Role Of Crude Oil In Africa

Thumb asia flooded with west african oil in latest sign of opec impact

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 oil importing 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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