Why wealthy countries should shield developing countries in times of crises

A daily wage labourer waits for work at a market in Colombo, Sri Lanka. Sri Lankans have endured months of shortages of food, fuel and other necessities because of the country's dwindling foreign exchange reserves and mounting debt, worsened by the coronavirus pandemic and other, longer-term troubles. APShow less

Last weekend, police shot at motorists protesting against fuel shortages in a town north of Colombo, Sri Lanka. Moody’s further downgraded Laos’s sovereign rating into “junk” territory as people queue at petrol stations. Lebanon’s electricity company provides four hours of power daily at best, as a hot summer approaches and generators become unaffordable for many. Quito, Ecuador, was paralysed on Wednesday by demonstrations against expensive food and fuel.

These countries are not the wealthy European states who are themselves struggling with high bills and worrying about a cut-off of Russian gas before winter. They are not the US, which considers an ineffective cut in petrol taxes to mollify angry drivers. With few financial resources, they are on the front line of energy shortages, hunger and often climate crises.

The most vulnerable are those lower and middle-income countries heavily dependent on imports of energy and agricultural goods, fiscally-constrained by already high debt levels, often suffering climatic problems such as drought and heatwaves, and frequently with political problems, including the legacies of civil wars, insurgency and violent drug gangs.

Depreciation makes basic necessities even more expensive in local currencies. Subsidies become unaffordable but cuts trigger protests, violence and even revolution.

Such crises matter in four ways. First, in the human suffering they impose in inflation, unemployment, hunger, collapsing living standards and forced migration. Second, in the effect on their neighbours, who may be drawn into wider regional downturns.

Third, in the danger for contagion, the rise in interest rates and a slowing in trade, that could repeat global emerging-market debt crises. Sri Lanka’s first ever sovereign default may be an omen

In the longer term, Tunisia, Egypt, Pakistan and Ghana are at risk. Emerging market debt has leapt to 67 per cent from 52 per cent of gross domestic product before the coronavirus pandemic.

Fourth, in the danger of cascading interruptions, as production or transit of oil, gas, important minerals or agricultural goods is interrupted by protests, strikes and insecurity — tightening global markets even further.

Governments who fear domestic discontent often restrict food exports, worsening the situation for others. This would be reminiscent of the 2011 uprisings which, often sparked by hunger, led to the uprising in Libya and a major surge in oil prices.

Unlike previous periods of energy turbulence, which typically centred on oil disruptions, today’s troubles are multifaceted.

For example, Codelco of Chile, the world’s largest copper miner, has been hit by strikes, while Peru, the world’s second-biggest producer, has suffered repeated protests in recent months at its Las Bambas mine.

Copper is an essential component of renewable energy systems and electric vehicles (EVs). Battery cars require two to four times as much copper as their petrol equivalents, driving up their cost just as more EVs are needed to save oil and cut carbon dioxide emissions.

The Ecuadorean protests forced Petroecuador to declare force majeure on its oil exports when it was unable to meet contractual deliveries.

Rising oil prices encourage greater American and European use of biofuels, but more of the corn, soybeans and sugar cane harvest is burnt in vehicles rather than appearing on dinner tables. Meanwhile, high gas prices drive up the cost of fertiliser, for which gas is an essential feedstock.

The source of the most acute recent trouble, and the intensification of pre-existing conditions, come from Russia's invasion of Ukraine. Gas to Europe has been throttled. Ukraine’s grain ports are blockaded, and silos bombed. But high-income countries have exported the pain of their own misguided policies.

Absurdities such as price caps and fuel tax cuts subsidise consumption. Export bans would cut off those most in need. Tariffs and trade barriers prevent poorer states from exporting their way out of trouble. Neither European countries nor the US are making any serious efforts on boosting energy efficiency and conservation, hoping to spare voters inconvenience.

European countries have to import more liquefied natural gas (LNG) to replace supplies from Russia. This is unavoidable now but the result of prewar foolishness. Germany is pressing ahead to close nuclear power plants that could still have a few years of viable operation.

The result is that LNG prices have gone through the roof for everyone, and many countries cannot afford the bill.

Several of Pakistan’s suppliers, such as Eni and Gunvor, have defaulted on long-term contractual deliveries, as it is more profitable for them to pay a 30 per cent penalty and resell the cargo elsewhere at a much higher price.

The country then must go on the spot market for a replacement — it received only one bid for supplies in July at an eye-watering $39.8 per million British thermal units, equal to $230 for a barrel of oil. Combined with a severe heatwave, Pakistan has suffered four to six-hour power cuts and had to cut the working week.

Some of the struggling states have brought ruin on themselves: Lebanon through feckless and gridlocked politics, Sri Lanka by corruption and a disastrous ban on artificial fertilisers. But any country may have structural problems or episodes of misrule; some are unable to spend their way out of trouble. Their vulnerable populations need support.

Wealthy western states have their own low-income people to think about. But they need to shield developing countries from beggar-thy-neighbour policies. Otherwise, they will undercut the global economy, security, and their own stand against Russia.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis