Zimbabwe opens first biodiesel plant to ease catastrophic fuel shortages in farm sector

High oil prices are disastrous for poor, oil importing agrarian countries, because they limit the production and marketing of food and drive up prices of all other products and services. Zimbabwe's president Robert Mugabe therefor commissioned the first biodiesel production plant in the oil-starved country, vowing that because of biofuels, Zimbabwe would "never collapse." The biodiesel plant's output is primarily intended to ease dramatic fuel shortages in the farming sector. Agriculture is an energy intensive economic sector and thus the project makes sense. In a country like Zimbabwe, biofuel production boosts food production instead of limiting it.

The country's dependency on imported fuels is a major constraint to virtually all economic activities, particularly the agrarian reform programme as the Zimbabwean government drives a rural modernisation programme whose success hinges on fuel availability. The biodiesel project is a culmination of years of research. In 2004, the Reserve Bank of Zimbabwe commissioned a biodiesel project at the Harare Polytechnic under which it procured a test vehicle, bio-reactor chemicals and other logistical support facilities, culminating in the "convincing" certification that biodiesel was a feasible option for Zimbabwe (previous post). The project will not just benefit the fuel sector, but is expected to have a positive impact on the rest of the economy as well through the creation of synergies.

Besides reducing fuel costs for farmers, Zimbabwe's peasants are set to benefit in a second way as a new and ready market for oil seeds emerges. Industry in general and the motoring public are also expected to operate better after the launch. The plant is being commissioned just in time for the festive season and the beginning of the summer cropping season, periods during which demand for fuel is very high.

As a nation we have once again demonstrated that the ill-fated sanctions against the innocent people of Zimbabwe can never subdue our resilience and inner propulsion to succeed and remain on our feet as a nation. Soon, our economy will be paying us back the dividends of the seedlings of progression we are planting across different productive sectors. - Robert Mugabe

The Transload biodiesel plant, located 15 kilometres (10 miles) northwest of Harare, is a joint venture between a Zimbabwean and South Korean firm. The plant has a capacity of 100 million litres of biodiesel annually. The main feedstocks are cotton seed, soya beans, jatropha and sunflower seed.

Zimbabwe imports some 4.7 million barrels of oil per year. Of this, the biodiesel plant would replace more than 630,000 barrels, roughly 13 percent, and save the country 80 million US dollars per year directly. Indirect savings due to smoother food production and lowered inflation have not been disclosed.

As a people, we have demonstrated that the dark clouds of our hard times, particularly those sown by Western destructive forces, have their silver lining by way of not just strengthening our resilience, but also of deepening our scientific research and stimulating our innovativeness. - Robert Mugabe

Zimbabwe is in the throes of an unprecedented economic crisis characterised by high inflation perched at nearly 8,000 percent, mass unemployment and chronic shortages of fuel. Fuel stations often go for months without deliveries while long queues form at the few that do receive supplies.

Mugabe's fusion of a discourse on energy security and political independence is not that far fetched: high oil prices and fuel dependence can literally destroy the economies of energy intensive, poor, oil importing countries like Zimbabwe. These developments are "exogenous" factors to which only biofuels offer an "endogenous" antidote. This is why the green fuels are often put in the ideological and geopolitical framework of economic independence and energy security.

The effect of high oil prices
More fundamentally, in least developed countries, record oil prices affect all sectors of the economy, but in particular the argricultural sector. In Zimbabwe, more than 65 percent of all people are employed in this sector. For the wealthiest countries (non-oil producing OECD), oil imports make up less than 2% of GDP, whereas for African oil importing nations this was more than 10% of GDP in 2006 (more here *.doc). In poor oil importing countries, oil price rises of the current magnitude imply a significant reduction of economic growth rates, an erosion of trade balances, rising unemployment, the destruction of the effects of debt relief efforts, and a hike in inflation rates. Of the 47 poorest countries, 38 are net importers of oil, and 25 are fully dependent on imports (more here). Zimbabwe belongs to the latter group. But there is more:
energy :: sustainability :: biomass :: bioenergy :: biofuels :: biodiesel :: oil :: energy independence :: energy security :: food :: agriculture :: rural development :: Zimbabwe ::

If coupled with low foreign reserves some of the effects of current high oil prices are: decreased import capacity, lower consumption and investment, lower production and employment. And as always, the poor are hit hardest as they face lower employment prospects, higher inflation (fuel, transportation, basic goods), and cuts in government spending on social services (in a recent report, when oil stood at around US$ 60 per barrel, the UN found that some of the poorest countries are already forced to spend six times as much on imported oil as on such fundamental social services as health care and education (earlier post). According to an African Development Bank document on the effects of high oil prices on African societies:

Lower employment prospects and the higher inflation rate will lower the purchasing power of the poor who have fewer (if any) instruments to hedge against the oil price increase. The biggest impact will be through higher price of kerosene which is used for cooking and lighting. The poor will also be affected by higher transportation costs. Clearly, higher petroleum costs will increase commuting costs and, especially in the case of agricultural economies, the cost of getting the crops to the markets.

Given the limited availability of foreign exchange, these poor oil-importing countries face a number of options. Consumers and firms could decide to reduce their oil consumption but since the demand for oil is highly inelastic in the short-term, they may be compelled to reduce their consumption of other imported goods. Doing so could undermine economic growth especially if capital goods imports are affected.

Alternatively, countries could try to access foreign currencies to fill the gap and finance the energy bill. However, obtaining funds from private markets, bilateral and multilateral sources must be consistent with medium-term sustainability and sound debt management. In highly indebted poor countries, the only solution to fill the financing gap, and not to weaken growth, is to obtain grants or highly concessional loans. More importantly, governments will have to consider sustainable financing plans as all evidence points to oil remaining at high prices.

High oil prices will also exert a heavy toll on the budget both on the revenue and expenditure sides. On the revenue side, the tax base will be eroded if the profitability of oil-consuming companies is adversely affected and if unemployment increases. Expenditure could increase wherever governments subsidize oil products, or programs, which make intensive use of petroleum products. In that regard, an important question is if there should be complete pass-through of the oil price increase.

Governments are under heavy pressure to intervene to cushion the effect of the oil price increase. If the price of oil is not mean-reverting, price controls will lead to ever increasing losses which will ultimately be borne by current or future tax payers.

Subsidies to public utilities can also worsen the consolidated government budget deficit. In many countries electricity is produced using oil and is sold by law below its cost of production. In this case, the government will have to bear the additional expenditure from a higher oil bill. If the government does not have the resources to do so (for instance, if foreign reserves are too low), it may have to resort to rolling blackouts which have very adverse effects. Moreover, governments will themselves face higher energy bills through their own activities and that of state-owned companies.

Central banks may be tempted to tighten their monetary policy in reaction to the increase in inflation. Previous oil price shocks have produced significant increases in real interest rates which undermined domestic investment, pushed countries deeper into recession and produced stagflation. Furthermore, a rising fiscal deficit, combined with increasing public expenditures due to petrol consumption by public entities, can prompt the authorities to use monetary creation to finance the additional expenditures. As the increase in the price of oil is akin to a supply shock, an accommodating monetary policy would contribute to inflation. Non-inflationary policies are needed to avoid hyperinflation and to maintain monetary credibility.

Zimbabwe hopes that by relying on locally produced biofuels, which are expected to be less costly than imported refined petroleum products, some of the potentially disastrous effects of these many problems can be averted.

Mugabe blames the economic collapse of his country on targeted sanctions imposed on him and members of his ruling elite by the European Union and the United States following presidential polls in 2002 which the main opposition and Western observers say were rigged.

Picture: soldiers guard the Transload biodiesel plant on the outskirts of Harare. Credit: AFP.

References:
Agence France Press: Mugabe commissions Zimbabwe's first biodiesel plant - November 15, 2007.

The Herald (via AllAfrica): Zimbabwe: Government to Launch Biodiesel Plant Today - November 15, 2007.

Biopact: High oil prices disastrous for developing countries - September 12, 2007

Ralf Krüger: Impact of high oil prices on oil-importing countries in Africa [*.pdf], UNECA Project LINK meeting, Fall 2006, Geneva.

African Development Bank Group: Can Struggling African Economies Survive Escalating Oil Prices?

African Development Bank Group: High Oil Prices and the African Economy [*.doc] - Concept paper prepared for the 2006 African Development Bank Annual Meetings Ouagadougou, Burkina Faso.

Biopact: Zimbabwe's jatropha project receives US$11.6 million - May 18, 2007