Energy poverty is always associated with economic poverty. It concerns people that have low income, low energy consumption and no access, or limited access, to modern energy fuel (petroleum products and electricity). Approximately 1.6 billion people do not have access to modern energy fuels. Moreover, a great number of them have no access to clean water. This means that they do not have access to economic development and they spend a good deal of their time collecting water and local energy resources such as wood and dung, leading to health problems and accelerating deforestation. Access to energy and water is an important component of the Millennium Goals. Energy inequalities have already been mentioned. Per capita energy consumption is 0.5 ton of oil equivalent (toe) in sub-Saharan Africa, 1 toe in China, 4 in Europe and 8 in the United States. Per capita consumption of commercial energy in the United States is 80 times higher than in Africa, 40 times higher than in South Asia, 15 times higher than in East Asia, and 8 times higher than in Latin America. Parts of world are ‘overenergised'; others are ‘under-energised'.
Energy poverty can be defined as ‘the absence of sufficient choice that allows access to adequate energy services, affordable, reliable, effective and sustainable in environmental terms to support the economic and human development'. According to this definition, energy poverty is an obstacle to economic development but energy poverty is basically explained by a low income situation. The purpose of this article is to understand more clearly the link between energy poverty, economic poverty and environmental fragility, and then to see how access to modern energy may trigger economic development. When estimating poverty worldwide, the World Bank uses reference lines expressed in a common monetary unit for all countries. Since 2005 a new standard for measuring purchasing power parity (PPP) has been established. Monetary income is not by itself a perfect indicator for measuring wealth and poverty. Other factors have to be taken into account. For measuring the level of development, UNDP combines indicators of life expectancy, educational attainment and income into a composite Human Development Index (HDI). To measure poverty UNDP uses the Human Poverty Index (HPI) which uses indicators of the most basic dimensions of deprivation: a short life, lack of basic education and lack of access to public and private resources. This rapid description shows that, for some countries, poor access to energy is an obstacle to economic development while, for other countries, the abundance of domestic resources of hydrocarbons does not lead to economic development and may aggravate poverty and income inequalities through the oil curse mechanism. According to the United Nations' demographic forecast, the world population could reach 9 billion inhabitants by about 2050, four times what it was in 1950. Is it sustainable in terms of human needs, food and energy resources?
The largest part of this increase will be in the less developed countries where the average demographic growth rate is high. This evolution shows that the world demographic, political and economic balance is shifting rapidly. One important component of demographic evolution is urbanisation. The size of the urban population in the global population, which was 3.5 billion people in 2006, could rise to 6 billion in 2050. Each year, more than 60 million people are added to the global urban population. The extent of poverty is generally higher in rural areas than in urban areas but this may change. In Latin America, where urbanisation has been very fast, a majority of the poor now live in urban areas. Urbanisation shifts upward the demand for energy because of private and public transportation, waste management, the use of charcoal instead of wood fuel and a greater need for petroleum products (kerosene, butane, gasoline) and electricity. In poor countries energy consumption per capita is low, less than 1 toe in low income countries. This low consumption is further aggravated by highly inefficient patterns of consumption and production. In developing countries, more than 2 billion people rely on traditional biomass for cooking and heating. Over half of the people relying on biomass live in India and China but the proportion of the population depending on biomass is much higher in sub-Saharan Africa.
In East Asia, the highest proportion of people relying on biomass occurs in the Philippines, Thailand, Myanmar, Laos, Cambodia and Vietnam. In Latin America, this is the case in many Central American countries (Guatemala, Honduras, Nicaragua). In low income countries, the rate of electrification is low: less than 25 per cent in sub-Saharan Africa, 50 per cent in South Asia and 80 per cent in Latin America. In countries such as Burkina Faso, the Democratic Republic of Congo and Mozambique the rate is below 10 per cent. More than 80 per cent of the people who do not have access to electricity are located in South Asia and sub-Saharan Africa. Lack of electricity is correlated to income level but also to the geography and density of specific countries. In many poor countries, with high population growth, the electrification rate, which is low, is actually declining because of lack of investment and poor management and maintenance of the existing plants. Blackouts and outages are very frequent. The situation is aggravated by the rise in oil prices because many power plants are fuel-oil fired. All countries need oil products and, since 2004, countries have been facing an unprecedented surge in the price of crude oil and petroleum products. Some of these petroleum products might be replaced by substitutes, mainly biofuels and natural gas, but energy systems are very rigid and inter-fuel substitution is a long process. A country's dependence on oil can be measured by the net oil import bill relative to GDP and its evolution over time. For many poor countries that are totally dependent on oil imports, the oil bill is an important component of the balance of payments equilibrium.
These countries are vulnerable to oil price shocks. More precisely, oil dependence and the vulnerability of countries to oil disruption or oil price shocks may be measured by a ratio which was proposed by the World Bank (UNDP/ESMAP 2005). The ratio (oil imports/total oil use) measures the external dependence for oil consumption. This ratio can be improved by enhancing domestic exploration aiming at discoveries and production. The second ratio (total oil use/total energy use) measures the economy's dependence on oil. It can be affected by policies to encourage inter-fuel substitution or better diversification of the energy balance. The third ratio (total energy use/GDP) measures energy intensity. It can be improved by increasing energy efficiency and also by a shift in the structure of production from energy-intensive activities to less energy-intensive sectors. Such changes imply structural measures that reflect a medium- or long-term vision of the energy future for a given country. On a shorter-term perspective, the rise in prices of oil and petroleum products that has occurred since the beginning of 2004 is having devastating effects on certain countries and certain customers. The oil bill has reached a level of 15-20 per cent of GDP in certain poor nations. Governments are under pressure to take measures to alleviate the burden. ESMAP (the World Bank Group) has conducted a survey in 38 developing countries to evaluate the solutions that have been found by governments for coping with higher oil prices. Political solutions from governments include price-based policies (full or partial pass-through of higher prices, subsidies, tax adjustments, compensation funds), quantity-based policies (rationing, mandatory conservation) and structural policies (fuel switching, energy efficiency). Among the political solutions, the question of subsidies is one of the most important. A number of countries have been convinced in the past to establish subsidies for certain energy products. This is particularly the case of oil exporting countries which use subsidies to transfer part of the oil rent to the population. Venezuela is an extreme example. Iran, which has some of the lowest prices, is one of the most energyintensive economies in the world. But oil importing countries are also establishing subsidies that pose some problems when prices rise because it increases the gap between domestic capped prices and international market prices.
This is the case in China, India, Morocco and many other countries. When people are accustomed to low subsidised prices, they are likely to resist more strongly any increase to the international market level. Indonesia provides an interesting and painful example. Indonesia is a major oil producer and was long a major oil exporter. This situation led governments to set up domestic prices for petroleum products well below international prices. This induced widespread smuggling of subsidised products out of the country. Then, in 2001, oil production began to decline, partly due to the lack of investment. At the same time domestic demand increased drastically, encouraged by low prices and a strong demographic growth. In 2004, the country became a net oil importer. The year 2004 corresponds to the beginning of the upsurge in crude oil prices in international markets. The government had no choice but to try to progressively remove subsidies. Two substantial price increases were made in 2005. These two increases still left gasoline and diesel prices at 80 per cent of international market prices and kerosene at 40 per cent. However, in contrast with the other adjustments made in the past which had led to violent opposition, the price increases of 2005 were accepted, thanks to the credibility of the newly elected government. At the same time, the parliament established a cap on the total amount of subsidy included in the budget. However, the cap rapidly became politically unsustainable because of the continuing rise in oil prices and the continuing decline in domestic oil production.
In 2008, petroleum products subsidies represented 22 per cent of state expenditures, more than the cumulated budgets for education, health and infrastructures. New price increases were decided in May 2008 (about 25 per cent) leading to violent popular opposition. At the same time Indonesia decided to quit OPEC. The question of subsidies (for oil products, electricity and natural gas) illustrates the fact that energy prices are politically sensitive matters. When international prices go up, it puts political pressure on governments and the cost of alleviation is very high. In addition, price subsidies tend to benefit mostly the rich since their level of consumption is higher. In Morocco, it has been estimated that 75 per cent of subsidies for petroleum products go to 20 per cent of the richest people. Cross subsidies between products are possible (kerosene is used more by the poor) but their management induces high transaction costs, especially because of smuggling.
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