PRESS OFFICE: ABSA
The sharp drop in the oil price has hammered Africa’s oil producers, while oil importers have benefited from cheaper oil. Among both the winners and losers there are countries that have made the best use of recent developments in the oil market.
Over the past two years oil has dropped precipitously, from $120 a barrel to $30, and is now hovering around $50 a barrel. The oil price is likely to stay at this level for 2016, rising slightly in 2017, and the prospect is that the price will remain below the $100 a barrel mark for years to come.
The impact on oil producing countries has been severe. Among the hardest hit in Africa have been its two biggest oil producers, Nigeria and Angola, both of which have economies heavily dependent on oil revenues. Other countries suffering from lower oil revenues include Equatorial Guinea, Gabon, Cameroon, Sudan, Ghana and Congo Brazzaville as well as key producers in North Africa, including Algeria.
The oil-price winners in Africa are all of the countries now paying less than half for imported oil than they were two years ago. This has enabled them to spend more on services such as education and health care as well as much needed infrastructure projects and, most importantly, encourages domestic spending. For some, however, the oil price windfall is lessened because they export commodities whose prices have also slumped over the past two years.
Those saving money on their imports of crude oil and oil products include Ethiopia, Kenya, Rwanda, South Africa and Tanzania, to name only a few. Consumers in these countries are also benefiting when they buy products with an oil element – when it costs less to fill up a car with petrol or diesel, they have more disposable income to spend on other goods and services.
There have been different economic outcomes among these oil-price winners. Ethiopia is faring best of all, and is doing fantastically well, with a GDP growth rate above 9% in 2015. Another clear winner is Kenya, with growth of nearly 6%.
Ethiopia has been channelling a lot of its spending, as well as attracting foreign investment, into developing a manufacturing base and creating the right environment for companies to start and flourish. While Kenya has discovered its own oil, it is not yet a producer. The Kenyan economy is more diversified, including growing financial technology (fintech) and mobile telephony sectors.
There have also been differences in the responses of the oil producing countries. Both Nigeria and Angola, the most heavily dependent on oil revenues, are restructuring and seeking greater efficiencies from their national oil companies which in each case are the dominant companies in their economies. However, their strategies differ. While Angola is drawing its national oil company closer to the ruling family, Nigeria is not only opening out its oil company, but it is seeking to lessen the country’s dependence on oil.
For Nigeria the oil price fall has been both a curse and a gift. The curse is the economic impact and a sudden shortage of foreign exchange. Nigeria is not a big manufacturing country, and relies on imports. Sharply lower revenues from oil sales have led to a lack of foreign currency, and particularly US dollars, with which to buy or import foreign goods.
The gift for Nigeria is the opportunity to restructure the economy and diversify away from its over-reliance on one commodity. It is also an opportunity to act against corruption, which had been fuelled by the huge amounts of money generated by oil proceeds. Austerity has enabled the new government to tighten up on revenue streams.
Nigerian ministers recently visited London, emphasising to investors and bankers that Nigeria is determined to diversify away from the oil sector. The country is seeking investment into other areas of the economy, offering opportunities to develop its infrastructure, as well as for manufacturers and consumer companies to develop the parts of the economy neglected when oil was the easy option for the government to follow.
Nigeria is also among the African countries pushing gas to power projects in order to end chronic electricity shortages that are slowing economic growth. While many gas projects are being delayed because gas prices have dropped as oil has fallen, the gas to power drive is focused on gas for development in the domestic economy rather than for export.
Ghana and Tanzania are other countries with gas projects specifically designed for power generation. While Mozambique plans substantial gas exports, it is also reviewing plans to utilise some of its offshore resources for onshore projects. South Africa is planning a gas import terminal to feed gas to power projects to meet the growing demands on its power sector.
These imperatives are likely to drive African economies for a while yet. The key players in the oil market, led by Saudi Arabia, are pumping as much oil as they can. The slight rise in the oil price is encouraging some United States shale oil producers back into the market, and new projects which will increase supply can take five to seven years to bring into production.
Chinese economic growth has slowed, and growth in European economies is lacklustre. While the US economy is more robust, it is not near the growth levels people had expected.
In these circumstances, the expectation is that oil prices will stay low. Goldman Sachs recently predicted prices would stay at current levels for 12 to 18 months. Barclays expects oil to average about $44 a barrel this year, with a slight recovery next year taking it to around $60 a barrel.
This will increase Africa’s mindset shift away from oil dominance, and sharpen the focus on gas production for power generation with its multiplier effect on economic growth and job creation. There is good news for both oil price winners and losers in Africa.
Camillo Atampugre is vice president, head of oil and gas for Africa at Barclays based in London. Barclays partners governments and businesses in oil and gas developments across Africa, particularly in exploration and production transactions.