Date:January 07, 2015

Oiling the Africa growth trajectory

By William Gumede

The crash in global oil prices, poor demand and an oversupply of crude could put the brakes on the growth of many African economies. Oil prices have fallen more than 45percent since June this year, with Brent crude – often used as a global benchmark – closing last week at a new five-and-a-half-year low under $60 (about R698) a barrel.

Last week the influential US Energy Information Administration (EIA) forecasted that global consumption of oil would drop significantly next year. The International Energy Agency and the Organisation of the Petroleum Exporting Countries have come out with similar downbeat predictions. Many fast-growing African economies depend on their growth and fiscal revenue from the export of one commodity, which is often oil, but it could be a metal or an agricultural product.

This makes these African economies systemically vulnerable to any changes in the price, production or demand of these commodities. The Nigerian economy is about 95 percent dependent on oil for its foreign exchange earnings, and 85 percent for its total revenue. Oil exports account for 46 percent of Angola’s GDP and 96 percent of its exports.

Any drop in oil exports, productivity or prices will cause massive fiscal, social and political challenges for African countries. This year volatility in the oil price over the past months – falling global oil prices have decreased government incomes across the continent. The reality is that in the long-term oil prices will decline as new oil and gas resources are exploited in the US and across the globe, including China.

For another, many industrial economies are determinedly pursuing strategies to become more energy-efficient, finding cleaner energy alternatives, and also to wean themselves off from being reliant on oil from volatile developing countries, including African countries. The upscaling of the US production of shale oil has changed oil markets, with big implications for African oil producers. The US used to be the biggest importer of African oil – before 2010 importing about a quarter of the continent’s total exports.

However, US imports of African oil has now declined by 90 percent, from around two million barrels per day to 170 000 barrels per day. Following the dramatic increase in US shale oil production, the US now produces more than eight million barrels of oil a day (in 2008 the US produced five million barrels a day). According to the US Energy Information Administration, in 2019 the US will be producing close to 10 million barrels a day – overtaking Saudi Arabia, which pumps about 9.4 million barrels a day.

The US Energy Information Administration’s 2014 Annual Energy Outlook report estimates the net import share of the total US energy consumption of oil will reach four percent in 2040 – this was 16 percent in 2012 and 30 percent in 2005. Some analysts in the US are estimating that by 2030 the US import of oil from abroad will fall to zero, because of the increase in domestic production of oil through shale sources. Although Nigeria has been the hardest-hit so far of African’s four major oil producers by the decline in US oil imports, Angola, Algeria, and Libya have also felt the impact.

In 2011, Nigeria exported more than one million barrels per day to the US – in February, it dropped to 38000 barrels a day. In 2008 the US imported around 513000 barrels per day from Angola – this fell to 217000 barrels a day last year. A report by the UK’s Overseas Development Institute (ODI) on the impact of fracking says the total estimated effect of a reduction in US oil imports from African countries amounts to $32bn since 2007 – including $14bn in Nigeria, $6bn in Angola and $5bn in Algeria. Most of the African producers have off-set the loss of the US oil market by increasing their exports to emerging markets such as China and India.

China buys a third of its oil from Africa – the rise in Chinese uptake of African oil has fuelled high growth in many African countries. However, China has committed to change its energy consumption patterns because of domestic and global environmental and health pressures. China’s planners are envisaging the next period of the country’s development path to be less oil-intensive. But China is dramatically increasing its own production of shale gas and oil. China’s 12th Five-Year Plan (2011-2015) elevates local shale oil and gas production – to reduce its reliance on foreign (African) oil and gas.

Astonishingly, many African countries appear not to be aware that the Chinese economy is slowing down, partially as the country undergoes a self-imposed structural transformation of its economy away from a state-led to a private sector-led one and towards a more consumption-driven one. A Chinese economy that grows at lower levels will also mean a decrease in the demand for African oil.

Industrial economies, such as Japan and the EU countries, have increasingly invested in new technologies to bring to the market new alternative sources of energy, to increase the efficiency of the current energy use, and also to be less dependent on Russian, African and Middle East oil. Clearly, these collective developments will impact heavily on African oil producers such as Nigeria and Angola. But smaller and new African oil producers, such as Ghana and Equatorial Guinea, as well as new explorations, will be impacted too. New African oil exploration in Uganda, Kenya, Tanzania and Mozambique will also be impacted by declines in US and Chinese oil imports.

For one, foreign investors in such new oil explorations projects may either slow their investments or postpone them. Ghana started oil production in 2010 and oil will overtake gold to become Ghana’s largest export in the next five years. Most of Ghana’s oil initially went to the US, but now goes to China following the reduction of US imports of oil. If China drops its oil imports, Ghana will be one of the smaller African oil producers to suffer.

Lastly, there appears to be a price war going on between the Organisation of Petroleum Exporting Countries (Opec), the US, Europe and Russia, which has further depressed oil prices that will harm Africa.

What should African countries dependent on oil-export-led growth do? African countries will have to deal with corruption, waste and tax repatriation more effectively, to free up African capital for wealth. African countries will have to govern democratically, in the best interests of all their citizens, rather than a few elite, and they may use the talents of all their citizens to overcome the complex challenges facing their societies, not just their family, friends, and ethnic group or political faction. African countries will also have to use current oil income more prudently.

African oil producers must save more of their oil income for a rainy day, to cover the shortfall in revenue that a drop in oil exports will cause. Nigeria’s savings of oil revenue in its sovereign wealth fund has just $1bn, yet oil producers such as Saudi Arabia, Norway and Abu Dhabi, which each have more than $600bn saved from oil income. Importantly, African countries need to diversify economies from depending on oil.

Africans must get serious about trading or bartering with each other more – one country can sell or barter products to another, which the other does not have but needs. African economic integration must go beyond nice-sounding words of pan-Africanism, but become more practical in deeds.

*Gumede is chairman of the Democracy Works Foundation and author of South Africa in BRICS: Salvation or Ruination (Tafelberg)