UNCTAD assesses the impact of rising energy prices on African economies, biofuel alternatives

Experts attending a United Nations conference on biofuels say alternative sources of energy could counter the rising price of fossil fuels, which is especially burdensome for developing nations. Growing concerns about petroleum price fluctuations, energy independence, access to commercial energy and the climate change impacts of fossil fuel use have drawn substantial attention to biofuels – fuels derived from biomass – as an alternative to meeting the world’s growing energy demand and as tools to stimulate rural development in the South and provide new end-markets for agricultural products.

Uganda's ambassador to the U.N. offices in Geneva, Arsene Balihuta, says the development of biofuels has many advantages for developing countries. They may lead to lower oil prices, to better energy security and diversification of energy sources.

"Their development may lead to the contribution of the development of rural areas, especially in the Least Developed Countries. What was interesting in one of the presentations was that bio-fuels are likely to be produced in the equatorial belt of the world, where most of the bio-mass can sustainably grow. And most of the Least Developed Countries are actually found in this belt."

The U.N. Conference on Trade and Development (UNCTAD), which sponsored the three-day meeting, reports world production of ethanol from sugar cane, maize and sugar beet doubled to 40 billion liters in five years. This represents the equivalent of around three percent of global use of gasoline. Some analysts estimate biofuels such as ethanol and biodiesel could make up 20 percent of fuels consumed worldwide by 2020.

Zambian Minister of Energy Felix Mutati noted that high fuel prices keep people impoverished, despite debt forgiveness and increases in international development assistance:

"Whereas, we have had debt relief; whereas we have had an increase in the volume of aid, this has been eroded because of the increasing price of importation of fuel. In the particular case of Zambia, the annual debt relief is in the order of $150 million. The impact of the increases in price are greater than $150 million."

Impact of rising energy prices on African economies
In an earlier document prepared by the UNCTAD, entitled The Exposure of Arican Governments to the Volatility of International Oil Prices, the UN agency showed that African countries, whether oil importers or exporters, are severely affected by the volatility of international oil prices. Governments see their budget revenue and expenditure fluctuate greatly. Projects started when oil prices were high are abandoned when funds dry up, because of price falls. Oil consumers, such as transport companies, are often squeezed between the pressure of higher prices, and the potential discontent of their clients if they raise tariffs.

Farmers see their terms of trade deteriorate when transport costs increase. Managing this risk exposure is no mean task. Trying to forecast prices is to no avail: the margin of error in price forecasts is so large that they cannot legitimately be used as a planning or budgeting tool. So how should Governments deal with this large risk exposure? Traditional tools such as domestic stabilization funds have amply demonstrated their weaknesses. Compensatory finance, from the IMF or the World Bank, has rarely been available, and if provided has fallen short and come late. Other measures such as privatizing oil trade and adapting tax levels eliminate the risks for Governments, but not for their populations:
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More innovative market-based tools, such as futures, options, swaps and commodity-pricelinked loans, also have their limitations, but by and large, perform well. Access to these tools has much improved, particularly for Governments that can now use multilateral facilities. Developing country Governments and African banks and oil companies should learn about these instruments, and explore how they can be used to mitigate the negative effects of oil price fluctuations on their economies and populations.

But the most radical change - a shift from a petroleum-based to a bio-based economy - offers most opportunities for African countries in the long run.

Opportunities for the developing world and the role of international trade
The budding biofuels market presents many opportunities for developing countries where biofuels may be produced most easily and cheaply, although different countries will enjoy different opportunities and biofuels may not be the most appropriate option for all of them. International trade in biofuels and feedstocks may provide win-win solutions:

* For several importing countries it is a necessary precondition for meeting the domestic blending targets

* For exporting countries, especially small- and medium-sized developing countries, export markets are necessary to augment local demand while initiating their industries.

Nevertheless, biofuels face significant tariff and non-tariff measures that offset lower production costs, hamper international trade and have negative repercussions on investments. The biofuels market is also distorted by subsidies, loans, direct payments and grants, tax breaks and incentives. Moreover, the biofuels market is distorted by the fact that the agricultural sector in many developed countries is the largest recipient of governments´ subsidy programmes.

Potential risks and downsides
But, there are downsides and risks to producing biofuels. For example, UNCTAD says, if undertaken uncarefully, the use of land for energy crops may be done at the expense of food crops. It also may be using scarce water resources. It says growing energy crops could reduce biodiversity. Thus the overall environmental costs of biofuels have to be weighed against the environmental advantages.

Small producers´ involvement and a dearth of technological capacity are additional factors that will require careful study, effective policies and strategic assistance in order to pave a sustainable path towards bioenergy development goals.

More information
UNCTAD: Trade, development and regulatory aspects of the biofuels option

UNCTAD: The impact of high energy prices on trade and development

UNCTAD: Emerging Biofuels Market: Regulatory, Trade and Development Implications [*.pdf]

UNCTAD: Potential uses of structured finance techniques [*.pdf]

UNCTAD: Challenges and opportunities for developing countries in producing biofuels [*.pdf]

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