Saturday, January 17, 2015

The Oil Price

The plummeting of global crude prices is generating ripple effects worldwide. While oil exporters are reeling from plunging revenues. Given the concentration of oil and other natural resources in Africa, how will it affect it. Since June 2014 however, the high global commodity prices have declined steadily; Brent Crude, the international benchmark for oil prices has lost almost 50 percent of its value. If the tumble in commodity prices in the 1980s led to economic contraction, budget deficits, debt crises and social misery, how will the current oil rout affect Africa's renewed economic transformation aspirations?

Newly independent African governments then, fired-up by nationalist zeal, and emboldened by resource discoveries, set ambitious economic modernisation plans, to be financed by resource windfalls - copper in Zambia, cocoa and gold in Ghana, and cash crops and oil in Nigeria. However, the lofty dreams were abruptly halted by external shocks from volatile global commodity markets, which disrupted the flow of foreign exchange. The effects were exacerbated through mismanagement by weak bureaucracies, and often, predatory dictatorships.

Persistent low prices will deplete foreign reserves, strain budgets, trigger cuts in social spending and other austerity measures, and ensnare oil producers in new debt. Forecasts have been indecisive on the medium to long term trajectory of oil prices ranging from $43 per barrel in the first half of 2015 to $95 by year's end. The slowing growth of China and consequent lowering of its demand for fossil fuels, emerging non-OPEC producers and new technologies reducing the cost of shale production could cap oil prices. Thus, if and when prices do rise, they are unlikely to reach the $100 mark. Perhaps, soaring oil prices and windfalls are relics of a time gone by.

African oil producers will be hard hit with varying severity. Veteran exporters like Angola, DRC, Equatorial Guinea, Nigeria and South Sudan will be affected as they all depend on oil rents for 50 to 70 percent of their governments' revenues and more than 90 percent of export earnings. Already, Nigeria is reeling from the consequences. Cuts have reduced capital spending to just 14 percent for 2015 while government salaries and other recurrent expenditure take the mammoth share, and the depreciation of the Naira is likely to have inflationary consequences in an economy that depends on imports for most of its food and consumer goods.
The war-torn South Sudan currently receives the lowest oil price in the world, $20 to $25, due to the shocks, the low quality of its oil and the payments for using of the pipeline traversing the Sudan. Declining oil revenues and output will threaten its already precarious attempts at post-conflict nation-building.

The experience for oil-importing African countries will be different. According to IMF projections, importers will experience increase in real income on consumption and decrease in the cost of production of final goods, and consequently, on profit and investment. Reduced import bills for countries like Djibouti, Benin and Malawi among others will save the equivalent of more than 11 percent, 6 percent and 5 percent of their GDPs respectively. Countries like Malawi which depend on foreign aid for more than a third of government revenue will have greater fiscal space, while Ethiopia's emerging manufacturing industry could be boosted from savings on oil imports.

Countries with recent oil finds such as Chad, Ghana, Kenya, Niger, and Uganda. Ghana's case is particularly striking. Having grossly overestimated expected earnings from its Jubilee oil fields, it embarked on a spending spree with wage increases and subsides and borrowed massively against future oil income. These have led to budget shortfalls since 2011, government debt, a 40 percent depreciation in the currency and a request for IMF stabilisation intervention. Critically, Ghana's oil production, like most of the new producers will be on a decline by late 2020 according to International Energy Agency forecasts. Ironically, the country is already exhibiting pathologies associated with the neighbouring dysfunctional veteran oil exporters.

Questions remain about Angola's $5 billion Sovereign Wealth Fund (SWF) and Nigeria's $1 billion and its Excess Crude Account for stashing surplus oil earnings on whether they will allow them continue with infrastructural projects remains to be seen.

It is clear that resource endowments and the presence of industrial policies by themselves are grossly insufficient without practical measures to ensure that the revenues count and the sustained commitment to generate shared prosperity for citizens.

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