Oil plays an integral part in the landscapes of the global and local economy. The price of oil holds great importance for the public’s fuel bills, for countries’ currencies and budgets and for the general health of the macro-economy. Since June 2014, the price of Brent crude has fallen by over 55%. The principal reason behind this fall is that OPEC, or more specifically Saudi Arabia, has continued to drill at unreduced rates in spite of a price drop precipitated six months ago by concerns of an oversupply of high-quality US shale crude. Making their position clear, Ali al-Naim, Saudi Arabia’s oil minister, declared that “we are not going to cut [production], certainly Saudi Arabia is not going to cut” at an OPEC meeting in Vienna on November 27th 2014.
This continuation in supply is firmly at odds with OPEC’s historic practice of restricting supply when prices are falling. Supply has often been manipulated out of a desire to keep prices buoyant, and also to retain market share. Mr al-Naim later declared: “Saudi oil policy… has been subject to a great deal of wild and inaccurate conjecture in recent weeks. We do not seek to politicise oil… For us it’s a question of supply and demand; it’s purely business.” A price drop of such magnitude is not simply a question of deficient demand. Given the instability enveloping oil producers in Iraq and Syria, the price would be expected to rise rather than fall. This is why Iran, among others, currently holds suspicions of foul play. Iranian President Hassan Rouhani asserted, “The main reason for [the oil price plunge] is a political conspiracy by certain countries against the interests of the region and the Islamic world … Iran and people of the region will not forget such … treachery against the interests of the Muslim world.”
Saudi Arabia’s anomalous behaviour is condemned by Moscow as a US-sponsored plot to harm Russia’s economy, which is heavily dependent on oil receipts. In an attempt to make 2014’s spate of sanctions really bite, it could feasibly be the case that the US is conspiring with Saudi Arabia to deflate prices. This widely accepted ‘conspiracy theory’ is gaining popularity in the media, including with Thomas L. Friedman of the New York Times: “One can’t say for sure whether the American-Saudi oil alliance is deliberate or a coincidence of interests, but, if it is explicit, then clearly we’re trying to …. pump [Russia and Iran] to death.” There is even speculation that the assurance of lower prices by Saudi Arabia would be exchanged for arms so that new regional threats, such as ISIS, could be dealt with more effectively.
Geopolitically, it would be a very tactical move by the US. Firstly the price drop, regardless of how it came about, has destabilised the Russian economy. It has forced Putin into raising interest rates abruptly to a growth-limiting 17% in in an attempt to arrest the Rouble’s fall. Equally, the price drop weakened other powers that are out of favour with the US, namely Iran (who are thought to need $100 per barrel to achieve a balanced budget), ISIS and Syria. All this is achieved with minimal harm to the US economy. The advent of fracking has seen net oil imports fall by 44% in the last 5 years, which means that the US is now far less susceptible to external shocks in the oil price than it was back in the 1970s, when supply shocks triggered a price spike.
How are African economies faring?
The media storm created by the price change, in the West at least, has seen an overriding emphasis being placed on the impacts it will have for Europe’s fledgling recovery. Little if any attention has been paid to the effect on the growth of developing, particularly African, economies. Given the ongoing impact of the Ebola crisis, ignoring the region is especially negligent. The price drop will naturally harm oil producers, but will it provide enough of a stimulus for the non-producers to get the continent back on course?
Nigeria became the continent’s largest economy in 2014, and is a real driver of growth in West Africa. It is one of several key emerging economies whose development could put European recovery on a far more sustainable footing. The recent price drop has the capacity to derail not only its growth, but that of other countries in the region too. Indeed, Paul Collier, speaking exclusively to The Cambridge Globalist, said that the “impact may spill over to neighbours”.
Oil holds integral importance in the Nigerian economy, which produces 2,252,000 barrels a day. The sector accounts for 14% of GDP, 80% of government tax revenues and 90% of foreign exchange earnings, meaning the impact of the recent price drop has been even more acute. The government had to take evasive action by cutting the national budget by 25% as an immediate response to the price drop, a painful prospect given the constant struggle to restrain the advances of Boko Haram, who recently perpetrated one of the worst massacres in the continent’s history, killing an estimated 2,000 people in the strategic town of Baga.
A year ago, GDP growth of 8.8% was being projected for Nigeria. Cash was being poured into rebuilding infrastructure in the wake of the civil war that ended in 2002; to finance this, the government was running a fiscal deficit of 5%. However, all the spending and growth forecasts were predicated on oil prices of at least $98 a barrel, not sitting below $50 a barrel.
The government also had to take monetary action, devaluing the Naria by 8% in immediate response to the price drop. This devaluation instantly knocked $40bn off the value of Nigeria’s economy, a sum ten times greater than the World Bank’s worst-case prediction for Ebola’s economic impact for the entire sub-Saharan region, which has amounted to $3-4bn to date.
This comes at a critical juncture for the Nigerian economy. The World Bank cut Nigeria’s growth forecast because of Ebola from 6.5% to 6%, before the drop in oil prices had even occurred. Furthermore, government’s loss of control of the North-East of the country to Boko Haram led the IMF to slash its growth forecast from 7.1% to 6.5%. Vandalism to the country’s pipelines is up 58% on 2013, with US$7bn (£4.7bn) being lost annually to theft.
The devaluation of the currency will have a further negative impact as Nigeria, like Angola, imports nearly all of its food and consumer goods, which will consequently become more expensive. This will only fuel domestic inflation further, exacerbating the risk of social unrest as goods, particularly food, rise in price. In the longer term, the weakening of the currency makes machines (capital) required for both farming and manufacturing more expensive. This, however, will only be of great consequence if the depreciation is prolonged and the lower oil price does not, to some extent, offset it.
Other, non-oil producing countries should experience a boost to GDP from lower oil prices. Firms’ costs are lowered, and consumers have more disposable income, in theory at least. In many cases, however, currency weaknesses are offsetting the price decline. In Zambia, for example, the benefits of a 2.5% fall in the price at the pumps by the end of November were offset by an 8% weakening of the Kwacha over the same period. Pump prices remain stubbornly high, as middle men endeavour to squeeze margins across the continent. Poor price transparency only hinders the translation of lower crude prices through the complex networks of brokers to lower pump prices. Insufficient government regulation only goes to ensure that prices are quick to rise but slow to fall.
Some benefit is being seen to percolate through to farmers, most notably in South Africa. Research conducted by AgriSA suggests that the price decline, if sustained, could wipe $250m (£170m) off farmers’ fuel bills. A further benefit of the price drop not confined to South Africa is that, over time, the price of fertiliser will likely drop. This will cause the agricultural sector, of critical importance across the continent, to be more productive. Agriculture is of great importance for African economies: it accounts for 55.6% of GDP in the Central African Republic and 44.3% in the Democratic Republic of the Congo, for example. Even Nigeria, Africa’s largest oil producer, is reliant on agriculture; it accounts for around 40% of GDP. This could, in the longer run, have a positive effect for the continent as a whole, provided oil prices stay down for a long period of time.
More column inches must be paid to Africa’s economic outlook; Ebola, political instability and the oil price are convening to slow regional powerhouses, such as Nigeria, to the detriment of the wider regional economy. The British press has largely centred its analysis on the short-term effect on the EU and Russia, overlooking the fact that it will be emerging economies, such as Nigeria, that will be providing much of the demand to fuel future European growth. Whether or not the price drop will have a lasting structural effect, or indeed reflects a serious affront to the development of the economies concerned, is dependent on how much further the price falls and how long it is sustained for. If we accept the prevailing US-Saudi narrative, it will come down to how far they are willing, and able, to push the price without antagonising the aggrieved nations to the point of desperation.