Opinion

Three reasons Africa will determine the oil price in the long term

Posted by Scott Johnson

24-May-2019


Africa might only be home to just 4 percent of the world's oil supply but, as many of its oil-rich nations begin taking advantage of this natural resource, it's starting to have an impact on the price of crude oil. This uptick will be good news for the continent's high-profile investors and entrepreneurs, both inside and outside oil, including Mzi Khumalo, Folorunsho Alakija, and Strive Masiyiwa.

In 2017, Africa's top-ten producing nations pumped 266,800,000 million tonnes of oil. As Nigeria alone has an expected 45 years' worth of supply, new exploration rights come up for grabs and political and domestic stability increases, Africa will start to play a bigger role in price fluctuations. Here are some of the reasons why.

1. Growth of political uncertainty in the continent

Africa is a developing continent, not just in economic terms, but in political terms too. It's a diverse, rapid-growth region, home to more than one billion people and there are vast political disparities between different parts of the continent. Countries such as Kenya, Ghana and South Africa – all former colonies of the British Empire – are more politically advanced than many of their neighbours. But many others are far less stable.

The global oil market is one of the first to suffer from political instability. Any hint of disruption impacts the market and ultimately has a knock-on effect on the crude oil price. As an example, this week oil prices took their biggest hit this year, brought on by the growing trade tensions between the world's two largest economies – China and the US.

National politics also has an effect. Nigeria, for example, the largest African oil and gas producer, extracting 2.3 million barrels per day, is going through some political growing pains. On top of that are serious safety issues. The industry is being heavily impacted by pipeline vandalism, kidnappings and militant takeovers of oil facilities in remote parts of the country. Just a few weeks ago there was a kidnapping incident on a rig in the Niger Delta, one of a series of attacks against oil workers. This all plays into the global oil price.

Libya is also one of Africa's largest oil producers, but as the country it's going through a period of political upheaval and turmoil, extraction has significantly reduced. The industry has also been impacted by the presence of ISIS in the country.

All of this continued instability impacts oil supply, and supply impacts on price. Although the price of oil slumped to $35 per barrel in 2016 due a global oversupply and a lack of agreements between OPEC members, the price has since nearly doubled. This increase is will see attention turn back to new oil reserves, and exploration in Africa.

On the back of high global oil prices between 2004 and 2014, a rush of new exploration put the East Africa region on the map as a new frontier for African oil.

2. Countries using oil reserves to kick-start poor economic growth

Although it has an abundance of natural resources, Africa is the world's poorest continent, and oil gives these nations a chance to kick-start their economies. Selling extraction rights is one of the ways to deliver rapid growth. Nowhere in Africa is this needed more than in war- torn South Sudan.

It's estimated that South Sudan has the capacity to produce 3.5 billion barrels of oil, and as it stands today only 30% of it being explored. No surprise then that just last month, the country signed a huge exploration and production deal with South Africa, part of a whopping $1 billion investment in Sudan. It's this kind of huge investment that will kick the global oil price up.

From 1995 to 2005, Africa's rate of economic growth increased, averaging 5% in 2005, and today it stands at around 3%, at a similar level to the booming US. As the continent continues to see economic growth of this level and seeks to carve out a more prosperous future, it is only natural that those countries with access to oil will seek to exploit it in order to create more jobs and grow their economy.

3. Increase in demand from the burgeoning middle classes

Like in many other developing areas of the world, such as India and China, as Africa grows and develops, albeit at a slower rate, it is experiencing a growth of the middle class.

With an increase in disposal incomes comes an increase in the consumption of energy, which will pile more demand on global oil supply. This demand is fragmented in Africa, with some nations seizing the opportunity to hike tax rates, but as India's boom has demonstrated over the last few years, once the middle class gets a foothold it expands at a rapid pace.

As Africa continues to embark on this journey of growth, the rest of us must realise that it will start to have more influence in determining world oil prices.



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Africamiddle classGeopoliticsPolitical RiskNigeriaSouth SudanAngola

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