Thursday, May 14, 2009

Oil Importers vs. Oil Exporters in the Credit Crisis

Daily Times Pakistan
Financial Times

Whether a country is an oil importer or and oil exporter may have an effect on how the country is being effected by the global credit crunch. Though both types of countries face similar pressures—such as the general lack of financing available and the lower volumes of foreign cash flows into their countries—each type of country faces its own set of problems.

Oil exporting countries in the Middle East and North Africa are facing much lower prices for oil then the record oil prices of 2008 they received. Most of these oil exporting countries’ governments heavily rely on the revenues from oil, and the lower prices mean that they are having a more difficult time raising money to run their countries. Additionally, these countries are facing tightening credit conditions and may have a difficult time funding their oil production. GDP growth in these countries is expected to contract from 5.4% to 2.3% in 2009.

Oil importing countries, on the other hand, are largely benefiting from the lower cost of oil. The lower cost of oil has helped offset the other negative effects of the credit crisis. These negative effects include less demand for their (non-oil) exports, lower levels of direct foreign investment, less tourism and lower levels of remittances. In this region, growth is expected to contract from 5.7% to 2.6%.

In other oil producing news, Nigeria, a major oil exporting country, has recently run into problems with provided its country with finished oil products, such as gasoline. This is something of a paradox; although Nigeria produces large amounts of crude oil, the have to import gasoline because their four, state-owned refineries are old and unable to produce the necessary quantities of oil.

In order to insure that they have enough gasoline for the country, the government gives subsidies to its importers. However, this subsidy system has been inefficient and expensive for the government to maintain given the drop in oil export revenues. For this reason, the Nigerian government recently stopped paying the subsidies. This backfired, though, as the importers stopped importing the finished oil which lead to shortages across the country. These shortages lasted for several weeks, and the Nigerian government was forced to pay the subsidies, although the payments are wrecking havoc on their budget.

1) Although the price of oil has decreased over the past 6 months, shouldn’t the funds that oil exporters raised during boom times help them survive this down period?
2) If the subsidies are too expensive for Nigeria, how can they continue to pay them? Are there other ways Nigeria can stop paying for the subsidies that won’t lead to shortages?

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