IDEAS21

The majority of our country’s politicians and economic commentators have painted themselves into a corner of empty promises and ineffectual policies by telling us the only way to create jobs and reduce poverty is to grow the economy at much faster rates.

The Minister of Finance, Pravin Gordhan, said in October last year that the economy must grow by seven percent a year. The Democratic Alliance maintains that a growth rate of eight percent is necessary. In November the Development Bank of Southern Africa said GDP must grow by 10 percent a year for a decade to create the 5 million jobs targeted by the government.

And yet in the national budget presented by Mr Gordhan on Wednesday, the 2012 growth forecast was revised down to 2,7 percent from the 3,4 percent projected last October. The growth rate is now forecast to increase moderately to 3,6% in 2013 and 4,2% in 2014.

But even these projections seem overly optimistic in the face of several near-term threats to the global and local economic outlook.

The first risk is that the Euro zone will sink into recession as a result of its sovereign debt crises and associated fiscal austerity measures. President Zuma has correctly warned that SA will not be able to escape the economic troubles in Europe, given that the region is our largest trading partner.

The so-called ‘economic recovery’ in the United States has also yet to deliver anything meaningful more than three years after the financial crisis. The US unemployment rate lies somewhere between 9 and 20 percent, depending on which definition you choose. Even powerhouse China’s economy seems to be coming off the boil, and the country may face a bursting real estate bubble similar to the one that landed Japan in the economic doldrums in the 1990s.

The second major category of risks consists in festering geopolitical tensions. The hottest spot of the moment is as usual the Middle East. The violence in Syria continues to escalate and threatens to draw in troops from other countries. But Russia and China – wary after the west’s military intervention in Libya – have drawn a line in the sand by vetoing the UN resolution calling for Syrian President Assad to step down.

More ominously, the hostile war of words between western powers and Iran over the latter’s nuclear programme continues unabated. The Israeli leadership is still threatening a ‘pre-emptive’ military strike on Iran’s nuclear enrichment facilities. Meanwhile, the United States and Europe have imposed stringent economic sanctions against Iran, whose economy and populace are now clearly suffering.

Should this situation spiral into another regional conflagration, it will have devastating economic consequences for the globe as a whole and for SA in particular – around half of our oil imports are sourced from Iran and Saudi Arabia. Iran has vowed to respond to an attack by closing the Strait of Hormuz, the world’s preeminent oil ‘choke point’ through which one third of the world’s seaborne oil is shipped.

The third – related – risk to the world and SA economy is another spike in oil prices, which in 2011 averaged a record high of $111 per barrel. Already, the price of oil is acting as a brake on the global economy. Spare oil capacity is now minimal and any further disruption to supplies could send prices towards or even above $150.

Most of these medium term threats are symptomatic of deeper underlying trends, namely the depletion of cheap and easily accessible resources and the degradation of ecosystems that provide vital services to human societies.

World oil production has been essentially flat for seven years and looks set to begin its inevitable descent with the next few years. This will be followed by peaks and declines in many other key resources, including coal and rock phosphates. Water and food are becoming increasingly scarce, thanks in part to climatic changes and land degradation, while the world population continues to grow by over 70 million a year. An increasing frequency and severity of natural disasters – many of them climate related – are adding to the economic stresses.

As a result, economies across the world are paying much higher prices for energy and many other raw materials, which is exacerbating financial imbalances and putting extra strain on highly-indebted countries.

In short, the world is encountering ecological constraints on growth. And in the absence of continuous growth, our debt-based monetary systems falter and implode. Thus without a return to cheap and abundant energy – which would require miraculous technological breakthroughs and a war-time effort to roll them out – debt crises and associated socio-political ructions are going to snowball.

So does this gloomy global trajectory mean that the poor of our country are destined to live in worsening deprivation and misery, and that their ranks will be swelled as more households drop out of the middle class?

If current mind-sets, values and policies prevail, the answer is probably ‘yes’. Exceptional socio-economic circumstances call for real paradigm shifts and radical policy innovations. SA needs to abandon its narrow obsession with GDP growth and adopt the broader goals of economically, socially and ecologically sustainable development.

We need an expansion of sectors that are labour-absorbing and energy and resource efficient, such as repair, maintenance and recycling, small-scale agro-ecological farming, localised production-consumption systems, decentralised renewable energy generation, and so on. We need to reduce our dependence on unsustainable industries such as primary extraction, urban sprawl, and financial speculation. In other words, the quality, type and sectors of growth are crucially important.

Although there have been welcome steps taken toward a ‘green economy’ in several recent policy documents, such as the New Growth Path and the Industrial Policy Action Plan, implementation has lagged behind rhetoric. This is partly due to obstruction from powerful vested interests – most notably the ‘minerals-energy complex’ – which are taking SA further down an unsustainable, resource-intensive and polluting path.

But almost all the policy frameworks – aside from the largely ignored National Framework for Sustainable Development – are still operating within an outdated paradigm. The green economy should not be seen as a subsector of industry. Rather the entire economy – agriculture, manufacturing, construction, services, etc. – needs to undergo a fundamental transition to sustainability on a scale equivalent to the earlier agricultural and industrial revolutions.

There are many ways that our economy and policies could be reoriented to deliver more genuinely sustainable development and to bolster society’s resilience to economic and financial shocks.

The first step must be to reduce unnecessary wastage of energy and materials and to boost efficiency and resource productivity throughout the economy.

The government is right to allocate massive funds to infrastructure spending. But this should be geared much more toward renewable energy and more sustainable transport systems such as integrated rapid transit, passenger and freight rail, and non-motorised transport in cities – and less on expanding export rail lines and ports that assume the global economy will continue to grow for decades.

As identified in the National Planning Commission’s Development Plan, the extension of basic services to the poor needs to be accelerated, including clean water and sanitation, health care, affordable electricity and quality education. If we can build world-class soccer stadiums and a high-speed railway, why can we not achieve these fundamentals?

Unemployment could be tackled by massively expanding the Department for Social Development’s Community Work Programme and the various “Working for… ” programmes – such as water, wetlands, fire, energy, etc. These labour-absorbing activities also help to rehabilitate ecosystems that provide essential public goods and services to society.

The crucial agriculture sector must gradually be weaned off fossil fuels and adopt practices that restore degraded soils and conserve scarce water. An army of small-holder organic farmers needs to be trained with a mix of indigenous and modern knowledge and skills.

In the construction sector, sprawling housing developments on the outskirts of cities need to give way to high-density urban redevelopments, sustainable human settlements involving mixed land-use zoning, and green building techniques and materials.

Where will the money come from to fund these programmes?

The government’s fiscus can be augmented through appropriate taxes on resource rents, including a windfall tax on the super-normal profits of synthetic fuel producers and mining companies. Fiscal incentives – mixes of taxes and rebates – can be used to promote firm and household-level green investments. Profligate state spending on bloated salaries and elite privileges must be reined in.

Even more importantly, the transition to a sustainable and more equitable economy urgently requires serious monetary system reform. An obvious place to start is a financial transactions tax to bring speculative capital down to earth where it may be put to productive use. We should also follow the example of Brazil and North Dakota’s state banks, which rightfully place the enormous power of money creation in public hands rather than leaving it to private commercial interests.

If ecological limits mean that we cannot grow our way out of poverty and unemployment, then we must share our way out. The poor need to consume more for their basic needs to be met, while the wealthy should consume less to reduce their ecological footprints. Businesses can contribute to reducing inequality by capping executive pay and introducing employee ownership schemes. Government officials should be held accountable for their use of public funds and receive performance-related remuneration.

This need not be viewed as a fanciful wish list in the face of entrenched ideologies, cultural norms and institutional relations. Rather, it is hopeful call to action for human beings individually and collectively to evolve their consciousness and behaviours in response to a fundamentally changing reality.

Published in the Cape Times, 13 March 2012

To mix the favourite metaphors of the departments of transport and energy, transport is the heartbeat of the economy, but energy is the lifeblood. Transport in South Africa is overwhelmingly dependent on liquid petroleum fuels. Petrol, diesel, jet fuel and heavy fuel oil provide 98% of the energy used by the transport sector and electricity contributes the rest.

Thus transport planning, which is intrinsically long-term given the life span of infrastructure, must be based on a realistic assessment of energy and oil security. Although there have been some welcome shifts in South Africa’s transport policy and planning in recent years, some aspects are still heading towards dead ends.

The International Energy Agency has stated repeatedly that the era of cheap oil is over. Data from the United States Energy Information Administration show that conventional crude oil output has been on an “undulating plateau” since 2005.

The production of unconventional oil, which includes extra-heavy oil from Venezuela’s Orinoco deposits, Canada’s tar sands and shale oil in areas such as North Dakota in the US, has increased in recent years. But this has come at a much higher marginal cost of production and an even higher cost to the environment in the form of massive pollution and greenhouse gas emissions. In short, the oil industry is scraping the bottom of the proverbial barrel in an age of “extreme oil”.

Oil is running out
Mature oil fields are depleting at an average rate of more than 5% a year and many analysts expect total liquid fuel production to enter terminal decline within a few years.

Meanwhile, world oil exports have been declining at about 2% a year since peaking in 2005 as oil exporting nations, such as Saudi Arabia and Iran, consume a growing share of their own crude.

Biofuels are proving more damaging to global society than they are worth by pushing up food prices and incentivising the destruction of old-growth forests.

In the face of stagnant oil supply and rapidly rising demand in the emerging economies, oil prices have trended steeply upwards, from less than $40 a barrel in 2004 to $111 on average in 2011 and more than $120 now. Tension in the Middle East threatens another “super-spike”, perhaps above $150 a barrel.

In South Africa a new oil refinery will not improve energy security in a future of diminishing world crude output and rising prices. And although a third of our petroleum fuels are produced by Sasol and PetroSA from coal and gas, consumers pay prices benchmarked on international oil prices.

We have been warned
In the past few years we have had ample warnings of what the continued dependence on imported oil will mean, such as bitumen shortages, petrol stations running dry, aeroplanes grounded and farmers losing crops. These energy developments should be critically informing the government’s infrastructure planning for road, air and rail transport.

Expenditure on the maintenance of the existing road network is necessary, especially before the costs of bitumen and diesel rise even higher. But, in the context of peak oil, spending on new roads for the most part does not make long-term sense, including the R25-billion allocated by the treasury in the current budget cycle for new national roads.

The Gauteng Freeway Improvement Project, which is projected to cost R20-billion, represents a massive misallocation of resources. Following public opposition to the road tolling, the government has decided that taxpayers will bail out the South African National Roads Agency Limited — and subsidise Gauteng motorists — to the tune of R5.8-billion. All this money should rather have been spent on more efficient mass transit. We can only hope the same mistakes are not repeated in other parts of the country.

Government policy regarding air transport is even more questionable. The Airports Company of South Africa has, in recent years, spent billions upgrading the OR Tambo and Cape Town international airports and building the brand-new King Shaka International Airport in Durban. Although useful during the 2010 World Cup, how will these upgrades benefit South Africa in a future characterised by massive debt deleveraging in the Western economies combined with surging fuel prices?

Moreover, the national carrier, SAA, recently asked the government for a R6-billion “recapitalisation” — read bailout — to improve its cash flow and fund the purchase of a fleet of 20 new aircraft. Management says it expects the airline to make a loss in the 2012 financial year, mainly as a result of — you guessed it — high oil prices. Why should South Africa’s beleaguered taxpayers continue to subsidise a loss-making entity with a bad management record that serves a privileged minority?

Finally something is being done about rail infrastructure
Fortunately, there is some good news on the transport policy front: rail infrastructure is at last starting to be overhauled. Transnet has embarked on a R300-billion capital expansion programme. However, most of this is geared towards expanding capacity on coal, iron-ore and manganese rail lines to boost exports. Only R7.7-billion has been budgeted for expansion of Transnet’s general freight capacity, which should progressively take the place of road-based freight transport.

Passenger rail is making a comeback. In late February the department of transport announced that the government would soon issue a tender for 7 200 new train coaches and locomotives, to be procured in the next 20 years at a cost of R128-billion.

Although that might sound like a lot of money, consider that South African households spent R67-billion on private motor vehicles in 2010 alone. So, from a societal cost perspective, two years of new car purchases would be equivalent to the entire passenger rail upgrade.

The other bright light is the development of integrated transit systems in major cities, led by bus rapid systems in Johannesburg and Cape Town. Fully loaded buses are far more energy efficient than single-occupant cars.

In the 2012 Budget Review R300- billion was pencilled in for a proposed high-speed rail link between Gauteng and Durban. Given its huge price tag — and the strong likelihood of cost overruns — this should be a low priority relative to the provision of mass transit in cities and upgrading existing freight rail.

In their seminal book, Transport Revolutions, Richard Gilbert and Anthony Perl argue persuasively that we electrify our transport systems and power them increasingly with renewable energy.

This task is both monumental and pressing — and thus each rand spent on unsustainable oil-dependent infrastructure will cost the nation dearly in terms of future constrained mobility and economic losses. The government must urgently reconsider its transport strategies.

Published in the Mail & Guardian, 9 March 2012

http://mg.co.za/article/2012-03-09-barrelling-down-the-wrong-track/

Every year the National Treasury increases so-called ‘sin taxes’ on cigarettes and alcohol, both addictive substances whose use results in large health and social costs. So why not impose a similar tax on another substance that is a national addiction, deleterious to our long-term health and depleting globally – namely, oil?

Consumers already pay taxes and levies on petroleum fuels – amounting to about a third of their retail prices, which are now near their all-time nominal highs over R10 per litre. Further fuel price increases would hurt poor people who generally spend a large proportion of their meagre incomes on transport. Rather, the Treasury should impose a ‘syn’ tax – a windfall tax on the profits of synthetic fuel producers Sasol and PetroSA, which together contribute about a third of our fuel supplies. At the same time, consumers should begin a ‘rehab’ programme to address their oil addiction.

A windfall tax on synfuel profits will not make any difference to the price of fuel paid by consumers. This is because national fuel prices are determined by the Department of Energy on an ‘import parity price’ (IPP) basis. That is, local ‘basic fuel prices’ are benchmarked on international refined petroleum product prices, to which are added transport costs, wholesale and retail margins, and levies and taxes. Thus Sasol and PetroSA sell their synthetic petrol and diesel at the same prices as the companies – Engen, BP, Shell, Chevron and Sasol again – that refine imported crude oil.

Any increase in international crude oil prices or a weakening of the rand exchange rate pushes up local fuel prices, raising the rate of inflation and hurting SA’s consumers but boosting the profitability of synfuel producers. PetroSA recorded a R871 million net profit in fiscal year 2011, while Sasol Group operating profit increased by 25% to R30 billion.

Sasol is SA’s largest company by sales and market value and contributed R25 billion in direct and indirect taxes in the past financial year, ranking it amongst the country’s largest corporate tax payers. PetroSA by contrast is wholly owned by the state.

So should an extra windfall tax be imposed on the synfuel producers? This question was addressed comprehensively by a special Task Team appointed by then-Finance Minister Trevor Manuel in 2006. The Task Team found that both Sasol and PetroSA have benefitted extensively from state support over several decades.

Sasol was created and funded by the Apartheid state in the 1950s, but was privatised in 1979 and is now listed jointly on the JSE and the New York Stock Exchange. Sasol’s first synfuel unit was financed by the state-owned Industrial Development Corporation. The company has always been guaranteed full uptake of its products at import parity prices, enjoyed low tariffs on the pipeline network constructed by Transnet over the years – which gave Sasol market access for synfuels and gas and amounted to a subsidy of approximately R860 million per year – and benefited from tariff protection between 1979 and 2000 to the tune of at least R6 billion.

Moreover, Sasol was privatised “on terms very favourable to investors”, thereby benefitting a small group of shareholders, 40 percent of whom are foreigners.

Mossgas, which later became part of PetroSA, benefitted from tariff protection on the same basis as Sasol, ultimately enjoying subsidies from motorists amounting to R1.5 billion up to November 2004. Soeker, which discovered the gas feedstock, was funded by government but later absorbed into PetroSA. The state invested R13 billion in Mossgas and R8 billion in Soekor, and wrote off loans to these entities amounting to R8 billion and R1.5 billion, respectively.

The Task Team cited several independent estimates of the costs of production for existing CTL and GTL; these ranged between $22-45 per barrel and $18-30 per barrel, respectively. Even though these costs have surely risen over the past five years, the profitability of the synfuels producers indicates that they are considerably lower than recent crude oil prices.

In short, the Task Team commented that “very large amounts of the tax payers’ money have been used to support and maintain the synthetic fuels industry”. Thus they recommended the imposition of a windfall tax of R1.25 per litre of synfuel at an oil price of $110 per barrel, which would garner over R10 billion in annual tax revenue.

However, then-Finance Minister Trevor Manuel shunned this advice, saying the tax might undermine further investment in the synfuel industry, which he argued was necessary for bolstering energy security. An additional reason cited by the Treasury was that it could not be sure whether the windfall profits were of a cyclical or structural nature. With hindsight, it is clear that oil prices have been trending upwards for at least eight years now. And they are expected to shoot much higher after the world passes ‘peak oil’ production.

As it happens, at the same time that the Task Team released its report, Sasol announced that it was considering building a new coal-to-liquid plant, dubbed Mafutha. But the company later said it needed partial government funding for an investment set to cost in excess of R50 billion.

Last year Sasol put project Mafutha on ice because of concerns about the costs of greenhouse gas mitigation and the quality of coal in the Waterberg field. Thus the main justification for withholding the windfall tax has not materialised – and given climate change and other pollution concerns, that might be for the best.

The proceeds of a syn tax should not be used to subsidise domestic fuels, as this would encourage our oil addiction. The revenues should instead be utilised to reduce SA’s dependency on oil imports. Global oil production has been essentially stagnant for six years and an increasing number of analysts warn that we are at or near ‘peak oil’ production, and that annual output will begin an inexorable decline within the next few years. As the International Energy Agency’s chief economist Fatih Birol is fond of saying, “we must leave oil before oil leaves us”.

Thus syn tax revenues should be invested in renewable electricity capacity and more efficient and sustainable transport systems, like electrified rail for both freight and passengers. Subsidised public transport would be a much more sustainable form of support to poorer commuters than fuel subsidies.

In a country with amongst the highest levels of inequality in the world, it is iniquitous that a few private shareholders – many of whom are foreigners – should profit at the expense of our citizens. Our government should follow the example set by their Australian counterparts – in respect of their mining ‘super-tax’ – and divert resource rents to sustainable investments for the benefit of all South Africans.

Published in the Mail & Guardian, 10 February 2012

http://www.mg.co.za/article/2012-01-20-barrelling-towards-fuel-shortages/

These days the news is full of dire warnings about another financial meltdown emanating from the sovereign debt crisis in Europe. Professor Nouriel Roubini, who was catapulted to international fame after correctly predicting the 2008 financial crash, says Europe is sliding into a ‘double-dip’ recession – if not depression – and a break-up of the eurozone is increasingly likely.

So in the face of this downside economic risk, why does the price of oil remain stuck above $100 per barrel? What are the short, medium and long-term prospects for oil prices? And most importantly, what do the underlying currents imply for future economic prosperity?

To answer these questions, we need to interrogate the ‘usual suspects’: the insatiable Chinese dragon; supply fundamentals; the OPEC (Organisation of Petroleum Exporting Countries) cartel; the geopolitical risk factor; and assorted speculators.

Before starting the inquisition, some historical context is useful. Between 1986 and 2003 the oil price traded in a remarkably stable and narrow range, averaging about $20 per barrel. From 2003, it rose steadily for several years and then spiked dramatically to reach an all-time nominal peak of $147/barrel in July 2008. When the world sank into recession after the global financial crisis later that year, demand for oil fell rapidly and the oil price plunged to around $40/barrel. Since then, the price has ratcheted up again, and has traded in triple figures for the whole of 2011.

The resilience of the oil price reflects first and foremost the tightness between the global supply and demand for oil.

Despite oil consumption having apparently peaked a few years ago in the industrialised countries, demand for oil products continues to grow apace in emerging economies.

China leads the pack, expanding its oil consumption by nearly 10% a year. Last year 13 million new cars were sold in China, topping US vehicle sales for the first time ever. And it seems that whenever the oil price falls, China taps into its vast foreign exchange reserves – over $3 trillion and counting – to stockpile crude for its strategic petroleum reserve.

Meanwhile, oil producers can’t seem to meet demand like they used to. A number of independent oil analysts have been warning for years that oil production could reach its all-time peak early in the 21^st century. Now even the International Energy Agency agrees that conventional crude oil output likely peaked in 2006. The data show that world liquid fuel production has been essentially stagnant for the past six years, aside from an increase in biofuel output that has in turn boosted food prices.

Global spare oil capacity is now minimal, which means that the slightest market disturbance can trigger big price fluctuations.

Furthermore, most new oil sources outside a few Persian Gulf states – many of which are in deep water – have marginal production costs of around $80 per barrel. Canada’s tar sands have marginal costs of about $90-100.

Another perennial suspect is OPEC countries: most of them can no longer ‘afford’ for the price to drop below $100, as they are dependent on high oil revenues to maintain government spending and social stability.

Speculators no doubt played a part in amplifying the wild price gyrations in 2007-2009, but without fundamental price drivers they would have nothing to bet on.

Our final suspect is geopolitical risk. Certainly, the conflict in Libya this year played a significant role by taking about 1.2 million barrels per day of world oil exports offline. And tensions persist throughout the Middle East region, centred now on Syria and Iran.

So all in all, there are many forces keeping the oil price in three digits. Meanwhile, there seems to be a ceiling for oil prices at around $120; above this level, it destroys demand.

Forecasting oil prices with any great precision is notoriously difficult. Nonetheless, we can be reasonably confident about certain trends.

In next year or two the oil price kite will continue to be buffeted by the winds of financial turmoil and an increasingly tight demand/supply balance. If the world economy continues to grow, spare oil capacity will essentially disappear next year. But if Europe falls into a financial/economic abyss, the oil price could drop markedly, although probably not for very long.

For the remainder of this decade, the greatest likelihood is that oil prices will continue their volatile swings, but around a rising trend driven by falling supply.

Beyond that, the trajectory for oil prices will depend largely on how governments and societies respond to diminishing oil supplies. If they attempt to continue business-as-usual and compete for a shrinking pool of the black liquid, it will become increasingly unaffordable and engender economic chaos.

If, on the other hand, there is a concerted mobilisation to reduce oil dependency through conservation and efficiency, investing in alternative energy supplies, and electrifying transport systems, then eventually the oil price train could run out of steam.

Indeed, the economic fortunes of the world hinge on which of these scenarios comes to pass. The window of opportunity for launching a crash programme to mitigate the impending decline in oil production and accelerate a transition to a sustainable global economy is rapidly closing.

So fasten your seatbelt and tighten your economic belt: 2012 promises to be another wild ride on the oil roller-coaster.

Published in the Mail & Guardian, 25 November 2011.