Monday, 21 October 2013

Shrinking Oil Prices: Whither Africa?

AS NEW OIL discoveries are made almost on a monthly basis, it is time to face hard questions and seek answers. Among these are question as whither oil supply in the next decade and beyond? Whither the price? Who will be the losers and who shall be the winners? What impact on world economic growth? Specifically will Africa gain or lose?

Transport and energy Infrastructure
 are what Africa need to trade with itsel
Africa, which is likely to be fastest growing region in the next five years, stands at the threshold of rapid balanced, all inclusive development, experts say. Although some countries could suffer temporary setbacks due to revenue declines, continent is well poised to maintain its development thrust.

This is because some of the fastest growing countries in the continent are just now discovering Fossil fuels such as oil and LNG.  They have not even sold a single barrel and have thus not tasted oil money. To these countries energy prices are the bottle necks.  Consequently any price decline would thus be a welcome relief.  
The same is that case for the non-oil producing Africa countries. They rejoice at any price declines. If the declines are significant and sustained, oil consumers enjoy significant savings which spur growth.
Either way it seems, the prospective price declines need not worry Africa. In fact, it could open another gate valve to development.

East Africa which is just discovering how much wealth she has beneath , stands a better chance of shifting gears to embrace a balanced growth. The region has enjoyed more than a decade of robust economic growth ranging between more than four per cent in Kenya to more than seven per cent in Tanzania. The drivers of growth were tourism, agriculture, trade, transport and communications and some manufacturing.

 For this region therefore Fossil fuels will be just an additional source of income. Earnings from a barrel of crude oil or a cubic foot of LNG will supplement earnings from a ton of coffee, tea, flowers and vegetables in terms of generating foreign exchange and even taxes.  Consequently the potential for a balanced economic growth which will reduce poverty level significantly is very high.

 Why are we convinced that fossil fuel price will decline? Experts estimate that given the current rate of fossil fuel discoveries in the world, the global supply will rise from the current 73 mbd (Million barrels per day) to 110 mbd in 2020.  This is a 51 per cent growth in just a decade. Demand on the other hand is expected to grow by 8 per cent per year to 96.7 mbpd over the same period.  The question then arises: Are we looking at fuel glut in the next five to seven years?

Basic economic theory teaches that, an increase in supply of a product is a good thing only to the point of equilibrium. That is to the point where demand for the same good equals Supply. At that point, the price is optimal. However, if supply keeps rising against static demand or if supply grows faster than the rate of increase in demand, there is cause to worry.

This is what is going on in fossils fuels sector. Discoveries of Oil and LNG appear to be running ahead of demand. This is both goods news and a cause for caution.  In east Africa, like anywhere else on the globe, It is good news because competition among suppliers will force down the price, and more important eliminate speculators and Cartels. Herein lies the cause for concern. How low will the price of crude go? And how will it affect the world economy? Who shall win and who shall lose?

The price of crude still appears high at slightly over US$100 a barrel. However, experts project that the price will soon decline.  They estimate that nearly 30 per of the price of a barrel of oil is “fear premium.” That is the price we pay due to instability in the Middle East. This is because traders, mainly derivative traders, bid up prices at any slight sign of trouble in the Middle East.  However, with advances in oil exploration technologies coupled with more fresh oil discoveries worldwide, this risk factor is being hedged out. 

Another factor that could also be hedged soon is the Monopoly of OPEC. OPEC controls 40 per cent of world output. This has given it a monopoly to set the world prices. Consequently, the world market price for crude oil simply scatters around OPEC price. OPEC controls prices by controlling output. So that if prices rise sharply OPEC increases output: when the price is low she reduces output.

The new discoveries of crude oil and LNG including the shale oil and gas are threatening OPEC’s monopoly. The US for instance is tending towards self-sufficiency. The US is the largest consumer of fossil fuels uses 18.9 million bpd. By June this year, the US was produced 7.4 million barrels of shale oil per day.  This figure is expected to rise to 9 million bpd by 2018. This coupled with the current production of crude could see the US being near self-sufficient in fossil fuels by 2020. 

The continued discovery of oil in the eastern Africa coast and  parts of China only adds to OPEC headaches. It means that 60 per cent of world output of oil will be outside OPEC. Since this will have become a buyers’ market, competition will force prices down the cliff. How far will it shrink? That remains to be seen. But days of US $80-100 a barrel appear to be headed in the direction of history.

The Upshot of this analysis is; African oil producers face a huge oil price decline just when many have entered the market. This will stymie the anticipation of a windfall gain and the resultant economic benefits to a country. However, the good news is low crude oil prices lead  to low prices of almost all other goods resulting in significant  decline in inflation. Low consumer goods spur further economic growth.

But east Africa and Africa generally will need to continue opening itself up for trade with itself. This means that as the region opens up new oil and LNG wells, it should also continue to build pipelines, railway lines and roads to connect itself with Africa in order to open new markets for their goods, say experts.

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