How high oil prices will affect Africa

Today, the most distressing news for business people to digest is the nerve-racking increase in crude oil prices, which translate into higher costs of production of basic commodities as well as increase in cost of transport. Currently, the price of crude oil is hovering below US$ 140 per barrel, up from US$ 99 in January.
Entire world oil reserves were estimated at over one trillion barrels, of which Iran, Iraq, Kuwait, Saudi Arabia and United Arab Emirates held a total of 700 billion barrels.
Entire world oil reserves were estimated at over one trillion barrels, of which Iran, Iraq, Kuwait, Saudi Arabia and United Arab Emirates held a total of 700 billion barrels.

Today, the most distressing news for business people to digest is the nerve-racking increase in crude oil prices, which translate into higher costs of production of basic commodities as well as increase in cost of transport. Currently, the price of crude oil is hovering below US$ 140 per barrel, up from US$ 99 in January.

In Rwanda, this is reflected in a 33 percent increase in the price of petrol, (from Rwf 670 to Rwf 897) in the same period. The bad news is that, according to Alexei Miller; Chief Executive of Gazprom, Russia’s largest crude producers, the price is expected to hit the US$ 250  mark, which would be an 85 % increase on today’s price.

What does this mean for Rwanda and Sub-Saharan Africa?

The world’s main problem with oil and fossil fuels is that their reserves are fixed and because of continuous exploitation, a time will come in the foreseeable future when fuel reserves will run out completely.

So, why are fuel prices skyrocketing?

Matthew Simmons, the chairman of the Wall Street Energy Investment Company in 2005 said that “peak oil” - when global oil production rises to its highest point before declining irreversibly - was rapidly approaching, even as demand was increasing. He further added that that it was inevitable that the price of oil would soar above $100 as supplies failed to meet demand.

Peak oil is said to have reached in most oil producing countries except Saudi Arabia, Iraq and Kuwait, (who are among the four top oil producers, including Canada) which are projected to approach this point within the next ten years.

Now that Mr. Simmons’s words have come to pass, only three years later, do we have any reason to believe that the peak oil point is responsible for the record surge in oil prices?

This seems not to be the case. But the fact that most of the remaining oil is locked up in the Middle East, a largely politically unstable area, is enough to alarm oil market analysts. It is difficult to imagine hostile Iran and Iraq governments passing the chance to use oil for political ends.

According to Professor Kenneth S. Deffeyes, We hit “peak oil”, a geological limitation to the oil supply in the ground. He adds that with no additional supplies, a bidding war began in 2005 over the remaining oil in the ground. It is widely recognized that the drive behind the current spike in oil prices is due to speculation on the markets.

Gerry Ramm, the president of the Inland Oil Co. of Ephrata told the US Senate that Excessive speculation on energy trading facilities is driving this runaway train in crude oil prices.

So in a way the danger is not the depletion of oil reserves per say, but is more urgent, because, as soon as the markets will perceive dwindling reserves that cannot put up with the world demand, the price of oil will rise to become unaffordable to most people.

Theoretically, it will imply that it will be too expensive to fly or drive, to ship basic commodities from supply centres to where they are needed most, to grow basic foods with fertilizer and pesticides and to warm people’s houses in regions that experience a harsh winter.

If the United States cannot find enough oil to run its economy, it will resort to forceful means of quelling the likes of Iran, in order to gain access to uninterrupted supply. Also, President Bush,s push to resuscitate offshore exploration cannot substantially affect supply.

If Uganda finds adequate reserves of oil on its territory to power a small progressive Asian economy, it would be in the interest of the citizens of that country to support their government to find all plausible ways of getting their hand’s on Uganda’s oil. Remember, all this is in theory!

How does the oil crisis manifest itself today?

In Nigeria’s Niger delta oil producing area, local militia’s who demand a fair share of oil revenue for the indigenous community continue to force oil multinational Shell to regularly stop their operations in the region.

In Venezuela and Bolivia, leftist leader Hugo Chavez and Bolivia’s Eva Morales’ drive to re-nationalize the oil industry has put them in direct conflict with investors in their respective  countries’ oil industry.

As with many other world crises, the hardest hit countries in the world will be from sub-Saharan Africa, not for anything other than the fact that if oil drives a nation’s economy, then a limping economy, compounded with increase oil prices, will only slow down more.

Governments faced with the choice of reducing oil consumption vis-à-vis borrowing to cover the skewed balance of payments due to higher expenditure on oil will opt for the later.

An African Development Bank Group concept paper on High Oil Prices and the African economy predicts that the biggest impact will be through higher price of kerosene which is used for cooking and lighting. It adds to say that the poor will also be affected by higher transportation costs.

For sub-Saharan Africa, the tragedy is that for countries that produce oil, they cannot process it themselves, but instead sell it and buy the finished product at a much higher price. To further compound this problem, the matter of inequitable distribution of oil revenues is at the heart of many of the political problems in oil producing countries in Africa, especially in Nigeria and to some extent, Gabon.

Secondly for countries that have to depend on imports to sustain their oil needs, the increase in price is going to hit the production and transport sectors massively, especially for countries that do not put a lot of emphasis of keeping emergency oil reserves to mitigate these shocks.

For countries that would have adequately planned, a diversion to renewable sources of energy like solar and wind power, and use of biofuels (which in itself is a can of worms), will ease slightly the dependence of fossil fuels.

Contact: kelvion@yahoo.com

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