A silver lining to the oil cloud?

I, Anver Versi, Editor, African Business magazine has just spent two and a half weeks on assignment in Angola where I was amazed at the ambition and scale of developments taking place just a dozen years after the end of one of the most protracted and brutal civil wars in the history of modern Africa.

The term ‘looking like a construction site’ to describe rapid urban development has often been used indiscriminately but, in this case, it is absolutely appropriate. The city centre does look like a very busy construction site and the activity is replicated all over the country. Angola is almost literally constructing a new country. (The full report on this exciting urban revolution will appear in a special African Business supplement, African Cities, out in February).

The financing for this massive building work comes largely from oil revenues (Angola, with an output of just under 2m barrels per day, is the second-largest producer of oil in sub-Saharan Africa, after Nigeria). Naturally enough, the current slide of the price of crude has been causing some degree of concern in the country, although most officials we met seem confident that as it has done in the past, the price of oil will bounce back, perhaps in a year or so.

The sharp decline in the price of oil, which went from $115 per barrel in June to around $60 at the time of writing, a drop of almost 50%, has indeed been causing deep worry for all producers all around the world. Nigeria has already raised interest rates and devalued the naira and other African oil producers are having to make rapid alterations to their budgets to cater for leaner times ahead.

The main cause of the decline in the price of crude is because currently there is a glut in the market. The oversupply is itself the result partly of slower growth in China and Europe but mainly because of what The Economist describes as ‘manic drilling’ by shale oil producers in the US who have been pumping crude into the market at breakneck pace.

It noted shale oil producers have completed around 20,000 new wells since 2010 and increased the US’s oil output by a third to nearly 9m barrels per day. This is just short of Saudi output and about par with the total African production. So what is the outlook for African oil producers such as Angola and Nigeria whose development plans were factored on oil fetching around $100 per barrel? Will prices recover in the near future? Or is this the beginning of the end for traditional oil production?

Economies can be lifted
The answer is ‘yes’ to the first question and ‘no’ to the second. Cheaper oil, let us not forget, is sweet music to consumers and non-oil nations. A $40 price-cut per barrel shifts $1.3 trillion from producers to consumers globally. This means lower production costs and lower fuel bills and, in essence, gives consumers an extra $1.3 trillion spending power.

This could lift many economies and will be a boon to African countries whose growth is a based on an expansion of services rather than oil exports. Exports of non-oil commodities from Africa too, could be boosted while imports of manufactured goods should cost less in the medium term.

As economies grow, the demand for oil will increase and the price could well begin a steady climb once the current oversupply has been absorbed. In addition, so far, the phenomenon of shale oil (which began about four years ago) is largely confined to North America. World consumption of oil, at around 90m barrels, will be unaffected by shale oil and will continue to rely on conventional oil for the time being.

In addition, shale oil producers have also been hit very hard by the drop in prices. Their production costs are higher than the prevailing price of oil and pundits expect a number of bankruptcies in this sector. In addition share prices of shale oil companies have been tumbling faster than their conventional equivalents. This means there will be less investment into shale oil, cutting back on oil output and reducing the overflow.

For Africa, the decline in oil prices is a timely warning to look to other, more sustainable, forms of economic development. Fortunately, the continent is blessed with many resources – often overlooked. It is time to take another look at what we have at home, rather than what the neighbours have to offer.