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AFRICA

Role Of Crude Oil In Africa

Africa has considerable oil and gas resources that can

help accelerate growth on the continent if used strategically.

Although new resources are discovered progressively,

they are not equally distributed; indeed, 38 out

of 53 African countries are currently net oil importers.

High and volatile oil prices are thus a challenge for all

of Africa; they represent an opportunity to be pursued

for exporting countries and an obstacle to be tackled for

importing countries.

The broad objective of this report is to shed light on

key issues related to the social, environmental, and economic

impacts of high and volatile oil and gas prices.

This includes a discussion of Africa’s oil and gas status

and its major challenges and opportunities in the energy

sector.


Global Perspective and Status of Oil and Gas

Resources in Africa

Energy is an indispensable input for economic growth

and social development. Two-thirds of global energy requirements are met with oil and gas supplies.

Conventional wisdom holds that energy consumption

per capita is strongly correlated with the level of

economic and social progress. Remarkably, the three

non-renewable fossil fuels, oil, natural gas, and coal,

constitute almost 90 percent of commercial energy consumed

globally.

The regional composition of global energy consumption

reveals a wide disparity in global use and access

to commercial energy. Although Africa has about 15

percent of the world’s population, it consumes only 3

percent of global commercial energy. The paradox is that

Africa’s share in global energy production is about 12

percent, and trending upwards.

The evolution of world energy markets in the post-

1970 period has been dramatic and its impact on the

world economy and politics profound. This is illustrated

by the worldwide economic ripple effects caused by

price volatility and occasional spectacular spikes in the

prices of the dominant global energy resources—oil and

gas. World oil prices have trended ever higher since

2000, and natural gas prices have tracked along. Some

of the reasons for the rise in oil prices include rising

demand in emerging economies, especially in China

and India, declining spare capacity in major producing

countries, peaking of production in several important

oil-producing areas, and lack of expansion in refinery

capacity.

Driven by continued high demand in the Western

world, coupled with significant and accelerating new demand from emerging economies, such as China, India,

and Brazil, global energy consumption is expected to

grow by more than 50 percent in the first quarter of

this century. Oil and natural gas are expected to be

in particularly high demand by 2025, with global oil

consumption (demand) projected to rise by 57 percent.

It is very unlikely, even taking into account the massive

investments in the energy sector around the world,

that the oil and gas industry will be able to produce

and deliver sufficient energy to meet global demand.

By some projections, the “peak oil” production has

already been reached, or will be reached in a few years.

The ensuing shortages, coupled with concomitant rising

energy prices, will place significant pressure on net oilimporting

societies in Africa if not addressed strategically

and aggressively.

Africa is endowed with vast quantities of both fossil

and renewable energy resources. Furthermore, it is the

main continent in the world with frequent and substantial

new findings of oil and gas: In the past 20 years,

oil reserves in Africa grew by over 25 percent, while gas

grew by over 100 percent. Africa’s rich oil fields and

the prospects for more discoveries have transformed it

into an important player and a key “target” in global

oil production and resource extraction. Oil production

in the continent is expected to continue to rise at an

average rate of 6 percent per year for the foreseeable

future. The majority of oil reserves (and production) in

Africa comes from Libya, Nigeria, Algeria, Angola, and

Sudan, which together produce more than 90 percent of the continent’s reserves. Proved natural gas reserves

in Africa are mainly concentrated in four countries—

Algeria, Egypt, Libya, and Nigeria—which possess 91.5

percent of the continent’s proved reserves. In particular,

Nigeria’s undeveloped natural gas reserves are a logical

target of the international giants in the sector. Furthermore,

large deposits of natural gas have been identified

in Tanzania; significant oil deposits found in Albertine

Graben in Uganda and in the western part of Ghana (offshore);

and there are potential significant oil discoveries

in South Africa, Mozambique, and Tanzania.

Considering the current uncertainties about energy

supply, the key drivers of future demand, the policies of

consumer countries (especially with respect to nuclear

and other alternatives to oil and gas), and expected

future global economic growth and technology development,

there is need to clearly establish Africa’s position

and develop strategies for future supply adequacy. The

energy crisis due to high oil prices, the environmental

impacts of oil production, and the growing concern

about the viability of oil-based fuels and products are

leading to initiatives to find and develop alternative

energy sources.


Maximizing the Benefits from Oil and

Gas Resources

A key concern regarding the governance of oil and gas

resources is that the governments of African oil- and gas-producing countries receive an inadequate share of

the large rents from production. This may stem from

a number of reasons, including contracts and regimes

that are not designed to extract maximum rents; and

oil and gas policies that are designed primarily to promote

and attract investments and have not evolved with

changing global dynamics and national interests. The

sustainable development of oil and gas resources requires

policies, principles, and practices that support the utilization

of resources in a manner that does not prevent

future generations from benefiting from the resources.

A great challenge, particularly for oil-producing African

countries, is to ensure sufficient, reliable, and environmentally

responsible supplies of oil, at prices that reflect

market fundamentals. To achieve this important goal,

several challenges have to be addressed, including high

and volatile oil prices; growing external and internal

demand for oil; increasing import dependence of many

African countries; and, most importantly, sustainable

management of the continent’s oil and gas resources

for the benefit of all. The regional nature of these challenges

and the growing interdependence between net

importing and net exporting African countries require

a strengthened partnership among all stakeholders to

enhance regional energy security.

The sustainable management of oil and gas also

faces the challenge that large natural resource revenues

tend to replace more stable and sustainable revenue

streams, exacerbating existing problems related to development,

transparency, and accountability. This tends to free natural resource-exporting governments from the

types of citizen demands for fiscal transparency, and

accountability that arise when people pay taxes directly

to the government. Thus, natural resource export earnings

actually sever important links between the people

and their governments—links that are related to

popular interests and control mechanisms. Governance

indicators such as government effectiveness, voice and

accountability, political instability and violence, the rule

of law, regulatory quality, and control of corruption

are correspondingly markedly weaker in oil-rich African

countries.

Despite the challenges and issues involved, an oil and

gas resource boom can, under the right circumstances, be

an important catalyst for growth and development. The

often-referred-to “natural resource curse” can be avoided

with the right institutions and policies. Several countries

in Africa have demonstrated this and there is some

reason for cautious optimism that more countries have

learned hard lessons from past resource booms, and, in

future, will pursue strategies and policies that will allow

them to fully reap the benefits of their natural resource

wealth.


Impact of Rising Oil Prices

The AfDB has developed a new open-economy macroeconomic

model to quantify the impact of high oil prices on oil-importing and oil-exporting African economies.

The results of the model estimations suggest that high

oil prices can have very harmful effects on the economies

of African oil-importing countries, especially those that

are heavily debt-burdened. The rising oil prices will lead

to a decrease in output and consumption, and to a

worsening of the net foreign asset position. For median

oil-importing countries, the five-year cumulative output

loss resulting from a doubling in the price of oil can

be as large as 23 percent under a fixed exchange rate

regime. However, this recessionary effect can be cushioned

through government intervention in the form of

limited pass-through of the oil price increase or through

foreign aid.


Challenges, Opportunities, and Policy Issues

Oil and gas resources are a principal source of public

revenues and national wealth for the governments of

net oil-exporting countries. As a major source of wealth

and energy in Africa, oil and gas resources are critical

for growth, development, and good governance. They

also pose major management challenges for African governments.

The issues go beyond technical management

of oil and gas resources and collection of revenues.

Resource control, governance, transparency in the utilization

of resource wealth for development, preserving

and optimizing the resource base, environmental protection,

and securing equitable and intergenerational longterm

benefits (especially poverty reduction) are among

the many critical ingredients that should be embedded

in any coherent strategy aimed at harnessing oil and

gas resource wealth. In other words, achieving sustained

growth from oil and gas resources entails managing and

enhancing the status of a complex portfolio of natural,

human, and social capital.

 


 


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