African oil demand set to rise

The African continent has primarily been of interest to the global oil industry in terms of supply. North Africa and the Gulf of Guinea have long been important sources of oil and gas production, while the number of African net hydrocarbon exporters is steadily increasing as exploration takes off in the eastern half of the continent. Yet there are signs that Africa may also play a more important role in global oil consumption, as strong economic growth feeds through into increased demand for energy.

Africa consumed just 3.5m barrels of oil a day (b/d) in 2012, equivalent to 3.86% of global oil consumption. In comparison, with a population of 1,072,000,000, it contains 15.1% of all humankind. Yet in its recent Medium Term Market Report, the International Energy Agency (IEA) suggests that rising oil consumption in Africa could compensate for slowing demand growth in China.

Discussing such long-term trends is usually fascinating and also very speculative but there is little doubt that Africa’s share of global demand will increase. Even the 2012 figure represents an increase on the 3% of global demand generated by Africa in 2000.

The IEA says that the increase is “in keeping with the relatively robust macroeconomic growth experienced in the region, but it is also consistent with evidence privately obtained from traders, refiners and other market participants on the ground.”

Apart from anything else, energy consumption remains closely linked to economic growth and growth on the African continent now consistently outperforms the global economy. The IEA forecasts that oil demand will increase by 3.7% a year in China over the period 2012–18, by 3% a year in India and by 4% in Africa. It added: “There are strong reasons to believe that African oil demand growth will accelerate further over the forecast period.”

At the same time, European and North American demand will remain largely static because of weaker economic growth, greater energy efficiency and efforts to reduce carbon emissions. The member states of the Organisation for Economic Cooperation and Development (OECD) consumed less oil than developing countries for the first time ever in April this year, after accounting for as much as 80% of global demand as recently as 1980.

Demographic changes look certain to drive up African energy consumption. The population of the continent increased from 221m in 1950 to 1,033m last year and is forecast to reach 2bn by 2050, when it could account for a quarter of global population.

All of these people will consume energy in one form or another and much of this energy is likely to take the form of oil. In addition, investment in large-scale cement and fertiliser plants will absorb much more natural gas, reducing the volume of gas available to supply thermal power plants, which will therefore continue to rely on oil feedstock.

The telecoms effect
It is also interesting to look at what the IEA regards as the causes behind the improvement in Africa’s relative wealth. It lists three main trends: China’s emergence as an important importer from the continent; sharp rises in prices for the industrial commodities that many African states export; and the impact of the mobile communications boom in economic terms and on energy demand. 

The IEA’s reference to the telecoms sector as a driver of both economic growth and energy demand is particularly intriguing. It concedes that the sector is only “a direct source of energy demand at the margin” in Africa but the technology does require access to electricity, whether phones are charged at home, at work and or by street traders.

Just 10% of rural African homes are supplied with electricity, yet there were 650m mobile phone subscribers on the continent by the end of last year. Each phone charge may consume a minute amount of electricity but the wide distribution of mobile phones means that more and more villages now need access to electricity.

Once supplies are guaranteed, people are more likely to buy other consumer goods that are powered by electricity. At present, most of this electricity is supplied by small diesel or oil-fired generators, each of which consume small amounts of feedstock but which collectively place large demands on local supplies.

It seems likely that African economic growth will be relatively energy intensive. The mining, oil and gas industries all consume large amounts of energy, while the growing middle classes will spend more on cars and on consumer goods that require electricity, as well as travelling more by air.

Industrial and manufacturing energy demand is likely to be lower than elsewhere in the world for the foreseeable future but there are some signs that a manufacturing boom could occur further down the line.

China was able to take control of global mass manufacturing because of low wages but many companies are now switching production out of China because of rapidly rising labour costs. The main beneficiaries to date have been other countries in Asia, including Vietnam and Bangladesh, but African economies could also benefit in the longer term because of their large, young workforces.

The number of African air passengers increased from 18m in 2003 to 32.5m just seven years later, yet the African Airlines Association estimates that just 15% of Africans have ever travelled by air. A combination of rising incomes, for the middle classes at least, and the spread of low-cost airlines, should bring air travel within the reach of more Africans.

Figures on car ownership are difficult to find but there is little doubt that the number of cars on African roads is increasing, while the continent’s nascent railway renaissance suggests that rail transport will also absorb more fuel in the future. The IEA predicts that diesel and petrol demand will increase by an average of 4.5% a year between 2012 and 2018.

Inaccurate reporting
There is, however, a problem with the reporting of oil consumption in Africa. Consumption in many countries is partly satisfied by stolen and smuggled oil and refined petroleum products that do not appear in official statistics. 

In addition, the IEA claims that there has been underreporting of African oil demand and cites figures from South Africa and Nigeria to support its case. It states “Much of the recent historical data on African oil demand have become increasingly inconsistent with the region’s strengthening macroeconomics.”

Other governments may not consider the collation of official data to be a high priority and so it can be difficult to obtain accurate figures. As Table 1 demonstrates in the case of Nigeria, there is sometimes little correlation between economic growth and oil consumption.

The oil majors divested themselves of some of their African fuel distribution networks over the past decade, but they may have sold off their assets at exactly the wrong time.

Apart from increased car ownership, trade volumes across the continent are rising more quickly than economic growth, as more and more goods are transported across African borders by growing fleets of lorries operated by both international and local logistics companies. African oil and fuel consumption should therefore become a more important element of global demand over the next few years but the lack of industrial and manufacturing capacity means that it is likely to be a generation before African demands rival those of other continents.