Negotiating Oil Prices Amidst Oils’ Crippling Effects: An ASEAN Strategy
Antonio A. Ver, President & Founder, Asia Pacific Basin for Energy Strategies
Abstract:
A 600% spike in crude oil prices since 1999 has triggered a grim chain of economic turmoil, food shortages, and worsening social unrest in many parts of the world. Multiple factors may have propelled the pernicious rise in fossil fuel prices. However, one thing is self-evident: every oil-consuming country has a vital stake in finding a sound, long-term and socially responsible solution to the unchecked prices of oil, its derivatives, as well as products that depend on oil for their manufacture and distribution.
In a growing region such as the ASEAN, the stakes are just as high as in G8 nations and in the explosive-growth economies of China and India. But the stakes for ASEAN can also be the pistons that would drive creative strategies in response to oil price hikes, and provide a collective action model that may frame a global energy plan. After all, “ASEAN controls 40% of the entire oil and gas resources in the Asia Pacific rim.” (Weerawat Chantanakome, PhD, former Executive Director of the ASEAN Centre for Energy).
Through strong advocacy by the ASEAN as a collective negotiating body, this paper urges the United Nations to: (a) immediately convene a technical working group or a UN-sanctioned entity that will implement effective measures in negotiating socially acceptable pricing and supply policies with oil producing countries and cartels; (b) empower this working group or body to confer with the Organization of Petroleum Exporting Countries, the Council of Gulf Oil States, trading and financial institutions involved in oil futures, as well as the governments in the Asia-Pacific Region towards agreement on a global pricing model that is at once compassionate, rationally profitable, and morally responsible.
Outcomes anticipated from this ASEAN-driven strategy: (a) by the fourth quarter of 2008, a global forum within the UN is created based on the ASEAN model of collective negotiating power; (b) by the second quarter of 2009, this UN forum has proposed concrete steps to harness sources of renewable energy and to revamp one-sided pricing policies; (c) by the third quarter of 2009, OPEC and other industry associations have reviewed those proposed steps; (d) by the fourth quarter of 2009, the ASEAN model is widely accepted as the catalyst of cooperation among governments, international institutions, non-governmental organizations, oil industry associations and consumer groups working towards a global consensus on an enlightened energy policy.
While the infrastructure for energy security is being built, and it will take many years to build it let alone raise the required huge investment, let’s negotiate!
* Antonio A. Ver is also the Convenor of Asia Pacific Basin for Energy Strategies.
Let’s build our Carbon store and help save forests!
Angelo A. Jimenez, Executive Vice-President, APBest
Situation
The Clean Development Mechanism (CDM) established by the Kyoto Protocol allows projects that reduce Greenhouse Gas (GHG) emissions to generate carbon credits called “Certified Emission Reduction” (CER). CERs are certificates of financial assets that can be sold and traded in the Carbon market.
Energy efficiency, alternative fuels and renewable energy projects provide the biggest potential for emissions reductions and carbon revenue worldwide.
Carbon credits, like the CERs, are widely traded worldwide. Transactions ballooned from US$30B in 2006 to US$80B (Euro40B) in 2007, with CDM increasing from US$5B to US$24B (Euro12B), representing an increase from 450 MM to 947MM tons of CO2 equivalent in emissions reductions.
What about our forests?
“Deforestation was clearly terrible for wildlife, for the indigenous peoples of the forests, and for the “ecosystem services,” as the modern jargon has it, which forests provide, such as climates which bring rain. But the whole process seemed so vast the huge socio-economic forces behind deforestation in the developing countries so intractable, that it seemed impossible that anything could be done to stop it or even slow it.”
Things have changed, and the change can be summarized in a single word: Carbon.
For, as the threat of climate change has become more and more clear, there has been a growing perception that the biggest benefit of all that rainforests provide is their function as a Carbon store, and the biggest danger from their destruction is the release of carbon dioxide into the atmosphere when they are cut down and burnt.
APBest[1] can help preserve forests in Lumads’ areas to become part of this burgeoning global market.
Let us build our Carbon store!
The Strategy
The Coalition for Rainforest Nations, a grouping of 40 countries with substantial forest holdings from Costa Rica to Papua New Guinea, proposed in 2005 that there could be an agreement: We preserve our forests. You in the rich world pay us to do so. They were met with a sympathetic response.
Strategy: We unite! All indigenous peoples, our forest villages, we, Lumads nationwide, unite and organize “Lumads Preserve Forests” or “LPF” and create our Carbon store!
APBest commits the following:
- Bring an organizing team to form the LPF into a Movement, expand the socio-economic network, build capacity, and imbibe social responsibility.
- Bring a world-class CDM consultant and engineer to prepare and design the CDM program for the Movement.
- Bring the CERs to the Carbon market!
The REDD initiative, UN’s Reduced Emissions from Deforestation and Degradation, springs from the idea of being paid to conserve forests. Reducing emissions from deforestation in developing countries (REDD) is increasingly becoming familiar as a result of the Copenhagen meeting. For REDD is now a key part of the treaty negotiating process under which, it is hoped, the developing countries will agree to tackle their own, mushrooming greenhouse gases, in return for billions of dollars of new aid.
- Strategy: Let us bring the Movement to REDD.
- Commit to do this through the Asia Pacific Basin for Energy Strategies, an energy think-tank in the United Nations in 7 months.
Overcoming Barriers
With so much money potentially at stake, banks and carbon trading firms are ramping up their interest.
But much has to be sorted out, such as how to ensure the forests aren’t cut down, how to accurately measure the amount of carbon saved over time, the best method to trade REDD credits and how to ensure indigenous communities of Lumads get a fair share of the money.
“Satellite monitoring as well as developing national carbon accounting systems will be key, and so too will be avoiding “leakage” in which preventing deforestation in one area causes logging to occur in another.”
Some conservation groups also fear rich nations will merely buy up vast amounts of REDD credits to meet their emissions targets while doing little to clean up their own industries. Europe also fears a flood of cheap REDD credits could overwhelm its existing emissions trading scheme, depressing offset prices.
“For us the main point, from a trading stand-point, where REDD projects are difficult is on their permanence,” said Trevor Sikorski, director of commodities research for Barclays Capital in London.
“If it’s about deforestation but then that deforestation goes ahead in three years then that carbon would still be released into the air. So it’s all about the reversibility of forests as carbon sinks and that’s the real core issue that has to be addressed,” he said.
Forests soak up vast amounts of carbon dioxide, acting like a set of lungs for the planet. But clearing and burning them is contributing to about 20 percent of all mankind’s carbon emissions that are warming the planet.
The United Nations aims to incorporate REDD into the next phase of the Kyoto Protocol from 2013.[2]
The idea is to complement the Kyoto scheme, Clean Development Mechanism, to allow wealthy states to invest in clean energy projects in the developing world in return for CO2 offsets called CERs. These are presently trading around 16 Euros per ton.
“Huge Market”
“The dimensions are massive. If you compare with a CDM project of 60,000 tons a year, these projects are sometimes 200 times bigger, so if this comes through, it’s going to be a huge market,” said Renat Heuberger, managing partner of global carbon project developer and advisory firm South Pole Carbon.
Indonesia has rapidly become the center of REDD trial schemes in Asia because it still has large areas of forest, despite rapid deforestation.
FFI has teamed up with Australia’s Macquarie Group to develop three REDD projects in West Kalimantan and Papua. Investment group New Forests, headquartered in Sydney, has signed a deal with the government of Papua to protect 200,000 hectares of forest that could save up to 40 million tons of CO2 being emitted over the project’s lifetime. The Australian government has pledged A$30 million as part of a scheme to protect 50,000 hectares of forest in Kalimantan and rehabilitate at least 50,000 hectares of drained peat swamp.
- United in our Movement, we can overcome obstacles and tap into grants-in-aid, banks and financial markets.
Community development is a key
Plowing part of the proceeds directly back to the estimated millions of Lumads who live around the forest to develop sustainable biofuel production, e.g., from Jatropha, biomass power generation, mini-hydro power projects as well as promote growth of alternative cash crops and a micro-finance system.
Failure to do so would mean villagers returning to illegal logging.
“If you don’t involve the local communities in either an alternative business or something that is good for them to actually preserve that forest, there’s no long-term suitability of that project,” said Pep Canadell, executive officer of the Global Carbon Project.
But there are barriers that need to be overcome. Some conservation groups fear placing a greater value on forests risks a jump in land rights abuses by governments and corporations in the rush for carbon credits, threatening the livelihoods of indigenous communities.
More than a billion people worldwide depend of forests for their livelihoods, so REDD is a huge threat to them if not managed properly, the group says.
It is claimed that the key is to limit the direct involvement of national governments in funding schemes for local communities. REDD schemes should also meet stringent verification standards to ensure permanence, community involvement and protection of forests’ biodiversity.
“If everything is vested in the national government, that’s where you will find it very difficult to have that fair level of participation at the community level,” said Jeff Hayward, of US-based conservation group Rainforest Alliance.
“Fundamental to verification criteria is who owns the carbon, what rights do they have, how they decided upon the use of those rights, how fairly are they being compensated, are they informed,” said Hayward, manager of the alliance’s climate initiative.
“APBest commits to balance national government’s role and Lumads’ community involvement, and directly deliver funds to the Lumads and their forests,” said Antonio A. Ver, APBest president. Ver has been invited to attend Cambridge University’s Climate Leadership Programme in June.
Protecting the price of carbon credits protects our Carbon store and forests
However, some observers question whether the carbon credits expected to be received will be priced high enough to make the scheme worthwhile.
One of the key parts of the Copenhagen climate agreement is a comprehensive treaty aiming to reduce deforestation rates in the developing countries by at least 50 per cent by 2020.
APBest strategy: Help structure the treaty to provide strong pricing protection.
Let us stop illegal logging and make our Carbon store make money!
Coal Liquefaction: Its Impact on the ASEAN Coal and Oil Markets
Antonio A. Ver, President, Founder, Asia Pacific Basin for Energy Strategies, President, H&WB (Pte Ltd) Corp.
Abstract[1]
Coal liquefaction is among the technologies offering an alternative to oil importation for countries with coal resources yet little or no oil. The Philippines is envisioned to be the “Hub for Southeast Asia” for coal-to-liquid (CTL) fuels with the establishment of the first and only hybrid coal liquefaction plant, currently being developed by H&WB Corporation of the Philippines using proprietary technologies from the Headwaters Technology Innovation Group of the USA. The vital feature of this technology and investment is its ability to produce fuels lower than present fuel prices.
A key advantage of all CTL products is their low sulfur content when compared to conventional petroleum products. While Direct Coal Liquefaction (DCL) diesel would require blending to counter the high aromatics and low cetane, Indirect Coal Liquefaction (ICL) diesel can be used as a transportation fuel by itself, with little modification or blending required. ICL diesel has such good blend properties that it can be used as a stock to improve the qualities of poorer streams, such as DCL diesel. A blend of ICL and DCL diesel would produce a transportation fuel that exceeds all current quality specifications. Using this product in the domestic market would help provide a clean, reliable source of domestically produced fuel.
The role that DCL and ICL naphtha can play in future gasoline markets is not as clear as that of diesel. Both fuels have very low sulfur content that will be advantageous as a blend-stock. DCL naphtha has an octane rating that is likely near or just below most regional standards. This stream may have better applications in the olefins market as a liquid steam cracker feed. An option for use of the DCL and ICL streams is as a substitute for crude oil instead of direct blending.
Low sulfur, premium fuel streams from coal liquefaction could fit well into the future ASEAN market. Due to the inability of regional refineries to keep up with product demand, the liquids produced from coal would likely be competing with marginal supply from the Middle East. Blended DCL/ICL diesel fuel appears to be fungible throughout the market, with premiums available in markets where very low sulfur is required. The emergence of cleaner fuels such as those from CTL throughout the ASEAN region is expected to widen the spread between prices of clean and dirty products.
The use of domestic low rank coal, particularly from coal-importing countries like the Philippines, for coal liquefaction is not likely to affect the ASEAN coal market. The recent focus of China on coal liquefaction and other clean coal technologies, however, is expected to affect the regional and worldwide supply, and prices, of steaming and coking coal. An expansion of the supply capacity of Australia, China and Indonesia will be required to meet the increasing demand and curb prices.
[1] Mainly from Headwaters Technology Innovation Group, “Philippine Coal Hybrid Liquefaction Project Step-1 Initial Evaluation Final Report, submitted to H&WB Corporation, 2006.
The Human Face of the Ongoing Global Economic Crisis*
Prof. Benjamin E. Diokno, Professor of Economics, School of Economics, University of the Philippines,
We’re all poorer as a result of the global economic crisis – rich, middle income and the poor. But the impact of the crisis will be different depending of one’s economic circumstance.
But the first important lesson is that the losers are not firms or institutions but real people: bank owners and shareholders, real estate developers, workers (who lost their jobs or may have a hard time getting employed), retirees (who invested in mutual funds or played in the stock market). Losers too are all Filipinos who will pay higher taxes for the measures needed to fix the problem or will be denied essential public services in order to assist failing banks. [Remember: Filipinos are still paying for the failed banks as a result of the Asian financial crisis].
Because of the crisis, the Philippine economy will slow. We’re feeling this now. The government projected a GDP growth of 6.1 to 6.8 percent in 2008, but we’re lucky if the Philippine economy grows at 4.4 percent. That’s a lot of foregone output that translates into fewer profits for capitalists and lower incomes for workers. Consumer spending, which has been the major driver of the economy in recent years, has slowed. The growing consensus is that the Philippine economy slow even further in 2009.
As a result of the crisis, even the wealthiest Filipinos are poorer now through the so-called wealth effect. Bank owners and shareholders are poorer to the extent that they have invested in mortgage-backed assets that are now valued much less. Bankers who have invested in ROPs (Republic of the Philippines bonds or sovereign papers) are losers since ROPs have taken a hit as a result of the global credit crisis.
As a result of the crisis, equity investors, those who invested in the stock markets, are poorer because the value of their equity investment has been cut by half. An investor who has invested P100 million in the Philippine stock exchange is poorer by about P50 million.
As a result of the crisis, Philippine exports are at risk. About two-thirds of our exports are in electronics and machinery parts, the types needed by the U.S. and other developed countries of Europe and Asia. But with the U.S. and half of the world in recession or near recession, the demand for Philippine exports has slowed.
Instead of growing at 11 percent, Philippine exports will, at best, grow at 5 percent this year, and stagnate in 2009As a result, some factories have closed or operated at less than full capacity. This means workers are losing their jobs. In January 2008, some half a million wage-and-salary jobs were lost. And the loss of relatively ‘good’ jobs continues.
Our other export – overseas Filipino workers – is also at risk. This is important since overseas remittances as percent of the GDP; the size of the economy is the highest in the Philippines. The need for labor in crisis-affected countries is lower. Some affluent foreigners who lost their investment or jobs as a result of the current crisis can no longer afford a Filipina maid or Filipino driver. Jobs in the finance sector and service industries abroad are being lost.
Car manufacturing plants, department stores, restaurants and other food outlets are closing in the U.S. As a result, Filipino-Americans who send remittances to the Philippines are losing their jobs. Remember that half of the overseas remittances come from the United States.
In sum, there will be an economic slowdown that would affect most Filipinos in terms of less jobs and thus lower incomes. And there are two areas where the Philippines are most vulnerable: exports and overseas employment.
*This Paper was presented by Prof. Diokno in the Round-table Discussions of Asia Pacific Basin for Energy Strategies. Antonio A. Ver is President of Asia Pacific Basin for Energy Strategies. October 20, 2008.
Macroeconomic Assumptions Outdated, Revamp 2009 Budget Proposal
Prof. Benjamin E. Diokno, Professor of Economics, School of Economics, University of the Philippines
As a result of the ongoing global economic crisis, there has been a significant change in the economic outlook for the Philippines. Based on more optimistic assumptions, there is a real risk that the projected tax revenues for 2009 may be on the high side – perhaps by as much as P100 billion. A crucial policy issue is to whether to stick to the original proposed deficit of P40 billion (slightly higher than half a percent of GDP) or allow a higher deficit to stimulate a badly weakened economy. Sticking to the original deficit target is unwise. If adopted, the government’s ability to address the need to create more jobs and to provide a safety net to the neediest will be severely constrained.
Fiscal stimulus
A more appropriate 2009 budget is one that would allow a slightly higher deficit, say 1.0 – 1.5 % of GDP. But the higher deficit should focus on the following measures designed to create jobs and stimulate consumer spending.
Job creating measures
First, higher funding for more labor-intensive reconstruction and repairs projects and less capital-intensive, slow-moving projects with large right-of-way (ROW) component. Examples of the labor-intensive projects are rehabilitation of irrigation canals, repairs and regular maintenance of existing national and provincial road, construction of small water impounding (SWIM) system, reconstruction and repair of school buildings.
Foreign assisted projects should be pursued with more vigor – accelerated if possible. This makes a lot of sense since it minimizes commitment fees for project delays and serves to minimize the risk of rising cost of financing the deficit through foreign borrowings. Financing through official development assistance (ODA) is cheaper than through commercial borrowings (which may be unavailable at reasonable costs given the ongoing credit crisis).
Second, create an army of volunteer nurses under a Health Service Volunteer Program (HSVP). Some 400,000 nursing graduates are either unemployed or doing work unrelated to nursing. This is a monumental waste of skilled human resources. It is also grossly unfair for all families who have invested in the college education of their children. Filipinos in the countryside, especially those with very little access to basic health care, will benefit immensely from this program.
The central government, in partnership with local governments, may employ some 15,000 volunteer nurses to work in 1,500 municipalities nationwide to provide basic health care for the poor, especially the young and the elderly, many of whom have not seen a doctor in their lifetime. I estimate that this program would cost an additional P1.8 billion ($40m), based on the following computation: 15,000 times P10,000 per month times 12 months. The cost of the program for two years is approximately P3.2 billion. Participating towns should supplement the operating costs of the program.
Measures to stimulate consumer spending
Third, the conditional cash transfer (CCT) program should be expanded to benefit some 3 million households. This is based on one-fourth of the elementary enrolment of 12,096,656 in public schools during the 2006-2007 school year. The rice subsidy program that has a large leakage and has been a major source of rent seeking should be folded into the CCT program. Each household beneficiary will receive P500 per month for 10 months through its authorized bank or some more efficient method that may emerge in the future (for example through pass a load using the mobile phone). The total maximum cost of the project is P15.1 billion ($336m), computed as 3,024,164 households times P500 times 10 months.
Fourth, give a tax refund to fixed-income earners who filed an income tax return in 2007. The objective is to stimulate consumption spending at the earliest possible time. Through the multiplier effect, it would soften the adverse impact of slowing consumer spending assuming that the refund will be spent rather than saved. It would benefit some three million hardworking, taxpaying workers.
A conservative estimate of this proposal is P12.4 billion ($276m). We use the following assumptions: (a) the basis of computations is the personal income tax collection of P138 billion in 2007; (b) ninety percent of taxes collected are paid for by fixed income tax filers; and (c) 10 percent of the taxes paid in 2007 will be refunded. The estimated cost of P12.4 billion could be further reduced significantly if the refund is capped at P5,000. From the equity standpoint, this makes sense.
Here’s the bottom line: these four measures will cost the Filipino taxpayers some P29.2 billion. This is a very conservative estimate – that is, on the high side. Still, it is significantly less than the projected loss of the National Food Authority of P40 billion in 2008 alone.
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Presented in Round-table Discussions Series of the Asia Pacific Basin for Energy Strategies (APBest), an energy and economic think-tank, on October 20, 2008 in Quezon City. Antonio A. Ver is President of APBest.