Topic: “Role of BRICS in Energy Security”
The oil price plunge since June 2014 may have been deemed as a boon for the global economy. But, that depends on where one stands, as a producer or user. BRICS economies also felt the impact.
Fiscal impacts have been negative where taxes on exports/ consumption of oil constitute an important source of government revenues as in the case of Russia. Though, it has been positive with respect to outlays with energy subsidies like in the case of India. The overall net impact on global GDP is expected to be positive. Besides a boost to global demand derived from the transfer of purchasing power from oil producers to consumers, lower oil prices have widened the space for (temporary) expansive monetary policies and enabled lower government spending with fuel subsidies.
Crisis for Russia as Exports Plunged
Oil and gas account for more than 70% of Russia’s exports and nearly half of its budget revenues. Russia’s economy has suffered a strong negative impact from lower oil prices. The energy sector is responsible for 17-25% of its GDP.
The oil price fall has come on
top of economic sanctions from the EU, Japan and the US related to the Ukraine crisis.
While balance-of-payments current account balances have remained positive, annual
resident capital outflows were running at 4-5% of GDP as of December 2014.
Devaluation pressures on the Ruble stemming from geopolitical risks increased after the oil price fall gathered pace. As a result, not only has annualized inflation moved above 10% this year, but also the US$600bn foreign debt of Russian banks and non-banking firms became an increased source of concern. Although large foreign reserves may still serve as a buffer against balance-of-payment crisis, real GDP is expected to slump by more than 3.5% this year, followed by another 1.5% in 2016.
China, India, and South Africa Benefit As Consumption Economies
According to World Bank estimate a 10% decrease in oil prices is expected to lift growth in oil-importing economies by something in the range of 0.1-0.5 percentage points, depending on the share of oil imports in GDP. Positive fiscal and current-account impacts are also expected. So clearly China, India, and South Africa are beneficiaries.
As per World Bank, China will experience an activity-boosting effect of lower oil prices in the range of 0.1-0.2%, given that oil comprises only 18% of energy consumption. A deflationary impact is also on the cards, although it will be limited as energy and transportation correspond to less than 20% of the CPI. Fuel subsidies amount to only 0.1% of GDP, so fiscal impacts will not be significant. On the other hand, as China remains the second-largest world importer, lower oil prices throughout 2015 and 2016 will likely raise its current account surplus by 0.4-0.7 percentage points of GDP.
Sweet Spot India and South Africa
India has an oil import bill of 7.5% of GDP and has derived high terms of trade gains from the oil price evolution. Furthermore, its challenges with fiscal deficits and high inflation have been made easier. The government has already taken the opportunity to phase out diesel subsidies and hike taxes on oil derivatives. Falling oil prices have also helped to bring inflation down to less than 4.5% a year last December, opening space for some monetary policy loosening ahead.
South Africa is also a net importer of oil and a beneficiary from lower prices, including by corresponding effects on inflation and the import bill. As far as current-account deficits and GDP are concerned, recent oil price developments have come as a relief after the previous decline of prices of metals and minerals that comprise a substantial chunk of the country’s exports and GDP.
Mixed Bag for Brazil
Brazil has a small deficit on its oil foreign trade — as compared to the other countries and that qualifies it for potential benefits of declining prices both on its current-account deficit and as a facilitator for an undergoing domestic price realignment of oil derivatives.
On the other hand, the new international price regime and levels have come at a moment in which strong bets on future oil-related investments had been made in previous years, toward an expected crossing of the threshold to the group of net-exporting countries. Together with the unfolding corruption scandals in state-controlled Petrobras, world oil price developments have prompted a full downward review of such investments. It has really hurt the country’s chances.
Road Ahead: Great Potential in Cooperation among BRICS Nations
Considering the recent crash in Oil and Gas market it become imperative for BRICS countries to come closer and increase their cooperation in Oil and Gas sector as Countries like Russia is a major exporter of Oil and Gas, whereas India, China and South Africa are the biggest importers and consumers of Oil and Gas.
BRICS Summit Should Facilitate
In such a situation, the Platform of BRICS Summit can be used as a facilitator for Policy
Makers of all 5 countries to increase cooperation among nations in the field of Oil and
Gas. Interestingly, India already has committed huge investments in Russia Oil and Gas
blocks via National Oil Companies (NOC) like OVL, OIL, BPCL and IOC. On the other
hand China is also keen on investing heavily in the country. All these countries should
come together to form a consortium in the Oil and Gas space.
USP of Indian Oil and Gas Space