Climate Change? Africa Needs a Different kind of Oil.

Introduction

COVID-19 has caused significant harm to global manufacturing supply chains and industrial activity, halting transport, and global travel in the process. As global economic and human activity was brought to a grinding halt, African economies felt the brunt with rising current account and fiscal deficits and debt sustainability concerns reemerging ever more strongly. Indeed, 38 out of 53 African countries are currently net oil importers (African Development Bank, (2020)), exposing them to lower oil prices which are poised to recover as vaccines rollout and the reopening of economies ensue. At the height of the pandemic, oil prices fell below $40 per barrel, the West Texas Intermediate, briefly going negative for the first time in history (in April 2020), (See OECD, 2020).

Source: United Nations

Global oil demand is forecast to fall by 10%, with prices expected to fall by 40%. African countries such as Angola, Algeria, Rep. of Congo, Nigeria, and Libya will see their revenues from oil fall further during this period. Not only with taxes from oil sales plummet, but the dividends given to governments from these governments will also equally fall. As such, global creditors agreed to postpone some debt even as this is not enough to place African economies on a sustainable path

Not only has Africa been producing oil for the last 70 years, it currently accounts for 9% of global output., down from 12% at the start of the decade. Given Africa is so resource-rich, why has its oil industry not thrived in equal measure? On the one hand, policymakers have been attracting investment in the wrong parts of the oil industry. The global economy relies on petrochemicals across a range of sectors from pharmaceuticals, textiles, and industrial processes. Africa did not prioritize investments into these sectors, which not caused its labor force in the sector to lag, it equally meant they imported more oil than they exported.

Chart 1: Value of African Oil Trade

Source: African Union

As illustrated in the chart above, crude oil net exports rose steadily from 2000, peaking in 2013, before falling in 2019. In the meantime, countries on the continent have increased their imports steadily to compensate for little refinery capacity. While this imbalance has persisted, African countries’ financial positions have become precarious leaving them little room to respond to exogenous shocks such as COVID-19.

The IMF reported that in 2018 the petroleum sector accounted for over 50% of gross domestic product (GDP) of Equatorial Guinea, 80% of government revenue, and more than 94% of exports, with crude oil exports alone, $3.2 billion, accounting for 65% of exports. In the Republic of Congo, Government data shows that the petroleum industry accounted for an estimated 60% of the State budget, whilst in Algeria, which is also a significant gas producer, Algeria.com has reported 95% of exports, 52% of budget revenues, and 25% of GDP are from hydrocarbons.

Unless countries prioritize smart investments across the public sector, they are unlikely to benefit from an increasingly integrated global economy. On the one hand, one could argue for better legislation that aligns foreign direct investment towards priority sectors in the energy sector. Furthermore, a number of African countries rely on budget support from the IMF, rather than simply address short-term issues around education and health care, they should explicitly seek to improve refinery output and contribute to more advanced global value chains. Furthermore, such an approach will ensure that governments continue to benefit from improved oil revenues while transitioning to cleaner energy fuels.

Structural reforms have been overdone across Africa. The last decade has seen a pillaging of the term, but very few have provided actionable plans towards achieving this. For example, the oil sector could benefit from better-trained workers, but limiting worker training to the oil industry without thinking about the global energy transition is counterproductive. Rather than call for structural reforms, policymakers should ensure that skills programs are verifiable and measurable; One metric would be the amount of refined oil produced by a country over a given period. Moreover, a distinction should be made for refined oil used in sectors such as textiles and pharmaceuticals, etc. In the coming years, it will be preferable for Africa’s refineries to transition entirely to advanced fuels as this will insulate the market for their produce. Anything short of this will see Africa's resources go to waste.

Furthermore, most African governments do not want to prioritize the energy transition because their revenues rely on oil exports. This approach is counterproductive and geopolitical moot for Africa. Not only will further cede its sovereignty, but it will also equally create social costs that are currently unimaginable. Firstly, policymakers should seek to only attract investments in the refinery sector to ensure its workforce is sufficiently competitive against global behemoths; Secondly, its workforce must be trained, but such training should be practical and the skills gained should be directly employed on the job.

Finally, employees in the energy sector should be equally trained to work with advanced systems that will come in handy when governments finally prioritize green energy. Companies such as BP and Shell have invested extensively in renewable and storage technology to diversify their revenues. it will be unfortunate if Africa’s energy companies were unable to provide sustainable energy for its industry and citizens. By no means is the oil industry anathema to the transition; it can be harnessed to ensure that countries are able to transition to renewable energy.

COVID-19 has exposed structural vulnerabilities in Africa’s oil industry that is keeping it from contributing to global value and supply chains. African countries must now leverage their oil industry to ensure that employees are sufficiently skilled to facilitate the energy transition. Doing so will require quantifying the extent of labor market reforms to ensure that transferrable skills can be gleaned from the oil industry, and then leveraged across their renewable energy sector. Admittedly, one can ensure that such upskilling is divided into two parts, one approach should emphasize the development of key capacities across software and the other should culminate retraining to bolster capacity across installations and monitoring of grid technology. In other to achieve this, one would have to ensure that technology is better targeted.

If investments are better targeted, such an outcome is likely and refined oil will grow substantially. In addition, such governments will benefit over the long run as their budgets will be less contingent on movements in global commodity markets. Africa will eventually transition to renewable energy and experience from Morroco and Kenya show that it can be done in a low-cost manner over the long run.

Africa needs different kinds of oil, one that is processed and harnessed to boost the value-added from its exports. Furthermore, refined petroleum will kick-start a different type of industrialization and Africa’s youth will be readily absorbed into the labor market via credible employment. The adage that countries must transitions o cleaner fuels whilst going through natural gas is regarded to be true. However, while Cameroon prioritizes investment in the sector, it is important to continue making gains across the renewable energy sector. An example is the

Africa is facing a set of challenges that are well known, but it equally stands a chance to credibly leapfrog. But we must stop talking about structural reforms without ensuring that they are industry and sector-specific. This sort of counterproductive talk has caused an unprecedented disconnect between the word “structural reforms” and how they should be implemented.

Reference List.

  1. . OECD. (2020). The impact of coronavirus (COVID-19) and the global oil price shock on the fiscal position of oil-exporting developing countries. OECD Policy Responses to Coronavirus (COVID-19).

I am an economist and contributor to Nkafu policy, a think tank. I cover global economic, fiscal and monetary policy with policy and asset price implications.

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