Over the years, a peculiar scenario continuously replicates itself across the Africa wherever oil is discovered in commercial quantities.

This scenario played out in Ghana in 2007 when British oil firm Tullow Oil announced the discovery of 600 million barrels of oil, offshore Ghana. Scenes of mass jubilation followed that announcement across the country. The jubilation transcended the people on the streets of Accra and other towns in Ghana as an elated John Kufour, then Ghanaian president, reportedly said; “ were are going to really zoom, accelerate, and if everything works, which I pray will happen positively, you come back in five years and you’ll see that Ghana truly is the African Tiger.”

However, beyond this jubilation, which results from an expected positive economic impact of a new source of revenue, there lies the reality that has become Africa’s lot. Too many governments, too keen on relatively easy oil money, give it precedence over other sectors. For these countries, hitherto dependent on revenue from agric-based export, the story of oil discovery has been a chequered one.

This response to oil has a lot to do with the peculiarities that surround the sector. Unlike other sectors where governments are required to provide enabling environment, facilities and support, the oil sector only requires government approval, usually given at a fee, for investments to thrive. The derived revenue is shared, again unlike as in other sectors, at a percentage between the oil companies and the government.

Because of this, international oil companies annually pay millions of dollars to governments of African oil producing nations as exploratory fees, and millions more again as percentage profit. Since the agreements signed by the governments and oil companies are not public knowledge, oil production and sales figure are not very reliable, therefore the revenue that enter government coffers are at best, an estimate.  However, for major oil producers like Nigeria and Angola the figure runs into excess of $52.2 million per year at $65 per barrel. The current record price of oil, taken into consideration, makes the estimated figure nothing short of astronomical.

With these figures and the ease with which governments access them in mind, it is clearly understandable why countries become jubilant when they make significant oil discovery.  However, as would be shown below, there are significant dangers inherent in the overdependence that follows.

Oil pricing

The petroleum sector has always had an unusual commodity-trading sector that is very different from other sectors. Though most African oil producing countries are members of OPEC and are subject to its rules and protection, the influence of OPEC in determining the price of oil is largely limited to controlling how much oil member states produce at a given period. The main factor that influence the price of oil in the international market is trade in oil futures by commodity traders. 

Oil, like most commodities, is affected by supply and demand, the more the demand, the higher the cost. OPEC, an organisation of 12 oil-producing nations, was formed on the basis of supply regulation, and price control, to an extent, since competing against each other will mean supply will outstrip demand, lowering the price of what is essentially a non-renewable resource.

On the surface, low oil prices would be beneficial to the world economy, but very detrimental to producer nations that depend solely on income from oil, because they will need to produce more to meet developmental and economic goals. This increased production essentially means the resource will run out faster, so OPEC’s main reason for being is to ensure that production levels among member nations is kept at a level that will ensure prices remain high, thereby striking a balance that is mutually beneficial to member nations.

The goal of OPEC was to keep the price at $70 per barrel, but political upheaval and war in many oil-producing countries caused the price to raise to its present all time high of $105 per barrel, and with the continuing political turmoil across the Arab world, may rise even further.

The prevailing situation, which on the surface appear to be a blessing for African oil producing nations, most who, not expecting a sudden rise after the slump that occurred during the global financial crisis, hinged their current budgets on $65-70 per barrel, is not necessarily so.  Industry experts and analysts opined that a 10% increase in the oil price can lead to a drop in GDP of as much as 0.5%, an effect that is across board as it would, even if not immediate, trickles across to oil producing nations who may initially have the resources for extensive subsidy.

An increase in the price of oil also impact negatively on Agriculture – about 70% of the world’s fertiliser output is oil derived – and industry, as the increase is felt in the extra costs for goods and services, job losses and diminished purchasing power.

It is therefore not surprising that many nations are already pushing to take advantage of available oil reserves that were hitherto located in places deemed too expensive to drill in. In addition, other sources of oil, such as Canadian tar sands and other non-conventional sources are suddenly becoming economic when compared with the prevalent cost per barrel in the international market. This development will certainly spell doom for African economies, such as Nigeria, that derives more than 95 percent of its revenue from oil.

Looking at other sources of energy

Worried about increased financial burden stemming from high oil prices many African net importers of oil are already following the path laid by more developed nations, by seeking alternative sources of energy.

Some alternatives available are solar, hydro-electricity and “biofuels”

Solar and wind power currently account for just 1-2 per cent of all electricity produced Namibia. However, Mr. Shimweefeleni Hamutwe, an adviser on alternative energy at Namibia’s Mines and Energy Ministry, was reported by Reuters to have said that the government is looking for ways to finance new projects to boost the sector. There are plans, he said, to increase the amount of electricity produced from solar and wind sources by at least 0.5 per cent a year, with solar energy taking the lead.

South Africa is another country that is looking the solar way. Feasibility studies began in 2001 on a 100-megawatt solar project to help generate more electricity for the country’s main power grid. The country’s electricity supply company, Eskom, which has now finalized the technological aspects of the ambitious project, is handling the project.

Brazil has made considerable progress in biofuels development. Derived from organic matter – usually maize or sugarcane –, which is fermented. The end-product is an alcohol called ethanol, which is blended with petroleum to produce a cheaper, cleaner burning fuel. With half of the sugarcane crop is now used solely for this purpose, Brazil currently produces enough ethanol to fuel half of the vehicles in the country.

Another alternative energy source that is being developed in Africa is hydro-electricity, though its potential is considerably greater than is being harnessed in Africa at the moment, many western nations are utilising this renewable energy to the fullest.

However, the country that appears to be making biggest inroad into a viable alternative to oil is China, which is currently replacing gasoline with billions of gallons of methanol, as well as funding researches into solar energy and energy conservations. As oil price increases, many others will surely join.

Peak Oil

Oil is widely believed to be a finite resource and many analysts believe we may have reached what is termed Peak Oil, a term that refers to a time when oil production would reach a maximum.

While many stakeholders are arguing that peak oil is only a concept, as no one really knows the extent of the world’s oil reserves, they do not deny the fact that, like any non-renewable resource, oil will run out one day – some experts are predicting at most 50 years before the wells dry up. This situation will definitely impact the world negatively, especially as no alternative to fossil fuel is readily available in large quantities, but for the economies that depend solely on revenue from oil, this situation will be nothing short of disastrous.

Planning for a future without oil

It is concerning preparing for the future that Middle Eastern oil producing nations diverge from their African counterparts. While the Middle Eastern nations are currently investing in alternate sources of revenue such as the Dubai trade and tourism hub, their African counterparts seem to be either lacking in a solid vision for the future or lack the political will to see this through.

A lot have been said about the African nations and the creation of Sovereign Wealth Funds, which many are advocating as a viable way for them to invest their oil wealth. The SWFs were instrumental to the enviable economic diversification of most of the resource endowed Middle East nations, but many African oil exporters, like Nigeria, have wrestled for decades with how best to structure the SWF to hinder the expected pilfering from the political class.

Many are advocating that African oil economies not just invest in preparation for a future without oil, but should follow the very footsteps of the Middle Eastern oil giants, who are putting money away in safe and transparent investment, instead of just saving the money as a currency crisis might diminish their worth in the future.

Ghana, a nascent oil producer says it had learnt from the example of Nigeria, where oil is largely seen as a curse, and hopes to get its acts right on the word-go.

But, it is not just Ghana that is thinking seriously about the future, at least on paper, as Angola, Nigeria and others are also looking at how best to invest the extra income that the current high price of oil is bringing in. However, there exists a controversy: should Africa nations invest their SWFs at home or abroad? Should they even put away funds when there are a million things that need to be done at the moment, which those funds would greatly aid?

The questions highlighted above seem to be the biggest hurdle facing the oil producers. While the experts argue the value of saving for the future, the politicians are more keen on serving the present--especially as that would assure their re-election. Therefore, while the points for saving for a future without oil is on point and of great import, selling same to the powers that be and the citizens who are making do with a lot of decayed infrastructure is a very hard sell.

Then there is the other question of where to place investments: Some experts advocate that African countries follow the example of the Arab oil powers and invest in western countries where existing structures assures a return to investment. many others are calling for governments to invest in their own countries, as the investments would not only ensure the funds are within the control of the state, but would serve a dual purpose, that of safeguarding the country’s future and providing jobs for its citizens now.

No matter what argument finds purchase in the minds of decision makers in Africa, the salient truth remains that oil will run out one day, some say in fifty years, and African oil producing nations that have not, need to set machinery in motion and ensure that when oil runs out or another alternative found, they are not caught napping.

Article first published in May Edition of Business in Africa magazine