Oil price slump: Lesson for the new oil frontiers in Africa

[Image credit: Nicola Zinerelli_Gabon, Western Africa. One of the many oil rigs sitting on the continental shelf]

The recent tumbling oil price to below $50 dollars has not hit the largest exporting country alone. The impact is felt world all over and worse in the economies dependent on oil and gas industry for its growth. Oil companies are rethinking their strategies, cutting costs and downsizing activities while oil dependent countries have been forced to undergo austerity measures and  reduce national budgets in order to minimize deficits. The oil price decline as forecasted by a World Bank report will remain low in 2015 with a slight rise in 2016 unless the major players decide to intervene, which has so far not been the case. In the Sub-Saharan Africa, Nigeria an OPEC member hardest hit had to raise its taxes and cut spending.  A number of African countries as reported by IMF are at risk from the fall of oil prices, as oil exports account for a larger percent of their GDPs.  What does this portent to the new oil frontiers?

On a brighter side, the odds are in favour of East African region being major oil importers. The plunge in oil prices means a reduction on the import bills, reported to have had a positive effect on their growth. According to a Bloomberg report, stock prices have soared in the East African countries, 22% in Tanzania, 18% in Uganda and 9.4% in Kenya whereas in Nigeria, the stock index fell by 24%. On the other hand, the plummeting oil price is threatening the exploration boom in the region as companies reset their focus and slash their expenditures. Fortunately, the region’s onshore exploration makes it favourable for investors of its low cost maintenance and technology advantage. London based Tullow Oil, a key player in the region, reports a reduction in their exploration budget to $200 million, majority of it focused on the East African onshore exploration and appraisals.

The region should brace itself for significant delays on oil related infrastructural projects such as a regional pipeline, refineries and port constructions due to its reliance on external investments.  While this is seen as a negative effect, it could also be a blessing in disguise! The rush to become major oil exporters needs a careful rethinking based on the current oil price reality. This is a perfect opportunity for the region’s governments to draw lessons from this experience and rethink their resource governance strategies. From sub-Saharan region alone, it is clear undiversified economies bore the brunt of oil price slumps thus the need for oil frontiers to sort out their regulatory, legislative and fiscal policies in order to attract the investors in the recovery period. The other reality is certainly the hostility of the global market to the new entrants and current oil price plunge exemplifies it. Last but not least is the cyclical nature of commodity prices, a reality which engulfs the natural resource trap countries. Kenya 1976-79 coffee booms should serve as a lesson to the region.

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