News and Information

Africa to Suffer Oil Shock
July 27, 2004

The Nation (Nairobi)

July 27, 2004
Posted to the web July 27, 2004

Isaac Esipisu

Oil price strengths are expected to hurt economies in Africa.

The Standard Chartered Bank in its report African Quarterly says that although Africa is a net oil exporter, the continent will still be worse-off as a result of higher oil prices.

"Although Africa is a net oil-exporter, and many African countries have benefited from oil-related FDI (foreign direct investment), the overall impact of oil price strength is still expected to be negative," said the chief economist of Standard Chartered Bank Africa, Razia Khan.

The presence of key oil producing countries such as Nigeria and Angola, in a region otherwise marked by low consumption, means that Africa's oil exports exceed its imports. In net terms, Africa is an oil exporter.

Nigeria alone accounts for about eight to nine per cent of OPEC production. Africa currently supplies 16 per cent of US oil imports. By 2015 this is expected to rise to 25 per cent.

Nonetheless, the poorest developing countries are usually most at risk from a higher oil price. An IEA study suggests that in the past, the boost to economic growth in oil exporting countries (as a result of higher oil) was always less than the loss of economic growth in oil importing countries.

Oil prices are set to remain high for the remainder of this year. This is a clear negative for growth in countries such as South Africa and Kenya, with a relatively large manufacturing base, where oil accounts for approximately 20 per cent of total imports.

Nigeria, where oil accounts for 95 per cent of exports, will benefit the most, but it has also suffered from higher inflation, following the adjustment of domestic fuel prices. "Overall, high oil prices are a negative for African growth," Ms Khan notes.

In terms of economic size, Sub-Saharan Africa's oil importers outweigh the exporters.

Africa's oil producers are enjoying windfall profits from the oil price boom, but the outlook for extended high prices is a concern for inflation and current accounts in oil importing countries.

Oil prices are set to remain high in response to rapid demand growth, limited spare capacity and ongoing geopolitical tensions in the Middle East and elsewhere.

OPEC's decision to raise quotas to 25.5 million barrels per day (mbpd) at the June meeting has provided some relief but has not brought prices substantially lower. OPEC currently looks set to endorse a further 0.5 mbpd increase from August, but extra capacity is now limited and demand forecasts for 2004 are still being revised upwards. Iraq's production is volatile and frequently disrupted.

Attention is increasingly being focused on Russia as a potential source of additional capacity, and bankruptcy fears surrounding Yukos, Russia's largest oil company, have added to market nervousness.

"We see no early resolution of geopolitical concerns and expect the OPEC basket price to remain volatile, averaging $35 per barrel (pb) in 2004. The risks are still firmly on the upside. We anticipate a slowdown in the US in 2005 and moderately slower growth in China," noted Ms Khan.

This should ease demand growth and, alongside increasing capacity, ultimately bring prices lower. However, they are unlikely to fall much below $30 pb until political concerns abate.

Much of West Africa's oil reserves are offshore, making oil more expensive to extract. Nonetheless, higher oil prices, and the need to diversify sources of oil imports, have resulted in a surge in oil-related FDI.

According to the most recent FDI statistics, Angola, Algeria, Nigeria and Chad accounted for almost half of the annual FDI received in Africa. Africa's oil producers dominate the list of FDI-recipients.

This trend should continue in the future. Strong growth in FDI is forecast in Sudan, Sao Tome e Principe, Nigeria, Mauritania, Equatorial Guinea, Chad and Angola.

In oil-importing countries however, sustained high oil prices are expected to increase input costs and reduce non-oil demand.

Despite the higher oil price, African growth is still expected to improve this year.

According to the UN's Economic Commission for Africa, Africa has not yet recovered from the oil crises of the 1970s. Other studies suggest that Sub Saharan African countries could lose as much as three per cent of GDP with every $10 rise in the price of oil - but this is disputed.

This time around, with most commodity prices broadly supported, the impact on terms of trade for Africa's oil importers will not be as negative as previous oil shocks.

Economic reform also helps to mitigate the impact of a higher price for imported oil. While inappropriate policies worsen the impact of an oil price shock, fiscal reform, more exchange rate flexibility and healthier external balances (perhaps as a result of debt relief) lessen the fallout from a high oil price.


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