Belinda Beresford
It has been vilified as the devil’s excrement and lusted after as black gold, but oil still continues to lubricate the world economy.
Whatever you call it, oil has been nothing but bad news for Africa. Those who have it curse it. So do those who don’t.
Countries without oil supplies believe their economies are held to ransom by fluctuating oil prices. But countries with reserves of the precious liquid are nothing to aspire to, suffering corruption, massive debts and political unrest.
Angola’s cornucopia of oil and diamonds has been blamed for fuelling the country’s decades-long war. Nigeria, sub-Saharan Africa’s biggest oil producer, has earned billions but its general population is impoverished and the country has endured repeated coups. In both countries the infrastructure is decaying. The largest cities in each, Luanda and Lagos, both spent days without electricity this week.
According to the Organisation of Petroleum Exporting Countries (Opec), world oil production is about 73-million barrels a day. Nigeria pumps out around two million barrels per day. Angola produces 735 000 barrels a day.
Over the past year the price of oil has tripled to about $30 per barrel. The price rise follows Opec’s decision last year to cut production. Dr Rod Crompton of the Department of Minerals and Energy Affairs points out: “We have gone from the lowest prices in over a decade to the highest in over a decade in just a few months.”
There are fears that the rise could see a repeat of the oil crisis of the early 1970s when Opec first flexed its muscles and drove up prices. But these are widely dismissed, not least because such an action would damage the growth of the United States economy and carry a high political risk. Sustained high oil prices also encourage the development of alternative energy sources such as solar power.
The current spike in the oil price is not expected to go much higher, nor is it expected to be a long-term phenomenon. Howard Roberts of the Central Energy Fund estimates that over the long term, average fuel prices should range between $16 and $18 a barrel.
However, for non-oil producing countries the effects of oil price increase can be calamitous, especially for landlocked countries with high transport costs.
Fuel is often the largest component of import costs and it tends to take time for a country to reduce its demand for oil. This means that price hikes can have a tremendous negative impact on a country’s balance of payments, which in turn puts downward pressure on the currency.
Since oil affects transport costs, a price rise impacts on every sector of the economy – and this is exacerbated by its ubiquity in the making of plastics. Thus an oil price shock increases inflationary pressures which tends to lead to higher interest rates. These in turn retard economic growth.
To a degree South Africa is in a fortunate position because a lot of energy is obtained from coal rather than oil. Oil price rises also help the synthetic fuel industry and could lead to changes in the estimated economic viability of projects such as Mossgas while boosting the revenues of Sasol.
Oil price rises are also felt directly through petrol price increases.
FBC economist Mike Schssler estimates that the full impact of the crude oil increases should filter through to South African consumers next month – and could see petrol at around R3,20 a litre. In part this is because petrol prices are currently being subsidised by 8c a litre from the Equalisation Fund, designed to buffer fluctuations in fuel prices. However, the surplus in the fund will run out at some point, when the 8c per litre will be again added to petrol prices.
BoE Securities said in its February Oil/Fuel Monitor that it expects prices to rise to as much as R3,05 on the back of the higher oil prices and a weaker rand. But prices are expected to start falling a couple of months afterwards, providing, among other things, that Opec decides to increase production.
Climbing crude oil prices also affect the price of paraffin, which in South Africa has doubled over the past year. This particularly hits the poor who use paraffin as their main fuel.
Ostensibly the oil price rise heralds good news for African oil-producing nations. In reality the effects can be perverse. In Nigeria, the rocketing oil price has provided a financial boon to the government of Olusegun Obasanjo, which has been battling with the country’s economic collapse since gaining power a year ago. However, the increased flow of revenues can also up the political stakes in a country already wracked with divisions.
The real benefits of oil price rises can also fail to reach the governments concerned. Richard Cornwell of the Institute for Security Studies points out that in Gabon, for example, taxes on the oil companies are set in advance. This year they were fixed, using an estimated oil price of less than $20 per barrel, which means the government would not benefit from price rises above this. Gabon is sub-Saharan Africa’s third-largest producer, pumping 359 000 barrels a day.
While the discovery of oil reserves can seem like a bonanza to a country, history seems to show that it is as likely to damage a nation’s economy as build it. The oil industry is capital intensive, but tends to draw skilled labour from elsewhere in the economy. This can lead to a labour elite working in oil-related industries, and an underskilled and lower paid workforce elsewhere. Countries experiencing an influx of wealth tend to rapidly become heavily export dependent: an oil boom can artificially boost a country’s exchange rate which penalises exports and makes imports cheaper. This leads to dependence on imports – which becomes a problem when oil prices fall and there are no local substitutes available because the industry has been squeezed out of existence.
Oil is an addictive drug, allowing governments to avoid painful economic restructuring. Oil rich countries tend to become dependent on the commodity while other aspects of the economy wither as the oil sector gains political power.
Many oil-producing nations are notorious for crippling levels of foreign debt. Countries with large oil revenue potential were originally considered desirable debtors since creditors knew there was a reliable asset which could be used as repayment. In Angola, for example, loans to the government which have enabled it to continue the expensive war against Unita will be at least partly repaid in barrels of oil.
Not far behind the river of money produced by oil is corruption. The former military government of Ibrahim Babangida in Nigeria received a windfall of $2-billion when the oil price rocketed during the 1990 Gulf War. The money has never been accounted for. Meanwhile, Nigerian government statistics for 1995 showed that 70% of state schools lack even basic amenities such as desks and, in many cases, roofs.