Oil Profits a New Way to Save LDCs

by Jackie Jacobsen
for MediaGlobal

In the ongoing search for necessary aid to the world's LDCs, UN officials are optimistic that they have discovered a new source for development funds. As the price of oil continues to escalate to previously unseen levels, Anwarul Karim Chowdhury, the UN under-secretary-general for LDCs has suggested that oil companies contribute a small proportion of their profits to assist vulnerable states.

Chowdhury suggests oil companies donate 10 cents a barrel to forward to a development fund for these states. Currently, the average price of a barrel is $72, tripling in price since 2001. "This is a part of our efforts to secure new sources of development finance for LDCs," he said. "We need an expressed willingness on the part of producers and companies directly involved in oil production."

As oil prices have soared, critics have become more vocal about the severity of the global wealth disparity between oil-producing states and states with no petroleum reserves. It is estimated that Middle Eastern states will have exported nearly $400 bn in oil by the end of 2006, up from $307 bn in 2005. Because oil is the fuel of choice for 96% of all transportation and production technologies in the world, oil-producing nations can expect their economies to be buoyed by petroleum for many years to come.

In stark contrast, the potential for economic growth is significantly less promising for those developing states without oil reserves. According to UNDP statistics, the poorest 20% of the world's population only maintained a share of 1.2% of the global income in 1998. Roughly 50% of the global population now survives with less than $2 a day. In Zambia, nearly 67% of the population lives under this internationally recognized poverty line. "Extreme poverty appears to be decreasing in very few of the LDCs, and increasing in many," said UN Secretary General Kofi Annan.

The plan for lessening this looming disparity comes at a period when oil profits have exceeded all forecasts, and their share in global wealth generation has swelled. "This [contribution from oil companies] will help raise a special fund without affecting any other earmarked funding," said Arjun Karki, president of Nepal-based NGO LDC Watch. Karki emphasizes, though, that alternative sources for LDC funding should also be pursued.

This UN directive comes at a time when popular opinion has swung decisively against big oil companies. With leaping prices for automobile petrol and heat pinching the wallets of the developed world, and the increasingly outlandish bonuses received by oil company CEOs, individuals are calling for a change in oil distribution policies. ExxonMobil alone recorded $5.18 bn in profits for this year, up 65% from last year's figures. According to the Christian Science Monitor, 63% of Americans held oil companies to be solely responsible for the rise in gas prices.

A backlash against these wide profit margins is only natural, maintains critics. "It's not demonizing profit," said Tyson Slocum, an energy policy analyst at the consumer group Public Citizen. "It's talking about what level of profit is reasonable in a special commodity." Because so few states actually reap the benefit from surges in oil prices, and so many depend on petroleum in order to maintain economic productivity, it is only just to earmark a small percentage to enable LDCs to provide vital and basic services for their citizens.

Directors on the Executive board of the IMF, in a seminar on oil market developments, “agreed that the response by importing countries to higher oil prices will continue to require some combination of increased foreign borrowing, reserve drawdown, and adjustment, including allowing of real exchange rate depreciation.” The International Energy Agency estimates that a rise in petroleum prices has minimal effects on developed economies, but that the most vulnerable economies stand to lose 1.6% of their GDP, while the most heavily indebted sub-Saharan states may lose up to 3% of their GDP. Overall, with every $10 increase in oil prices, the world economy loses an equivalent of $255 bn.

Chowdhury maintains that there is a precedent for providing these resources so that developing states can withstand an increase in oil rates. The Common Fund for Commodities was established in 1982 by OPEC states, and is committed to enabling energy-dependent LDCs on diversifying their products and energy sources. However, the scope of the CFC's mission is too narrow to meet the growing needs of vulnerable states, and a new system of dispensing a percentage of oil profits is needed to further close the gap in global income disparity.