simultaneously and accordingly the above decomposition leaves some residues when compared with the actual changes. We did not try to adjust the residue since our objective, to describe each effect in isolation, was not furthered by these artificial adjustments.
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25 20 15 10 5 0 1980 Algeria
5. What-if scenario analysis
1985 Kuwait
1990
1995 Year Qatar
2000 Saudi Arabia
2005
2010 UAE
Fig. 14. Energy intensity – low case.
Given that each country in the sample has performed differently, there is possibility of cross-learning within the group. While a number of scenarios can be considered for such an analysis, we concentrate on two factors – export importance of oil and energy intensity – given their significant influence on the overall oil export dependency. We have not considered oil export price because countries may not have much flexibility in influencing the price individually. As the two factors have worked in the opposite direction, we consider a number of scenarios in respect of the above two factors to gain some insight about the changes that could have happened if such scenarios developed. The results are presented as a percentage change compared to the original outcome. In each case, only the factor under consideration is changed while the other factors are kept in their original values. 5.1. Oil export importance For oil export importance, the scenario verifies what would have happened if each country had the same level of oil export importance as measured by the mean level of the sample in each year. The result is presented in Fig. 13 for a selected number of years. This captures the overall pattern quite well as the trend has been similar within the phases we have considered before. Clearly, Iran dominates the result – because the change in the case of Iran is very significant in all the years due its very low export importance level. Iran gains from such a change while Qatar and the UAE loses in all the years because of their high level of oil exports compared to domestic oil use. Similarly, if the lowest level of export importance in the sample is considered for all countries, clearly the export dependency of all countries, except Iran, will be eroded due to the huge change compared to the present situation. This shows that Iran could benefit from any initiative towards improving its oil export level compared to its domestic use. Countries with a 4 The interpretation of the energy-intensity effect in the case of an exporter is not straightforward. While for an importer an increase in energy intensity directly affects the import volume, in the case of an exporter, the effect is passed through the exportable volume. Therefore, this factor needs to be considered along with the second factor, the importance of export.
high level of export importance are likely to be negatively affected if they fail to maintain their historic level of exports. These countries can be more vulnerable to changes in the export environment. However, it is not our intention to suggest that drastic changes in the export level are possible or feasible. Such an analysis is beyond the scope of this paper. 5.2. Energy intensity For all of the 1980s Libya displayed the lowest energy intensity. Then from 1990 to 2005 Iran achieved the lowest energy intensity until 2006 where Libya again had the lowest. If all countries in the sample could achieve the energy intensity as displayed by Libya or Iran, how would the export dependency change? To capture this effect, a slight modification of the approach is required. This is because the change in intensity would affect the exportable volume and the export to domestic oil consumption ratio. A mechanical application of Eq. 2 cannot capture this change. Accordingly, we have recalculated relevant energy requirements for each country considering the lowest energy intensity assuming that the price and oil dependency of the economy do not change. The changed domestic oil requirement is then subtracted from the overall oil availability5 to determine the revised exportable oil volume. The revised export volume is then used to calculate the export dependency in the low energy-intensity case and the result is compared with the original export dependency to find out the effect. Fig. 14 presents the results (excluding Iran and Libya – because of their low intensity in the study period). Most of the countries could have improved their oil export revenue share with respect to GDP by 5–10% during the entire period. The range was around 10% in the 1980s and reduced to 5% in the 1990s. The general rise in intensity in the 1990s has reduced the margin for potential benefits. Even a 5–10% increase in the export income share can bring additional revenue to the countries. Moreover, we assumed that the oil dependence ratio does not change but in reality this could also change – making room for additional export potential. 5
Oil availability= oil production+ imports 7stock change.
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However, an increase in the export could also affect the oil price internationally – this was not considered in the above analysis.
6. Conclusion Our analysis reveals the differences in the oil export dependence of MENA countries. Iran and Saudi Arabia dominate in terms of oil export revenues but Iran has the lowest dependence on oil export revenue per unit of GDP in our sample. The export dependence generally follows the same trend of volatility as that of oil price. Similarly, the effective oil export price also follows the general oil price trend but differences in the contractual arrangements and quality of oil lead to some price variations for individual countries. Although exporters have a high oil export to domestic consumption ratios, the difference within our sample was quite striking. Iran has the lowest level of export importance while Qatar has the highest oil export to domestic use ratio. Qatar has been successful in maintaining a low level of oil dependence of its economy while Iran continues to depend heavily on oil for its domestic energy supply. Clearly, Iran can gain significantly by increasing its exportable volume. MENA countries are generally highly dependent on oil for their domestic energy needs. Four countries in the sample met more than 60% of their primary energy needs through oil. This clearly shows the possibility for diversification of primary energy supply. Algeria and Qatar provide such examples of diversification where natural gas has been used for domestic purposes to maximise oil export. MENA countries can surely learn from these
experiences to initiate a transition to a less oil-dependent economic future. Moreover, the overall primary energy intensity has been increasing in these economies. Clearly, these factors are adversely affecting their oil export volumes. Through a what-if analysis we find that most of the countries could improve the share of oil export revenue to GDP by 5–10% if the primary energy intensity can be improved to the level achieved by the best performer in the sample. Energy efficiency improvements coupled with a reduction in oil dependency of these economies can surely make more oil available for exports. While an extra supply of oil can depress the price if the demand does not pick-up, the end of the recession in the developed economies, and lower than expected economic down-turn in Asian economies, do not support such adverse risks for exporters. On the contrary, efficient energy use and diversification away from oil provide a cheaper alternative to investments in oil exploration and field development in the shorter term. There are obvious environmental benefits as well from such a policy and MENA countries should consider these alternatives seriously. We are not suggesting that the road ahead is easy or smooth. Our earlier analysis has suggested that domestic oil pricing does not play a major role in influencing the demand (Bhattacharyya and Blake, 2009). In such a case, reducing energy intensity has to depend on non-price-based policy instruments. Changing the energy mix of a country is a long-term process and depends on the availability of alternative resources, infrastructure and financial resources for managing such a transition. Each country would have to search for its low-oil economy path, for which further additional research at the country level is required.
Acknowledgement The data used in this paper have been accessed through Economic and Social Data Service, UK.
Annex 1. Details of decomposition analysis (unit =%).
Price effect
Algeria Iran Kuwait Libya Qatar Saudi Arabia UAE
Export importance
1980– 1988
1989– 2000
2001– 2006
1980– 1988
1989– 2000
2001– 2006
1980– 1988
18.84 10.64 32.91 17.16 24.21 18.83
11.86 7.78 0.16 0.52 4.52 8.13
11.53 24.23 20.21 34.47 9.86 22.24
8.21 3.87 24.80 36.63 38.19 44.71
0.15 0.33 9.53 8.68 4.24 3.81
0.85 0.05 1.38 13.31 10.09 0.93
7.37 0.74 4.14 1.11 9.11 8.72
33.65
12.62
19.67
43.58
8.71
2.37
6.92
Total effect explained 1980–1988 19.54 3.91 19.90 11.33 2.89 5.38 67.61
Oil dependency 1989– 2000
Energy intensity effect 2001– 2006
1980– 1988
1989– 2000
2001– 2006
0.40 0.96 0.55 4.59 4.90 2.98
0.57 0.78 0.17 1.68 11.52 2.29
14.87 3.61 33.67 41.35 68.62 77.65
1.18 0.30 3.09 17.72 3.68 4.67
0.28 0.13 7.56 7.89 4.18 2.13
10.61
1.14
151.76
5.09
4.98
Real change
Residue
1989–2000
2001–2006
1980–1988
1989–2000
2001–2006
1980–1988
1989–2000
2001–2006
12.80 6.79 6.04 13.10 7.54 11.97 5.63
11.53 23.64 14.20 38.20 7.11 21.15 13.46
20.89 9.57 32.86 32.11 34.46 38.80 33.92
13.64 4.42 5.30 7.25 7.14 12.30 0.65
11.48 20.94 10.97 35.16 2.97 20.18 9.90
1.35 5.66 12.96 20.77 31.57 44.18 101.53
0.84 2.37 0.74 5.86 0.40 0.33 4.98
0.04 2.70 3.23 3.04 4.14 0.98 3.55
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