3 months ago

Unstable energy market and possible consequences on Bangladesh

-Reuters file photo
-Reuters file photo

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2022 has been a year of tension. While precarious geo-political situations and post-Covid economic uncertainties are finding new ground thanks to the war, crude oil prices' instability has consistently made headlines.

After bouncing over USD 120 per barrel (bbl) within months of Russia's attack on Ukraine, oil prices hit a one-year low in the first week of December. However, following the yearlong trends, prices are showing upward movements. With some other important factors combined, experts suggest a continuous spike to at least the first quarter of 2023.

RISE AND FALL OF OIL PRICES IN 2022: Brent crude traded between US$77 to US$79 in the last week of December 2021. Following Russia's invasion of Ukraine, it spiked to US$100 in mid-February, and a record high of US$139.13 since 2008 in the first week of March, owing to America's ban on Russia's fuel-oil exports-- the second largest exporter in the world.

However, prices changed dramatically within a week as China, the world's largest oil importer, enforced stringent COVID restrictions. It dropped below the US$100 mark in mid-March, rose above US$ 120 in June, and fell again.

Now, two significant events in recent times have resurrected the possibility of a spike in oil prices in 2023. The first one is the US$ 60 price cap on Russian crude oil fixed by G7, which has again led to uncertainty about Russia's oil supply.

The price cap will significantly cut down Russia's revenue from oil exports compared to mid-2022, when Moscow earned over US$21 billion a month. However, with the current price cap, Russia will make between US$10-15 billion a month, said the director of energy futures at Mizuho in New York, Bob Yawger, quoted by Reuters.

The price cap is evidently a strategic move to mitigate the impacts the decision to reduce production by the Organisation of Petroleum Exporting Countries (OPEC) and its allies OPEC+ could create. Price capping complemented the USA and IEA's (International Energy Agency) release of oil reserves by balancing the markets.

CHINA'S ECONOMIC REVIVAL IS IMPORTANT: While both US and EU economies are expected to face contraction in 2023, oil demand will be steadied by increased demand from China and India, suggested OPEC forecasts. Their economies are expected to grow by 5 per cent and 6 per cent, respectively.

The signs are visible already, especially in China, where easing Covid restrictions is supposed to ensure a strong economic rebound, as suggested by economists. The country's economic growth slumped to between 2.8 per cent and 3.2 per cent this year, which is among the lowest levels since 1976.

The Chinese government is now up on its toe to set things right. Recently, China's top two ruling bodies, the Central Committee of the Communist Party and the State Council, provisioned a strategic plan to expand domestic demand by increasing consumption and attracting investments until 2035. This has prompted Goldman Sachs to upgrade its growth forecast for China to 5.2 per cent from 4.5 per cent.

Once China, the world's largest oil importer, starts rolling again, USA and IEA's oil release might not be able to balance market demands since Russia will most likely reduce production in response to the price cap. Hence, most forecasts are predicting a spike in oil prices in 2023. Among the notable ones, the US Energy Information Administration predicts an average oil price of US$92 bbl, JP Morgan Chase & Co. forecast US$90 bbl, and Goldman Sachs economists forecast US$125 bbl.

IMPACT ON BANGLADESH'S ENERGY SECTOR: As most predictions are for a rise in oil prices in 2023 and coupled with a possibility of global economic recession, Bangladesh should be thinking about strategies to combat an ensuing battle on many fronts.

The national economy is already in tension with the dollar crisis, inflation, continuous devaluation of the taka against the dollar, downflow of remittance etc. Another significant spike in oil prices will hit Bangladesh's energy sector hard.

Bangladesh's power generation largely depends on imported oil and gas. Both commodities saw dramatic spikes in prices in the international market since halfway through 2022. Since then, Bangladesh has struggled to balance imports, leading to a crisis in the power sector. Even a planned load-shedding of around 2 thousand megawatts/day hasn't been enough to tackle the situation.

Then in August, the government increased fuel prices by a record  Tk 35, which was later minimised by Tk 5 only. Since then, transportation costs have increased, prices of daily commodities have hiked unprecedentedly, inflation has gone above 9 per cent (according to the govt.), and living costs have risen significantly, causing suffering to the middle and lower-income population.

Economists have repeatedly urged to adjust oil prices to stabilise the local economy. However, PM's energy advisor Tawfiq-e-Elahi Chowdhury has recently told journalists in a seminar that the govt cannot adjust oil prices until it becomes stable in the global market. This will certainly intensify other challenges that Bangladesh is bracing to face in 2023.

While the dollar crisis is not letting our import-export come to a balance, the trade deficit has hit a record USD 7.54 billion in Q1 of 2023. Remittance flow is falling month by month, and the main source of export income, the RMG sector, is shrinking with a downturn of demand globally, and many garments are ceasing production. On top of these, 2023 could be a year of political unrest.

More pressing issues await Bangladesh's economy as the country will start paying foreign debts from 2023 onwards. Especially repaying China, India, and the Asian Infrastructure Investment Bank (AIIB) loans with interest and principal will commence next year. As a result, foreign exchange will be affected, leading to a slew of problems like inflation and more devaluation of money, decreased Foreign Direct Investment (FDI), fall in individual and household incomes causing consumption fall, rise in poverty etc.

In the last FY, Bangladesh exported merchansise worth more than US$50 billion, where RMG contributed about 82 per cent. If the energy crisis intensifies next year, which is likely due to a possible oil price hike we discussed above, the sector will face further contraction as owners will reduce production to minimise the loss they might incur with full production using expensive fuel oil. And this will have a ripple effect as the dollar crisis will escalate, the trade deficit will further rise, and the central bank will have to use more reserves to balance it.

WHAT SHOULD BE BANGLADESH'S STRATEGY: Against the backdrop of a global economic downturn, rising inflations, and depleting economies, Prime Minister Sheikh Hasina called for austerity in terms of energy usage. However, mass-level frugality won't help if we cannot stop the huge and unnecessary waste of money in the sector.

The incumbent government has paid a staggering Tk 93,000 crore to private power generators regardless of their production in the last 13 years under the 'Quick Enhancement of Electricity and Energy Supply Act,' an act that makes it imperative to pay a minimum of 60 per cent charge of a power generator's capacity as 'capacity charge' even if they don't have to produce anything. So the first step to fight an impending energy crisis next year would be discarding this Act and ending the rental and quick rental systems.

Again, Bangladesh must check import dependency for power generation and find its own solution by strengthening Bangladesh Petroleum Exploration & Production Company Limited (BAPEX) with modernisation for inland gas exploration. The country also needs to accelerate the offshore exploration process, which moved at a much slower pace than expected over the last 7-8 years.

Another sustainable solution is focusing on renewable sources of energy. In our neighbouring country India, 40 per cent of the newly installed energy capacity in 2022 will come from renewable sources. Vietnam created an example by producing 9000 megawatts of energy from solar panels on rooftops. As a candidate for graduation from LDC, Bangladesh needs to generate 17 per cent of its total electricity from renewable sources, which currently stands at a meagre 2.08 per cent. The National Solar Energy Roadmap 2021-41 set a target of producing 20,000 megawatts of green electricity by 2041 with scopes of capacity extension to 30,000 megawatts. As the whole world is facing the consequences of an unstable fuel oil market, 2023 would be the right time to make all-out efforts to transform the country into a green energy-dependent one following the roadmap.

Besides, the transmission infrastructures from the Western to the Eastern zone must be completed quickly to extract the benefits from the newly commissioned coal-based power plants. With the first unit of the Roopur Nuclear power plant set to be operational in 2024, the completion of associated transmission infrastructures within the timeline is critical for the success of the country's one of the largest investments.

Energy efficiency is termed as the fourth fuel and can play a significant role in optimising energy demand if addressed sincerely. The government should encourage more energy efficiency-driven approaches and equipment, both at the residential and industrial levels, through different commercial incentives.

Tareq Ahmed Robin is an entrepreneur and industrial management expert.

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