ECONOMIC AFFAIRS: by Patrick J. ByrneNews Weekly
Oil imports threaten to blow out foreign debt
, May 24, 2008
Australia's foreign debt has grown at around 6 per cent (or $60 billion) annually over the past four years. Patrick J. Byrne reports.Australia's slow march to banana republic status continues, while Joseph Stiglitz, one of the world's leading economists, has warned what happens to nations when foreign debts get out of hand.
Australia's net foreign debt now exceeds $610 billion, or 61 per cent of gross domestic product (GDP), and is growing twice as fast as the economy.
Australia's GDP has been growing around 3 per cent annually and has just passed the $1 trillion mark. In comparison, the foreign debt has grown at around 6 per cent (or $60 bn) annually over the past four years. In 2007, the debt grew by a whopping $87 bn, or 8.7 per cent of GDP.
In today's terms, the Australian economy will be worth about $1,230 bn in 2015, and the net foreign debt could be worth:
• $1,030bn, or 84 per cent of GDP, if it grows $60 bn annually; or else
• $1,219bn, or 99 per cent of GDP, if it grows at $87 bn annually.Alarming
If these figures are not alarming enough, the federal Minister for Energy, Martin Ferguson, has warned that Australia's oil imports are set to blow out from only 20 per cent in the 1990s to 80 per cent of the nation's needs in 2015.
Australia's oil fields are running dry. Mr Ferguson says that it is now vitally urgent to find new oil reserves. However, it is going to take years to find and exploit them.
Last year, Belinda Robinson, of the Australian Petroleum Production and Exploration Association, warned:
"Using Geoscience Australia projections and assuming oil prices of US$50 a barrel... the deficit for oil, condensate and refined products is projected to increase to $27 billion a year by 2015 — around twice the 2005-06 deficit of $12.8 billion."
These figures appear to be based on oil priced at about US$50 a barrel and the Australian dollar at about US$0.80.
However, if oil is priced at $US150 a barrel, and the Australian dollar is $US0.80, then oil imports will cost the nation $75 bn annually. In today's terms, the foreign debt will be blowing out at $135 bn per annum, or 11 per cent of GDP.
Worse, if oil is priced at $US150 a barrel, and the Australian dollar drops to $US0.40 should the commodities boom subside, then oil imports will cost the nation $150 bn annually. In today's terms, the foreign debt then will blow out at around $210 bn per annum, or 17 per cent of GDP.
This will be unsustainable. A recent warning of what happens to states with huge foreign debts has come from Joseph Stiglitz, former chief economist at the World Bank until 2000, winner in 2001 of the Nobel Prize in economics, and author of several important books on globalisation.
In his latest book, Making Globalization Work
Stiglitz says that the Paris Group of lending nations periodically write down third world nation foreign debts that have no hope of being repaid.
However, for second world nations — and by obvious implication for first world nations like Australia — it is a totally different story. Stiglitz states that, aside from very poor nations and those recovering from very corrupt regimes, "Mexico, Brazil, Argentina, Russia and Turkey are on the long list of [second world] countries that have recently not just had a problem but faced an economic crisis because of difficulties in meeting debt obligations."
He says: "No one talks about debt forgiveness for these countries, partially because, at one level, these countries do have the capacity to repay: they could presumably raise taxes and cut expenditures enough to generate the required revenue. The value of the country's assets exceeds by a wide margin the value of what is owed. But the cost to the country can be enormous, beyond what its citizens are willing to pay.
"Even if creditors are not willing to forgive debt on their own initiative — which, typically, they are not — there is an alternative: default and renegotiation. This ... was the route taken by Argentina. But as we have also seen, Argentina's debt restructuring was unnecessarily difficult."
If Australia is to avoid a major foreign debt, it will have to boost its exports and slash its imports. As oil imports promise to be the biggest single cause of the blow-out of Australia's foreign debt, the building of a major ethanol industry becomes a major priority for the federal government.
Australia is ideally situated with the land, water and climate to be one of the few nations capable of building a major sugar-cane-based ethanol industry.
Brazil built a major ethanol industry in the face of crippling oil imports during the 1970s oil crisis. It is now the Japan of South America. Australia needs to follow the example of Brazil.— Patrick J. Byrne.