Developing Countries: In Need of a New Kind of Energy Boost

By Rod McLaughlin —

What do Belize, Honduras and Nicaragua have in common? A lot, but one commonality is that all of their oil is imported. And during a year, it can really add up. The large amount spent on this energy exits the local economy and enters into a foreign corporation or nation, never to return—a one-way, linear flow.

There are many ways for developing nations in the Caribbean and Central America to boost their economies, but one of the most effective is to fully utilize what’s already there. This is best done by replacing imported energy with domestically produced energy.

In theory, when money is spent on imported energy, these dollars leave the domestic economy and boost the coffers of another country, another company. However, if money is used to purchase locally produced energy, the dollars circulate within the local economy, helping it grow.

As an example, Belize imports approximately 7,000 barrels of oil per day, according to the CIA World Fact Book. If we assume that in August of 2010, a barrel of oil on the world market sells for roughly $150 (Belize), Belize is spending $1,050,000 (Belize) every day on imported oil, or $383,250,000 every year (Bloomberg.com). The Belizean economy thus suffers a hard loss, or lack in monetary gain for importing such a necessity. If that money was spent on locally produced energy rather than imported oil, the local economy will profit and better allocate their gains on energy costs regardless of the source.

So why not make this money work twice as hard by spending it on locally produced energy?

There is a complex relationship that exists between imports, exports and economic development. Many developing nations are in a position where they must import most or all of their oil. These nations will export raw materials to increase income and offset the money being spent on imports, but attempting to balance the trade is difficult—it’s very hard, if not impossible, for most nations exporting the less expensive raw materials to offset the import of finished goods/energy.

Below are three different scenarios for acquiring energy and the effects each one has on the importing nation’s economy:

1. Importing refined oil while exporting raw materials (sugar)
2. Importing refined oil while exporting ethanol made from sugar
3. Replacing imported refined oil with domestic ethanol

* Numbers are used for purely hypothetical purposes.

Scenario 1: Importing refined oil while exporting raw materials.

This scenario is actually occurring in developing nations around the world. They do not have the resources, facilities or infrastructure to produce and refine their own oil, so they have no choice but to import. Meanwhile, these same nations must also export their raw materials to other nations (that will process such materials) in order to make significant, if any, profit.

So how does this process really work?

For this particular example, let’s say a liter of imported gasoline costs $2. This is $2 that will leave the economy. In order to offset this loss, a nation will export another good, such as sugar, to a nation that can transform the good into another profitable product, such as ethanol. Also, the bulk sugar price for enough sugar to make a liter of ethanol may be $0.15.

The chart below indicates the export of raw sugar will only offset $0.15 of the $2 spent on a liter of imported oil, and thus $1.85 per liter leaves the local economy and goes to an overseas interest.

Scenario 2: Importing refined oil while exporting refined ethanol.

A more progressive approach to the import-export trade problem is to export a finished product such as ethanol. When we export a finished product, the jobs required to take raw materials to produce the finished commodity are supplied in-country, which in-turn, provides local citizens with work and trade-skills in contrast to outsourcing those jobs.

Unfortunately, exporting finished products is a step that is often missed by developing nations that are rich in natural resources but lack basic infrastructure. What then develops is an extraction relationship with between the third-world country and a more industrialized trade partner. An extraction relationship simply means that a trade partner takes, or more like extracts, the natural resource in its cheapest, rawest form, and then has the resource manufactured elsewhere. The final product is then sold for more than it was obtained from the country of origin, missing out on fair a profit.

There are numerous examples of scenario two all over the developing world: exporting crude oil instead of refined oil; exporting cotton instead of clothing; exporting coltan and other rare minerals instead of microchips; and exporting sugar and coconut oil instead of ethanol and biodiesel; and the list goes on.

The problem with the extraction method is that the nation with the natural resources is stuck with the most basic and laborious jobs, such as picker, digger, miner, small farmer, etc. Meanwhile, the jobs that create the finished products are done elsewhere, jobs such as engineer, designer, business manager, researcher, programmer, skilled tradesman, and assembler. The more skilled the job, the more value that is given to a product, and is thus awarded the highest salaries in the production process. These are the jobs a developing economy should keep at home.

In scenario two we would produce the ethanol domestically, keeping most of the revenue within the local economy. Let’s say that a liter of ethanol can be sold for $1.40. We now have $1.40 to offset the $2 being spent on imported oil, but as you can see, even with a revenue of $1.40, the purchase of imported oil still results in $0.60 which leaves the local economy and goes into foreign markets.

Exporting a finished product is preferable to exporting raw materials. In the case of imported oil, it is likely that the price you charge for your ethanol exports will be much lower than the price you would pay for your imported oil. The result, illustrated in the following table, is a trade imbalance of about $0.60 per liter leaving the local economy.

Scenario 3: Substituting imported refined oil with domestic ethanol.

Scenario two demonstrated that a nation can yield significant benefits by keeping much of the production domestically. While exporting this energy-commodity would be profitable, it would not be nearly as beneficial to the local economy as it would be if used to substitute imported oil in the form of ethanol or biodiesel. The key is to deter from spending the $2 on importing oil all together. By eliminating the expense of imports, all of the money spent on a liter of domestic fuel will stay within the local economy.

Realistically speaking, it is unlikely most nations will be able to offset 100 percent of their imported fossil fuel with ethanol and biodiesel alone. It is important to understand that substituting as much imported oil as possible is the next step in strengthening an undeveloped economy.

In scenario three, all of the benefits of domestic manufacturing still apply, but there is one significant difference. Manufacturing yields may have the same economic benefit, and the $2 per liter that would be spent on importation is no longer leaving the country. This is because the imported energy has been replaced with the domestic energy.

The chart illustrates how this has a tremendous impact, turning a net loss of -$0.60 into an economic benefit or a gain of $1.40 as the money cycles within the local community.

Most developing nations seek to improve their economic circumstances. But one of the major obstacles of economic growth is that they are not taking an objective analysis of factors that hinder their own growth. They aren’t looking for solutions that benefit the greater good of the local communities. Substituting imported energy is a powerful tool for these countries—it’s the best way to give them a true and healthy boost of energy.