IMANI: Running Commentary on a Few Recent Developments

Thursday, March 25, 2010

Oil Prices, Green Business, Employment and Statistics……

*OIL Price Palaver*

Nana Asafu Adjaye, CEO of the Ghana National Petroleum Corporation must be rubbing their hands in glee.  Oil has broken through the $80 price band! Every successful climb of the commodity on the price ladder signifies an increase in the value of Ghana’s oil resource, which in a way bolsters the bargaining position of the GNPC as it tours the world looking for easy cash to realise the ambitions of our new oil Tsars.

Alex Mould, CEO of the National Petroleum Authority (NPA) on the other hand is writhing in a little bit of agony, as he stares forlornly at the  computer. Every upward movement in the oil price is like a nail piercing his flesh. Very soon he would need to up the price by about 10%, which will be quite perceptible in our inflation-averse circumstances. Especially as we have a 200%+ upward adjustment of energy tariffs already staring us in the face.

Government will have to sit up and start strategising about how to deal with this “oil price paradox” in our national economic life. The paradox has arisen because Ghana shall soon be in the funny position of being both a net importer of fuel and a net exporter of the same commodity at the same time. A major feature of the incoming petroleum revenue management policy should be devoted to this matter. It seems to us that there are two main channels through which oil price-induced inflation percolate into our economy: transport and energy. Both sectors are rife with inefficiency. If some of the oil windfall was directed at salvaging the situation, the resultant benefits shall be legion.

*Oil Money Palaver*

The Ministry of Finance claims that in the first phase of jubilee development, 38,000 of the total 120,000 barrels per day of production shall accrue to Ghana annually. What they won’t do is publish in full all the assumptions and calculations that lead to this official “fact”. They are acting like smart alley boys. They want to eat their cake and have it. They don’t want folks demanding modern motorways as soon as first oil drops. But at the same time they want their new banker friends in Asia and Europe to believe that a huge chunk of the oil find shall be in their control, and so they should be treated as credit-worthy clients, and not some beggarly supplicants. Well, there are less incoherent ways to approach that strategy.

When you look at the 38,000 barrels claim it is so obvious how it disintegrates upon least scrutiny. One of the components in determining how many barrels of oil out of the 120,000 per day we have to give up is the production costs item. From a secondary source we understand that it is the belief of the Ministry of Finance that the production costs shall be in the region of 10,000 barrels per day equivalent in Jubilee phase 1. What that means is that the cost of producing 1 barrel of oil is about 8% of the market value of that oil. Using the government projected value of $60 per barrel thus implies that it would cost $5 to produce each barrel of Jubilee oil. This is clearly confused. Onshore production in some very fertile parts of the world cost more than $5 per barrel. To assume that ultra deepwater production in Ghana will cost the same amount when almost every other estimate puts the figure at almost 6 times that amount is to assume very recklessly. But time will tell.

*Carbon Capture in Jubilee*

Ghana has adopted an official policy of capturing and storing carbon from its young oil fields as part of her climate change obligations. This was announced by the Environment Minister herself, so there can be no doubt about Government intent. We are intrigued. What informed that choice of action? Carbon capture and storage technology is by no means mature. That means it is a pretty expensive option of carbon emissions mitigation. A calculation in a Scientific American article last year showed that power plants adopting this emission reduction strategy typically spend double the standard cost producing power. A more expensive option of getting involved in the carbon game for Ghana can mean fewer advantages in the carbon credit space. There is a greater likelihood that one shall fail to qualify for “CDM” status (the gold benchmark for mitigation) if one goes the route of a more expensive, more difficult to manage, approach. It is possible that government of Ghana is eyeing the less rigorous “mitigation” and “adaptation” funds that have been touted time and time again. The issue of course is that those funds are proving quite elusive. Government shouldn’t commit our nascent industry to any ponderous and onerous obligations in anticipation of some Santa Clausian largesse that may never materialise.

*1.6 Million Jobs Created*

We don’t subscribe to the view that the Ministry of Information is not a credible source for official government data. We are also cautious about singling out the Ministry for criticism when the practice with all official sources, including the vaunted Statistical Service, is to issue figures and statistics without any notes on methodology.

Without detailed notes on the recent figures put out by the Ministry of Information claiming that 1.6 million new jobs have been created as a direct response to government policy, it is near impossible to examine the plausibility of this prospect.

But if we were to take the release at face value and accept that around 600,000 NEW jobs have been created in road construction alone, then one needs to ask how much has been invested in that sector to warrant such an expansion.  Are we, for instance, talking about a thousand kilometres of roads built over the past year or so and 600 jobs per kilometre? Can these be productive jobs? If the workers engaged in this endeavour are being paid anything like the normal wage then the average new worker would be earning something like $1000 per annum. That should imply wage costs of about $600 million added-on. If labour constitutes 30% of cost, then total NEW investment should have been in the range of about $1.8 BILLION! Unless of course the methodology used was such that “employment” was defined very loosely, with no reference whatsoever to wages and duration of employment. Government needs to publish the details.

But whatever be the full facts regarding job growth due to government policy, of greater importance is the NET EFFECT on NATIONAL UNEMPLOYMENT. To determine that to any degree of certitude two other key factors beyond job growth are vital: job losses over the period and new entrants into the labour force. In every economy, job losses tend to track job creation to an extent. In our specific circumstances we know that whole industries are in contraction mode. Regarding the second factor, we know that employment figures are usually calculated with reference to persons above the age of 15 years outside fulltime education. Every year, hundreds of thousands of graduates and non-graduates enter the workforce in compliance with this criterion. Adding these two factors – jobs lost and new entrants in the labour market – could conceivably give us a figure higher than the quoted 1.6 million.

It is therefore entirely feasible that this *seemingly explosive* job creation rate notwithstanding, the net effect on employment could still be negative or insignificant. Government must publish the full details.

*Courtesy of IMANI Center for Policy & Education and*