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A few weeks ago a rare storm event known as "Derecho" ravaged the Washington, DC area, claiming many lives and leaving 1.3 million homes and business without electricity. My house was unfortunately among those hit hard by the power outage and in an attempt to cope with the 90F+ temperatures unleashed by the storm, we moved down to the basement -- generally, the coolest part of the house.
For the first few days the novelty was fun for the kids, but as the days wore on, frustration grew, in part because we had no idea when the power would come back on.
Although this doesn't really even begin to compare with the pain of chronic electricity shortages in some parts of Latin America, the impact of the DC storm and ensuing blackout reminded me of our vulnerability to shocks and our extreme dependency on energy.
What does this have to do with fickle oil prices? Well, a lot, actually, as our report "Mitigating Vulnerability to High and Volatile Oil Prices" points out.
Oil price volatility sets off a chain reaction across all goods and services. Food, gas, travel, electricity, tuition fees, entertainment and healthcare -- they all spike.
Since 2007, oil prices have remained high and volatile. And just as every home has to “tighten their belt” to cover increasing costs, governments face a similar dilemma, especially in light of falling revenues. This is particularly true for net oil importers such as Central American and Caribbean countries.
In both sub-regions, oil provides more than 90 percent of their primary energy needs. That’s more than a third higher that the regional average and over twice the global average.
But what can governments and households do?
When energy bills are due immediately and the need to reduce longer term dependency is clear, how should we evaluate the associated trade-offs without jeopardizing other household (such as education) and national priorities?
This new report attempts to help answer these questions. Looking at the short, medium, and long term measures available to concerned governments, the report focuses particularly on impacts to the power sector.
In the short term, market-based risk management solutions (physical and financial hedging tools) can be used to help manage the impact of oil price volatility on national budgets.
Some countries, such as Mexico, Panama and Ghanahave already begun to use these tools, while others are watching their experiences with interest.
However, in the more medium and long term, structural measures are needed to reduce vulnerability.
In Central America and the Caribbean, renewable energy sources, investment in energy efficiency, and increased regional integration with countries endowed with a more diversified supply, would amount to an average improvement in the current account balance of approximately 1.6 percent of GDP.
While at a country level, Haiti and Honduras could see deficits reduced by up to 3 percent of GDP. In Guyana and Nicaragua this reduction could increase up to 5 percent of GDP.
Not only does renewable energy directly reduce the need for oil in power generation, but it also reduces greenhouse gas (GHG) emissions.
If Central America and the Caribbean increased their renewable potential capacity by just 10 percent, the region could save up to 14.2 million and 5.6 million barrels of diesel and heavy fuel oil, respectively. This represents an average reduction in current account deficits of almost 1 percent of GDP.
Investments in energy efficiency could further increase these savings --and it's one of the most cost-effective ways to reduce the need for oil and oil-derived products.
If Honduras were to take advantage of energy-efficient strategies, the country could save up to 1 percent of GDP. Whereas in Nicaragua and Jamaica, savings could reach nearly 1.5 percent.
Oil dependency could be reduced further if countries were to integrate their respective energy sources. Such measures would also help to diversify generation sources, improve efficiency, lower the associated generation costs and reduce GHG emissions, attracting a saving of 2.4 million barrels of diesel fuel and 1.8 million barrels of heavy fuel oil.
These figures suggest a reduction of approximately 8 percent in the oil-fired share of these countries’ energy matrix.
While centered mainly on Central America and the Caribbean, the instruments and policy recommendations contained in this report are applicable to any oil-importing country seeking to mitigate vulnerability to high and volatile oil prices.
No doubt, decisions about investment in risk management, structural measures, and diversification will be difficult. But they are important to ensure that, going forward, we are better prepared to cope with oil price volatility.