Oil shock devastates poorest countries as shortages and protests mount

Developing countries are hardest hit by this year’s oil shock. Many rely on imported fuel and are crushed by a combination of high international prices, weak currencies and competition from wealthy countries whose economies are recovering from the pandemic.

Higher fuel bills are exacerbating inflation in countries that are already struggling with soaring food prices. The combination leads to unrest and protests from citizens, which democratic governments know from experience is one of the surest ways to lose popularity and power.

Sri Lanka, Laos, Nigeria and Argentina are among emerging economies in Asia, Africa and Latin America that have experienced long queues at some gas stations in recent weeks in due to fuel shortages.

Many governments face the dilemma of whether to cushion the blow of rising prices by increasing subsidies or cutting taxes – both of which hurt state finances – or by letting fuel prices rise and risking anger of consumers and businesses that cannot afford the extra cost.

Emerging Disorders

“We could see a lot of turmoil as emerging economies are more sensitive to fuel prices,” said Virendra Chauhan, head of Asia-Pacific in Singapore for consultancy Energy Aspects. “While historically most of them have relied on fuel subsidies to appease the population, due to a large and burgeoning import burden, it can be difficult to maintain these subsidies.”

The crisis is mainly the result of the double force of the post-pandemic demand recovery and the sanctions against Russia for its invasion of Ukraine, which have disrupted global energy flows, especially to Europe. Global benchmark Brent crude traded near $120 a barrel on Monday – around 70% higher than its average price in 2021 – after Saudi Arabia signaled confidence in demand and Goldman Sachs Group Inc. .predicted a tightening in markets as China emerges from lockdowns.

Among the emerging economies hardest hit by rising prices are Sri Lanka and Pakistan.

Mired in its biggest economic crisis, Sri Lanka is asking for help from the International Monetary Fund, China, Japan and India to pay for its fuel imports as domestic supplies dwindle. Airlines serving the country have been asked to carry enough jet fuel for the return trip or refuel elsewhere.

Soaring inflation and fuel prices have plunged Pakistan into a similar economic crisis, seeking an IMF bailout. But the fund insisted that the Islamabad government raise fuel prices to secure a deal. Meanwhile, foreign banks stopped offering trade credit for oil imports.

In Southeast Asia, Myanmar and Laos are also facing gasoline and diesel shortages, according to local media. In Myanmar, restricted access to dollars has prevented buyers from paying for imports. In Laos, long queues formed at gas stations last month as the country struggled to get enough fuel from its existing suppliers in Thailand and Vietnam, forcing the government to institute rationing.

Africa has been particularly hard hit, with Kenya, Senegal, South Africa and even oil-producing Nigeria all reporting fuel shortages. Airlines operating in parts of the continent have had to either cancel flights or refuel elsewhere.

Part of the problem is that demand is rebounding from the pandemic in developed countries, especially with the start of the northern hemisphere’s summer driving season. New York-area gasoline inventories fell to their lowest since 2017 last month, according to the Energy Information Administration.

Meanwhile, Europe has bought huge stocks of jet fuel in anticipation of a pent-up travel boom this summer, and diesel to replace Russian supplies.

“Europe is a big demand sink, and it won’t be easy to replace it,” Chauhan said. “Emerging markets are going to struggle to compete.”

The jump in demand was not accompanied by an increase in refining capacity. During the pandemic, when demand plummeted, operations at refineries in countries like the Philippines, Australia, New Zealand and Singapore were curtailed and stocks depleted. Now refiners are racing to replenish stocks.

The problem for many is where to find crude oil. As rich countries source supplies from traditional sources such as the Middle East, some developing countries are tempted to opt for cut-price Russian oil, despite concern over the anger of the United States and Europe, who are trying to pressure Russia with sanctions.

Russian decoy

Sri Lanka is trying to restart its only refinery with Russian oil, as the government tries to crack down on a growing black market in fuel. Lao Industry and Trade Minister Khampheng Saysompheng also said buying cheap Russian oil could be an option, according to local reports.

“Heavy discounts on Russian barrels, just from a price perspective, are attractive for some of these markets,” said Peter Lee, senior oil and gas analyst for Fitch Solutions.

Last month, a record volume of Russian oil headed to India and China.

For some poorer countries, the effects of rising oil prices fuel a downward spiral, where fuel import bills hurt the economy and weaken the currency, making oil imports even more expensive.

The Sri Lankan rupee has fallen almost 44% this year against the US dollar, while the Pakistani rupee has fallen over 11%.

The result is an increasingly frustrated electorate that tends to blame the government when food and fuel prices soar.

To cushion the blow, some governments increase subsidies or reduce fuel taxes, often to the detriment of public finances.

Mexico’s gasoline and diesel subsidies are costing the government more than double the extra profit the oil producer is making from higher crude prices, according to Bloomberg Economics estimates.

South Africa is among those that have temporarily reduced fuel taxes. Even so, motorists across the country are facing an almost 80% increase in fuel prices since the pandemic-induced low of 2020.

Indonesia, which saw President Suharto resign in 1998 after bloody protests over fuel prices and inflation, announced last month that it would increase state spending by about $27 billion this year, in part to pay for a 56% increase in fuel subsidies.

Former Pakistani Prime Minister Imran Khan was ousted in April after cutting fuel prices and then freezing them for four months, costing the government $600 million a month in subsidies and jeopardizing an IMF bailout.

High prices and fuel shortages not only irritate voters, but fuel broader economic problems. Farmers who cannot source or afford enough diesel cannot plant as many crops, further exacerbating food shortages and inflation. Higher ship fuel prices increase logistics costs. And governments that sacrifice revenue to keep fuel taxes low have less to spend in other sectors of the economy or have to increase their borrowing just as interest rates rise.

“What the world is realizing after the pandemic is that there is a need to secure our own energy supplies,” Chauhan told Energy Aspects. “This has amplified the impact on the transition from a fossil fuel-driven supply chain traded internationally to a domestic green energy transition.”