Across Asia and the Pacific, soaring oil prices are threatening the prospects of millions of poor households – and posing an unforeseen challenge to the Millennium Development Goals. Since 2003, prices have been rising inexorably, from around US$22 to above US$80 a barrel now, and have been showing little sign of easing.

Indeed, many developing countries in the region are likely to become even more exposed to rising prices, as measured in this Report by a new ‘Oil Price Vulnerability Index’ (OPVI). In response, the Report represents a set of policy options and priorities that can help reduce national vulnerability to future price rises and protect the interests of the poor.

How oil price rises have hit the poor

The Report starts by asking poor communities how they have been affected by rising oil prices. For this purpose, field studies were carried out in rural and urban areas of four countries: China, India, Indonesia and Lao PDR, interviewing 500 mostly poor households along with local authorities, public service institutions and other community stakeholders. These communities used four main petroleum fuels – kerosene, liquefied petroleum gas (LPG), diesel and gasoline. In addition, farming communities use chemical fertilizers for which the feedstocks are often petroleum products and natural gas.

Kerosene – Rural communities mainly use kerosene for lighting whereas urban households use it for both lighting and cooking. LPG – Most urban households prefer this for cooking because it is convenient, efficient and clean, though many rural households may opt to cook with traditional fuels.

Gasoline – This is the least significant fuel for poor households, since it is used mainly in cars and motorcycles that relatively few can afford.

Chemical fertilizers – Expenditure on petroleumbased fertilizers can be quite substantial for poor households.

The poor communities interviewed experienced steep increases in the retail prices of all these oil products. Before 2003, they had been protected to some extent by government subsidies. But when prices started on their upward spiral, these policies proved difficult to sustain and subsidy shields are steadily being stripped away. In some countries, the resulting price increases have provoked a public backlash,posing a dilemma for governments torn between the conflicting priorities of fiscal prudence and social justice. ...

Where do we go from here?

Along with the rest of the world, developing countries of the Asia-Pacific region face an uncertain oil future. While no one can predict how oil prices will move in the coming years, more signs seem to indicate an upward move than not. But in the final analysis, they converge on a single point, which is that the world’s finite oil resources will one day or another be exhausted.

Yet for the poor to rise above poverty, they will have to consume more electricity and modern fuels, including oil. Failure to ensure this means the poor will remain poor – indeed millions will slip back to relying on biomass fuels and human labour, back to eking out subsistence-level incomes while the rest of the population moves farther ahead in social status and economic affluence.

This Report outlines a range of solutions to prevent this from happening.While each country will doubtless weigh them in the light of its own circumstances, the broad direction should be clear. While adopting strategies to secure the future of their economies, all developing countries must alleviate the suffering of their poor in the immediate present. This means providing the poor with essential relief against rising fuel prices, by way of focused subsidies, compensation and direct cash transfers.

Simultaneously, a concerted effort is needed to shift the future trajectory of energy consumption, not only of the poor but also of whole economies, away from a reliance on oil. Reducing the oil intensity of development is no longer a matter of choice; it is the only course. The time to act is now – before affordable oil becomes a distant memory. (Executive Summary)

Download Overcoming Vulnerability to Rising Oil Prices: Options for Asia and the Pacific

PDF format, 2.9MB, 167Pages.

TEAM FOR PREPARATION OF THE REPORT

Team Leader: Nandita Mongia
Core Team: K.V. Ramani,Thiyagarajan Velumail, Bhava Dhungana, P. Balachandra, Sooksiri Chamsuk and Thomas Jensen
Editors: Peter Stalker and Kay Kirby Dorji
Data Team: Energy Focal Points – UNDP Country Offices in Asia and the Pacific, Sanna Salmela-Eckstein and Rebecca Roberts
Cover Design: Keen Media (Thailand) Co., Ltd.
Production Design: Nandita Mongia,Thiyagarajan Velumail, Bhava Dhungana, Sooksiri Chamsuk and Panida Charotok

Regional Energy Programme for Poverty Reduction (REP-PoR), UNDP Regional Centre in Bangkok (RCB)

This Report would not have been possible without a truly collaborative and cross-regional effort. Manuel Soriano, from the UNDP RCB, Anuradha K. Rajivan, from the Regional Centre in Colombo (RCC), and Kamal Rijal, from the Bureau for Development Policy (BDP) in New York, provided substantial advice on technical aspects of the Report. Cherie Hart from the UNDP RCB provided invaluable support with regards to advocacy and media outreach.

FORWARD:

Global oil prices have been rising steadily and now have hit an all-time high of US$84 per barrel. UNDP commissioned this Report because there is evidence that these rising oil prices are starting to bite, most severely at the incomes and lives of the region’s poor. Governments have been trying to protect the vulnerable – either by providing subsidies, or by obliging public oil companies not to pass on the full international price increases to local consumers. However, these policies are becoming difficult to sustain.

The political and social consequences are severe. Over the past few years, people across the region have taken to the streets in various Asian countries in reaction to significant fuel price hikes.

This Report examines how oil price rises are affecting the region’s poorest people. To capture this, it starts with a survey of day-to-day realities on the ground. The results are deeply disturbing. Over the last three years, households in the region are paying, on average, 171 percent more for cooking fuels, 120 percent more for transportation, 67 percent more for electricity and 55 percent more for lighting fuels.

This Report also develops an Oil Price Vulnerability Index (OPVI). This is a composite of selected indicators that reflects not just a country’s economic performance and the resilience of its economy, but also the extent to which it depends on imported oil. For 24 countries for which the index has been calculated, 13 have been flagged as relatively vulnerable, with high OPVIs. However, macroeconomic consequences have not yet become fully visible in many countries, although rates of inflation have shown a tendency to rise.

The current price rises should, however, not be viewed simply as the source of an impending crisis.They also offer an opportunity to seek new and promising directions. Indeed, many countries have the chance to redesign policy to achieve not just national energy security, but also security at the household level.

The Report proposes the establishment of an Asia-Pacific Compensatory Oil Finance Facility for least developed countries and small island developing states with a two-fold purpose: first, to help tide poorer countries over the immediate balance of payments or fiscal deficits provoked by the oil price hike; second, to enable countries to invest in alternative forms of energy so that they become less dependent on imported oil.

Hafiz A. Pasha
UNDP Assistant Administrator and Regional Director
Regional Bureau for Asia and the Pacific

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