Paper on Oil Consumption in Developing Countries

University of tilburg| Oil consumption in less developed countries| Empirical study on oil consumption in less developed countries| Abstract: This paper investigates the relation between GDP and oil consumption in a sample of 71 LDC’s. Two outlier countries with a deviating rate of oil consumption are found. Equatorial Guinea has relatively low oil consumption, while The Seychelles has relatively high oil consumption, in relation to their GDP. After that possible factors that might affect oil consumption are discussed.The presence of oil fields, dependability on oil, inequality, distribution of income and the distribution of GDP and labor between sectors are the main factors that influence oil consumption. After that research is done into the background and history of the countries. The factors that were found are applied to the countries and the conclusion is drawn based on that. | Table of contents Chapter 1 – Introduction3 1. 1Motivation3 1. 2Research goals and structure3 1. 3Structure3 1. 4Problem definition3 Chapter 2 – Data analysis4 2. 1Sample4 2. 2Sample characteristics4 2. 3Data analysis4 . 4Outliers4 Chapter 3 – Internal and external factors affecting oil consumption6 3. 1The presence of (un)developed oil fields in a country6 3. 2The dependability on oil and the availability of other fossil fuels 6 3. 3The degree of inequality or income distribution6 3. 4The distribution of labor and capital among the sectors and the 6 output of the sectors Chapter 4 – Outliers: Equatorial Guinea and The Seychelles7 4. 1Equatorial Guinea7 4. 1aIntroduction7 4. 1bFactors affecting oil consumption in Equatorial Guinea8 4. 2The Seychelles10 4. 2aIntroduction10 4. bFactors affecting oil consumption in The Seychelles11 Chapter 5 – Conclusion altogether13 5. 1Conclusion13 References14 Appendices15 1. Introduction 1. 1 Motivation One reason to choose for oil consumption was that it was important to choose something that was not too straight forward or done a million times before. Although oil consumption is considered to be an important figure, it was not a part of this course. It seemed interesting to look at the oil consumption rate of a group of developing countries, especially since this information was not known to the authors prior to this assignment.This meant that it was a stab in the dark for the statistical part. But luckily enough, two outliers were found, one above the average and one below, which was a bonus, because it allows us to write from different perspectives even though the reasons provided are country specific. Additionally, it is believed that the oil consumption is going to change in the coming years. Sustainability and “thinking green” becomes an ever more important issue in the global political arena and there are quite some projects that experiment with different sources of energy.So now that the oil consumption rate is not yet “tempered with” (the other sources of energy are not used on a global scale yet) and still an important economical indicator, it seems like this choice is very relevant at the moment, but nobody knows how long this will stay this way. That is why this assignment is about oil consumption, while it is still important. 1. 2 Research Goals & Structure In this paper the aim is to investigate the oil consumption of developing countries, when compared with the GDP per capita levels of these countries.With the statistical data of several consecutive years it is then possible to identify certain outliers, based on linear regression. The next step is to look for reasons why these countries deviate from the trend that was found in the regression. These reasons will then be put in a separate chapter for each outlier, so that there is plenty of room to put the reasons into this report. So, the ultimate goal of this research is to identify outliers based on the criteria mentioned above, and explain why these countries are outliers. 1. 3 StructureChapter 2 of the paper discusses the sample that was used and its characteristics. Further, the data is analyzed and the outliers are revealed. Chapter 3 discusses the possible internal and external factors that influence oil consumption in less developed countries. In chapter 4 the outlier countries are discussed. Background information and history are given. Also the possible factors discussed in chapter 3 are applied to the outliers. Chapter 5 will give a short summary and present the conclusion. 1. 4 Problem definition The problem definition of this research paper is:Which factors influence the oil consumption rate in developing countries to the extent that they significantly deviate from the expectation based on the GDP per capita level? 2. Data Analysis 2. 1 Sample For our research we selected 71 countries, all countries are Asian, African our South American. We found these data on www. nationmaster. com and used GDP per capita and Oil consumption per thousand people. We used data from 2005, 2006 and 2007, because we wanted to have a meaningful sample. We calculated the average GDP and oil consumption for all countries and afterwards usedSPSS for a regression analysis. For all data see Appendix 2. 2 Sample characteristics GDPOIL (per capita)(bbl/per day per 1,000 people) Average| 1. 761,16| 6,43| Median| 723,06| 2,13| Mode| #N/B| 1,393| Standard Deviation| 2365,7944| 10,97628| Variance| 5596983| 120,4786| Kurtosis| 9,54695| 19,87701| Skewness| 2,7134792| 3,968487| Minimum| 99,88| 0,14| Maximum| 13. 839,54| 72,47| Sum| 125. 042,61| 456,87| Count | 71| 71| Confidence level (95,0%)| 17,606065| 0,081685| 2. 3 Data Analysis R Square: 0,351918 Regression line: y= 0,00275 X + 1,588 2. 4 Outliers Our analysis shows that we have two outliers.Seychelles (upper red dot in graph 1) and Equatorial Guinea (lower red dot) deviate more than 2. 5 times the best fit linear regression line. Seychelles have a GDP of 8. 554,04 per capita and use 72,466 bbl/day per 1,000 people. Equatorial Guinea, being the other outlier has a GDP of 13. 839,54 per capita and only uses 2,083 bbl/day per 1,000 people Graph 1: Regression line. GDP per capita and oil consumption. 3. Internal and external factors affecting oil consumption In this section, we will discuss different factors which might have a positive or negative impact on oil consumption.Although the degree of oil consumption might be the cause of a chain of factors and one factor may be the cause or the result of another factor, it is important to look at the different factors one by one. 3. 1 The presence of (un)developed oil fields in the country Let us first investigate the presence of oil fields in a country and its consequences on oil consumption. The most obvious reasoning would be that oil consumption in a country increases if that country possesses multiple big oil fields, developed or undeveloped. However, there are a few catches that might turn out against the expectations.It is important to distinguish between developed and undeveloped oil fields. While developed oil fields directly give a national oil supply (if properly refined) and thus an expected increase in oil consumption, undeveloped oil fields do not. The reason why undeveloped oil fields might also give a rise in oil consumption is that the government may import or consume more oil, assuming they can exploit their own oil fields when they have shown a sufficient growth. This growth is needed to acquire the necessary technology to exploit oil fields and refine the oil. . 2 The dependability on oil and the availability of other fossil fuels Countries use oil and other fossil fuels primarily for the generation of energy. Developed countries also have other means of generating electricity, the so-called renewable energy. Renewable energy is replenished by nature, like water, wind, sunlight and geothermal heat. To produce electricity out of these sources requires a very advanced technology, which developing countries mostly don’t posses. Developing countries therefore are stuck with the traditional fuels.When a country has access to its own source of energy, like an oil field or natural gas well, it can use these for its own consumption. Imports from other countries will then be unnecessary. However, when a country has access to no energy source at all, it will have to import its electricity or fuel to generate its own electricity. If a developing country decides to import an energy source and generate its own electricity, it might limit number of energy sources to just one, to minimize the costs of acquiring technology and building specific refineries and generators.The latter also holds for when a country has access to just one source of energy. It will then probably focus its energy production on the particular source of energy, rather than importing other sources of energy. 3. 3 The degree of inequality or income distribution Income distribution is another important aspect in developing countries. A high inequality may have big consequences for economic growth and development. It may also affect the oil consumption of a country in a negative way. If the top level of a country earns most of the income, the lower and middle incomes may have less to spend on non basic needs.The use of oil doesn’t usually come in the basic needs basket. Poor people will first buy products to ensure their survival. A high percentage of people living below the United Nations Poverty Threshold of $2/day explains a low rate of oil consumption. 3. 4 The distribution of labor and capital among the sectors and the output of the sectors Another important factor is the distribution of labor among the sectors and the output of those sectors. A big service sector might be the cause of high oil consumption, while a big agricultural sector could result in relatively low oil consumption.The scale and technology that are used are also important. Small, labor intensive family farms will relatively use much less than for example big, capital intensive, industrialized farms. 4. Outliers: Equatorial Guinea and The Seychelles 4. 1 Equatorial Guinea 4. 1a Introduction Equatorial Guinea is a former Spanish colony located in west central Africa. Due to recent oil discoveries it’s one of the wealthiest countries of Africa. Despite its very high GDP per capita, Equatorial Guinea’s oil consumption lies way below expectations. In this section we will analyse and discuss the factors that are applicable to Equatorial Guinea.Let us first look at some basic data from the country. GDP – per capita (PPP):| $37,600 (2009 est. )| $36,700 (2008 est. ) | $33,900 (2007 est. )| note: data are in 2009 US dollars| | GDP – composition by sector:| agriculture: 2,2%| industry: 93,9%| services: 3,8% (2009 est. )| | Unemployment rate:| 30% (1998 est. )| | Budget:| revenues: $5. 015 billion| expenditures: $5. 988 billion| | Public debt:| 5. 4% of GDP (2009 est. )| 1% of GDP (2008 est. )| Inflation rate (consumer prices):| 7. 1% (2009 est. )| 4. 3 % (2008 est. )| | Oil – production:| 346,000 bbl/day (2009 est. country comparison to the world: 34| Oil – consumption:| 1,000 bbl/day (2009 est. )| Oil – exports:| 362,900 bbl/day (2007 est. )| Oil – imports:| 1,114 bbl/day (2007 est. )| Oil – proved reserves| 1. 1 billion bbl (1 January 2010 est. )country comparison to the world: 40| | Natural gas – production:| 6. 67 billion cu m (2008 est. )country comparison to the world: 46| Natural gas – consumption:| 1. 5 billion cu m (2008 est. )| Natural gas – exports:| 5. 17 billion cu m (2008 est. )country comparison to the world: 26| Natural gas – imports:| 0 cu m (2008 est. )| Natural gas – proved reserves:| 36. 1 billion cu m (1 January 2010 est. )| | | source: CIA world factbook 4. 1b Factors affecting oil consumption in Equatorial Guinea Now that we have investigated some of the economic data of Equatorial Guinea, it’s important to look at the history of the country. Before it became independent, Equatorial Guinea had been a Spanish colony. Spanish influences contributed to a high literacy rate, a good infrastructure and decent health and education standards. GDP was also one of the highest of the continent at the time. In 1968 Equatorial Guinea became independent and Fransisco Macias Nguema was elected president.Macias soon took control of the whole government, calling himself president for life he quickly became a dictator. Infrastructure, health care, education and living conditions all suffered during his reign of terror. Skilled laborers left the country, and people standing up against Macias were executed. The economy took a dive. When Teodoro Obiang Nguema gained power in a coup d’etat, he promised progression. Although some things improved, he was also a very autonome leader. All important decisions are made by the new president, such as naming governors, cabinet members and judges.In this way, Obiang can keep his close circle of friends and relatives on important positions. Their government has multiple times been suspected and accused of corrupcy. This is one of the reasons of the very high inequality in Equatorial Guinea. Although Obiang restored infrastructure, health and education, there is still a big gap between the poor and few rich. The CIA world factbook put it this way: “Although nominally a constitutional democracy since 1991, the 1996, 2002, and 2009 presidential elections – as well as the 1999 and 2004 legislative elections – were widely seen as flawed.The president exerts almost total control over the political system and has discouraged political opposition. ” In 1995 the discovery of big oil fields resulted in a dramatic increase in oil production. Due to this, the country experienced a huge economic growth and boosted government revenues. However, it did not lead to better living standards. All of the oil company’s and refineries were owned by the government (mostly together with a foreign investor). Obiang was even suspected of siphoning off money from oil revenues and the UN started an investigation.The main problem in Equatorial Guinea is the distribution of income. Per capita GDP might be high, but the distribution of total GDP is inequal. According to recent research, nearly 70% of the people in Equatorial Guinea lives below the 2$/day limit. This is one reason the oil consumption is relatively low in Equatorial Guinea. Equatorial Guinea has a big upstream oil industry, but the downstream industry is very small and has only one player; GeTotal, owned by the government and Total. The production of crude oil is very large, but there is just too little capacity for refining it.This means that most of the produced oil is exported, to countries which do have capacity and technology to refine it. The small amount of domestic oil consumption is imported from other countries and mainly used as motor oil and fuel. The large oil reserves don’t add to a higher consumption if the country isn’t capable of refining it properly. Another reason why Equatorial Guinea has relatively low oil consumption might be found in the existence of other sources of energy. The country also possesses a big natural gas industry.Large reserves were found in the Alba and Zafiro natural gas fields. This resulted in a big increase in the production and consumption of natural gas. “From 2001 – 2008, Equatoguinean natural gas production increased rapidly from 1 billion cubic feet (Bcf) to 236 Bcf as new projects came online. Domestic consumption over the same period went from 1 to 53 Bcf, increasing along side of production until 2007 when the completion of the Punta Europa liquefied natural gas (LNG) facility on Bioko Island allowed for greater exports. ” http://www. eia. doe. ov/cabs/Equatorial_Guinea/Full. html Although this is the only other source of energy used, the natural gas consumption became 53 times larger in 7 years. This might also explain why the oil consumption in Equatorial Guinea remains low, even after the discovery and exploitation of new oil fields. If we look at the GDP composition per sector, we see that nearly 94% of GDP is produced by the industry sector. According to the Energy Information Administration, the hydrocarbon sector was responsible for 95% of government revenue and 99% of export earnings.The service sector, often the sector which accounts for most of the energy usage, is very small, only 2. 2%. Agriculture also plays a small role in the composition of GDP. The agricultural sector deteriorated during the dictatorship of the first president and president Obiang reserved little money to repair it. This means that the agricultural sector is of low technology and labor intensive. This is another reason for low oil consumption. 4. 2 The Seychelles 4. 2a Introduction The Seychelles is a group of islands east of the coast of Africa, to the north-east of Madagascar.This group of islands has an unusual high oil consumption for their level of GDP per capita and in this part the objective is to find potential reasons for this high consumption. But before these potential reasons are addressed it is important to give a short background story of this country. In table 1 an overview of some of the basic characteristics is given and for a precise location the reader is referred to Appendix I where both the outliers (Seychelles and Equatorial Guinea) are marked on a world map. GDP – per capita (PPP):| $19,400 (2009 est. )| 21,300 (2008 est. ) | $21,700 (2007 est. )| note: data are in 2009 US dollars| | GDP – composition by sector:| agriculture: 15. 5%| industry: 28%| services: 56. 5% (2009 est. )| | Labor force – by occupation:| agriculture: 3%| industry: 23%| services: 74% (2006)| | Unemployment rate:| 2% (2006 est. )| | Budget:| revenues: $183. 9 million| expenditures: $195. 8 million (2009 est. )| | Public debt:| 43. 9% of GDP (2009 est. )| 74. 2% of GDP (2008 est. )| | Inflation rate (consumer prices):| 34% (2009 est. )| 37% (2008 est. )| | Oil – production:| 0 bbl/day (2008 est. | Oil – consumption:| 7,000 bbl/day (2008 est. )| Oil – imports:| 7,653 bbl/day (2007 est. )| Oil – proved reserves:| 0 bbl (1 January 2009 est. )| | Natural gas – consumption:| 0 cu m (2008 est. )| Natural gas – exports:| 0 cu m (2008 est. )| Natural gas – imports:| 0 cu m (2008 est. )| Natural gas – proved reserves:| 0 cu m (1 January 2009 est. )| | Exchange rates:| Seychelles rupees (SCR) per US dollar – 14. 2 (2009), 8 (2008), 6. 5 (2007), 5. 5 (2006), 5. 5 (2005) | Source: CIA world factbook 4. 2b Factors affecting oil consumption in The SeychellesNow that the basic characteristics are out of the way it is time to explore the reasons for the high oil consumption in the Seychelles. In the next paragraphs the following characteristics are investigated: First of, the 100% energy dependability on natural resources is researched, this will be followed by the high-service tourism sector and inter-island travel that is characteristic for the Seychelles. Finally, the role of the undeveloped oil fields in the region are investigated. The conclusions of these different aspects will then be presented in a conclusion about the first outlier: the Seychelles.But before the reasons that have been found will be addressed it is important to mention one fact. When constructing these outliers in the statistical part that has been described above, the first potential reason that came to mind was the existence and especially, the usage of a domestic oil source. However when doing the research, it was discovered that there are currently no used oil rigs on the soil of the Seychelles. To say it differently: All the oil used by the Seychelles is imported, so the most obvious reason for such a high oil consumption- having a domestic reserve- is not applicable to the Seychelles. world factbook CIA) As is also shown in the table above. 100% energy dependability on oil consumption The fact that the Seychelles use oil as their only energy source might play a distinctive role in the explanation of why the Seychelles use so much oil in comparison with the other developing countries when comparing GDP per capita with oil consumption. As mentioned before, the Seychelles have no natural resources of their own. So, no gas and no oil, everything has to be imported. The Seychelles decided to import only oil. world factbook CIA, 2008) The reason for this is not really established, but it is presumably because oil can be used for all transportation vehicles as well as in the housing sector. But for this report the relevance of the reason why is not so interesting, fact of the matter is that using oil as the single source of energy, this boosts the oil consumption of the Seychelles tremendously. High-service tourism sector and inter-island travel Then there is the aspect of the high-service tourism sector that is one of the main sources of income of this country the other one being agricultural exports.The agricultural sector in the Seychelles is labor-intensive and does not put a great deal of restrains on the oil consumption, because all the farms are small scaled –there are hardly any farms that exceed two Ha(Water for Agriculture and Energy in Africa: the Challenges of Climate Change,2008)- there is not much reason to invest in capital such as tractors and other high-level machinery. This is why the agricultural sector is not considered to be a main reason for the outlier level of oil consumption in the Seychelles. Now the explanation of why the other main source of income is considered to be such a reason.The Seychelles Tourism Board tells us on their digital home (Seychelles. com) that the tourists that come to this group of islands mostly originate from the France UK, Germany and Italy. (Seychelles Tourism ) These are all developed countries with high-expecting consumers as inhabitants. So, in order to please these customers and stay in business as a place these paying tourists would be willing to visit, the Seychelles simply must make sure that they are able to meet these high demands. For an example of these demands one can think of accommodations, infrastructure or public transportation.The accommodations and infrastructure are not the biggest problems on itself, when thinking about the oil consumption, however in construction and constructing roads the work is normally done by capital intensive machines that consume a lot of oil, think for instance of bull-dozers and the trucks that need to deliver the different parts of either of these projects. So, these parts might already account for some of the oil consumption increase in the past years. But the real issue of the tourism part is that the Seychelles consist of a number of islands and tourist want to visit different islands than the one they are ainly staying at. And now the spoiled customer part really does his work, because the Seychelles. com website tells us proudly that they offer an airplane service, a ferry service between the main islands and even a helicopter service to travel between islands. These services are of course very uncharacteristic for a developing country, and more importantly for this comparison, this boosts oil consumption in a country spectacularly. So, this is one of the main reasons why the Seychelles are an outlier when it comes to oil consumption compared to GDP per capita.Undeveloped oil fields in the region The final reason for the Seychelles to have such an high oil consumption is the prospect of having their own oil in the near future. Importing all the oil necessary in a country is a very expensive habit, especially when the reasons provided above give an extra boost to the oil consumption. This could be a reason why a country might try to use different sources of energy, or when thinking of the tourism service limit this to, for instance, just a ferry service. However, in the Seychelles the oil consumption has only risen in the last years. Environmental Management Plan for the Seychelles) One reason for this neglect of tempering costs may well be the discovery and the rumors about developing the oil rigs that lay within the boundaries of the Seychelles. There are two fairly big rigs within the borders of the country and on one of them the company Sepec already made a claim. (Environmental Management Plan for the Seychelles and ) So, this reason should not be seen as a direct motive to increase oil consumption, just because the islands are going to have plenty of it in the future.It is more subtle, in the sense that they have no incentive to cut the oil consumption but can continue to expand their oil slurping activities, because they know they have plenty of reserves in the long-run. So, they pay for it now, but as soon as their own oil comes in, all the institutions are in place and the maintenance is for free, at least from an economical view from the countries treasury. 5. Conclusion altogether 5. 1 Conclusion In conclusion it can be stated that there are multiple causes, all closely related, for the relatively low oil consumption in comparison to GDP per capita in Equatorial Guinea.While factors like a small service sector and the existence of other sources of energy, like natural gas, contribute just a little, the main causes are a high inequality and bad institutions and government. Corrupt government links with a high inequality. The top layer of the country enriches itself, while the rest of the people remain in extreme poverty, despite the rapid economic growth. These are the main factors that cause Equatorial Guinea to be an outlier below the normal rate of oil consumption for their GDP per capita.For the Seychelles the main causes are the 100% energy dependability and the tourism sector with their high requirements, which leads to the extreme levels of transportation, as described in the different sectors above. Moreover, these reasons are reinforced by the factor described in the final section, the potential oil fields on the territory of the Seychelles. These three aspects of the country in question are the main source for being an outlier when comparing oil consumption to GDP per capita. As mentioned before, the Seychelles are an outlier above the normal rate of oil consumption for their GDP per capita.