A long-term Egyptian recovery in place since currency devaluation in 2016 can resume after the war between Russia and Ukraine ends, Mathias Althoff, ... partner at Swedish frontier markets investor Tundra Fonder, tells The Africa Report.
More than $100 a barrel. It has been eight years since the price of crude oil has risen this high. An escalation triggered by the war in Ukraine, which then provoked a cascade of Western sanctions against Russia and has led to fears of a significant drop in sales by the world’s second-largest exporter, which is increasingly cut off from international markets.
Some traders are now hypothesising the cost of a barrel could reach $200 this year, if the EU decides to boycott its eastern neighbour and if the Organisation of Petroleum Exporting Countries (OPEC) insists on maintaining its production at current levels. Such a price has never been seen, even during the 2008 financial crisis.
Disparities between producers and importers
The consequences for Africa are numerous and sometimes contradictory. African economies are still heavily dependent on oil, both for the transport of people and goods and for energy, with many homes and businesses equipped with diesel generators. Any rise in the price of a barrel therefore affects purchasing power, freedom of movement and access to electricity.
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But oil is also one of the continent’s main sources of income: sales of the resource account for almost half of GDP for Libya and Congo-Brazzaville, a quarter of GDP in Angola and a fifth in Gabon, according to the World Bank.
“The region as a whole is benefiting from the high price since sub-Saharan Africa produces more oil than it consumes,” says Alan Gelder, a former ExxonMobil executive who is now an oil market specialist with natural resources consultancy Wood Mackenzie. “But there are significant disparities between producing countries, which benefit, and importing countries, for whom the situation is much more complicated.”
According to the IMF, importing economies (of crude and refined products) will see their budget and trade deficits rise, jeopardising their recovery post-Covid.
“This conflict comes at a time when most [sub-Saharan African] countries have few public policy tools to deal with the effects of the shock,” the Fund warns. “This is likely to reinforce the socio-economic pressures, public debt vulnerability and damage related to the pandemic that were already affecting millions of households and businesses.”
The central bank of South Africa, the continent’s largest importer of crude oil, has revised its inflation forecast sharply upwards for 2022: from 3.1% before the war to 5.6% today. Standard Bank, the leading pan-African bank, expects central banks in ten countries, including South Africa, Namibia and Botswana, to raise interest rates in an attempt to stem future inflation.
The rise in the price of oil is accompanied by an almost universal increase in the price of natural resources. This should help oil-importing countries that produce gold, copper and aluminium in particular, to balance their trade balances. South Africa’s central bank has therefore also revised its growth forecasts upwards for 2022, from 1.7% in January to 2% in March, due to the increase in the sale prices of these exports.
The main oil producers, for their part, are benefiting from the rise in the price per barrel. Algeria is in a particularly good position since it is back to its pre-pandemic production level. Minister of Energy and Mines Mohamed Arkab announced that Algeria would exceed one million barrels per day starting in April, an increase of more than 10% compared to 2020 and 2021.
“Africa is seen as the most reliable alternative to Russian oil,” says Kennedy Chege, a researcher at the University of Cape Town specialising in oil and gas. “Producing countries will soon have the opportunity to sign new sales agreements with Europe,” he says. Exports destined for Asia could be redirected to Europe, at a higher price and incur lower transport costs.
But not all producing countries are in the same boat. Five of the seven African members of OPEC, including Angola and Nigeria, are well below the production targets set by the organisation, due to dilapidated infrastructure and insufficient investment, which reduces their oil revenue.
Production in the Republic of Congo is highly variable while production in Chad, with the continent’s tenth largest oil field, has reportedly dropped 35% since the death of President Déby last year. Even Libya has seen its revenues fall in recent weeks after an armed group blocked two oil fields producing some 330,000 barrels a day.
Nigeria, the continent’s largest oil producer, mainly exports its own crude while importing refined oil. The scheduled opening of the huge Dangote refinery in the coming months should change the game somewhat, but for the time being Nigeria, just like other countries, is dependent on imported oil.
The Nigerian government subsidises petrol at the pump in order to make it accessible to as many people as possible: fuel is two to three times cheaper in Nigeria than it is in the rest of West Africa. But this policy does not apply to diesel, still essential to the country’s economy, and it hurts the state’s financial resources. The subsidy was expected to cost $7.2bn this year, according to January forecasts by the state-owned oil company. The rising price of a barrel will push this bill much higher still.
“In theory, we benefit from the rising oil price. In reality, this is not the case,” says Cheta Nwanze of the Nigerian think tank SBM Intelligence. “Basically, Nigeria is subsidising oil for the rest of West Africa, because suppliers from neighbouring countries are illegally sourcing from us. The war in Ukraine is also causing diesel shortages, thus increasing energy costs for businesses, which are likely to be reflected in unemployment rates and consumer prices.”
The rise in oil prices has been benefiting Egypt, which is exporting more and more oil. But as the world’s largest importer of Russian wheat, the country is also suffering from a 20% increase in food prices and inflation that is approaching ten per cent.
Egypt has therefore devalued its currency and started negotiations with the IMF to implement “a comprehensive economic programme” that could include new austerity measures.
Africa’s excess debt is also expected to increase. Ghana, one of the smallest oil producers (about 200,000 barrels/day), announced major budget cuts at the end of March to reduce its deficit and delay a debt crisis that many observers consider inevitable. A dozen African countries hold debt corresponding to more than 77% of their GDP– a threshold considered dangerous by the World Bank.
It is difficult to say what the long-term effects of the oil crisis will be. Some mining companies, anxious to reduce their increasingly expensive dependence on diesel, are now considering financing renewable energy projects, says Linda Mabhena-Olagunju, managing director of DLO Energy, a developer of renewable energy facilities, notably in South Africa and Nigeria.
But at the same time, Mabhena-Olagunju tells us, some Nigerian oil companies that were struggling to raise funds before the war in Ukraine are now being courted.
“After COP26, we saw an increasing number of banks deciding to no longer invest in new oil projects,” she says. “But now we are in an unprecedented situation, with the world more dependent than ever on African oil, because of the sanctions against Russia. This could be a game changer.”
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