G-8 oil aid increases African debt, study finds

Stat house
July 2005

G-8 oil aid increases African debt, study finds
The U.S. strategy to increase oil production in the world's least developed countries—particularly those outside the volatile Middle East—may serve consumers in Western nations but is likely to add to those poor nations' burdens of debt and economic hardship, according to a new study. New research published June 30 by the Jubilee USA Network reveals that the energy strategy for the G-8 nations is fundamentally at odds with its development strategy for Africa and the rest of the world. Drilling into Debt, co-published by Oil Change International, the Institute for Public Policy Research, and the Jubilee USA Network (with additional support from Milieu Defensie and Amazon Watch), finds that oil production and export increases rather than relieves countries’ debt burdens, despite generating massive revenues.

Doubling a country’s annual production of crude oil will increase the size of its total external debt by 43 percent as a share of its GDP, the report concludes, as well as increase debt service burden by 31 percent. For a country like Nigeria, which plans to increase oil production by 160 percent, this means a rise in external debt of $21 billion by 2010. In addition, a World Bank program designed to increase private investment in the oil industry of developing countries, was found to lead to debt levels (debt-GDP ratios) in those countries that are 19 percent higher than those countries that did not undergo this form of structural adjustment.

The World Bank estimates that 80 percent of revenues from Nigeria's oil industry accrue to only one percent of the population.

The relationship between debt and oil is due to the interplay of a number of factors. Increased oil revenues push oil-exporting countries to increase their spending dramatically in anticipation of continued export earnings. Higher oil revenues also improve the international credit ratings of oil-exporting countries, giving them access to vast amounts of capital at relatively low interest rates.

Debt also rises because of unwise fiscal policies and the volatility of the oil market, the report found. The study cites the examples of leading oil producers that are still saddled with huge debts, like Venezuela, Indonesia, the Republic of Congo, Mexico and Ecuador.

"Once countries are in debt, the temptation to turn to oil as a means of digging oneself out of debt is great," says the report. "If the G-8 nations, and the world, want to seriously tackle climate change, poverty, and debt, its time to look deeply at the common thread between all of them: oil."

Petroleum emissions are responsible for slightly more than a third of all global greenhouse gases, and Africa and other developing regions are highly vulnerable to the impacts of a changing climate. The G-8’s energy strategy, however, is to increase oil development in developing countries. Already, global annual subsidies to the fossil fuel industry are estimated at between $20-235 billion. And the G-8 Finance Ministers in their June 11 communiqué committed themselves to the “elimination of impediments to private investment” in Africa. Oil and mineral extractive industries receive at least 60 percent of foreign direct investment in Africa—and much more in oil exporting countries.

“If Tony Blair and other G-8 leaders are serious about tackling global warming and debt in Africa, they need to be willing to end support for the common factor that causes both—oil,” said Steve Kretzmann, Director of Oil Change and co-author of the report. “While we welcome debt relief for Nigeria, we’re concerned that their 160 percent projected increases in oil production virtually guarantees that they’ll be out of the frying pan and right back into the debt fire.”

The report’s key recommendations include: Ending Oil Aid; Increasing support for renewable energy and efficiency; and the immediate cancelation of 100 percent of the remaining multilateral and bilateral debt.

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