Home » Oil prices may cause instability in Africa

Oil prices may cause instability in Africa

by Atqnews
0 comment
Christine Mungai

image027Plus: Why Muhammad Buhari might end up being the unluckiest man in Nigerian history, if he wins (not loses) next month’s election.
An Amnesty International mission delegate’s fingers covered in oil from an oil spill at Ikarama, Bayelsa State, Nigeria. (Photo: Flickr/ Jenn Farr). An Amnesty International mission delegate’s fingers covered in oil from an oil spill at Ikarama, Bayelsa State, Nigeria.

SHOULD Africa’s oil producing nations like Nigeria, Angola, Algeria and Egypt be running scared after the global price of crude oil fell below $50 for the first time in five years at the beginning of the week, on account of global oversupply? Yes and no.

With prices slipping their lowest since 2009, experts said the decline represents a $4.4 billion drop daily in revenue for oil producers, which is equivalent to $1.6 trillion on an annualised basis.

But oil industry players and cash-strapped exporters are still comforting themselves as it’s not as bad as during the 2008-09 recession, when prices hit just $32.40 as global demand shrunk.

With the current glut driven more by “unexpected supply growth than plunging demand”, some analysts believe there could be room for price correction in the near future.

But others have argued that the fact that the oil glut is driven by technology, which made previously unprofitable shale reserves economically viable, the downward shift in the oil price is likely to be “permanent” – you can’t uninvent the technology, and the changes are likely to be here to stay.

But the price of oil isn’t only determined by the forces of demand and supply; there are plenty of irrational and capricious elements that drive the oil markets, and one of the most prominent has been global geopolitics.

Over the past 50 years, oil prices have spiked in the wake of conflict – or speculation of conflict – in oil producing regions. For example, substantial price increases were associated with the 1973 Arab-Israeli war, the 1978 Iranian revolution, the 1990 Iraqi invasion of Kuwait, and the run up to the American war in Iraq in 2003.

But the trend in price falls isn’t as clear. By all indications, the price of oil should be at an all-time high right now, with four leading oil exporters – Libya, Iraq, Syria and Nigeria – facing domestic insurgency or all-out war, which (rationally) should cause enough uncertainty in the markets to drive prices upward.

Instead, they are at their lowest in half a decade, and some observers have seen the aggressive US exploitation of its shale reserves as a devious reprise of the 1980s when increased output from non-OPEC countries (led by the US and Mexico) sent prices tumbling.

The reduced oil revenues hit the Soviet Union particularly hard, and the resulting cash squeeze was a key factor in bankrupting the Soviet Union and “ending” the Cold War; the US strategy was called “pumping (Russia) to death”.

The same script is playing out today with the US and the Saudis on one side and Russia and Iran on the other, and the price of oil is already below what Moscow and Tehran need to finance their budgets.

Where does Africa fall in all this? Oil price booms and busts also drive political developments; governments have risen and fallen on account of Brent crude. But the story isn’t quite so straightforward.

Take Nigeria, for example. The country has been exporting oil since 1958, and the oil price spike of 1973-74 was great timing for the country, as it was in dire need of a cash injection to reconstruct its battered economy following the 1967-70 Biafran war.

With increased revenue from oil, in the 1970s Nigeria embarked on a massive reconstruction drive, with major spending on infrastructure projects – starting in 1975, the government, under military ruler Murtala Mohammed, begun the process of moving the capital to Abuja, which would entail building an entire city from scratch.

Reckless borrowing spree

But even more crucially, Nigeria began recklessly borrowing against anticipated future oil income. One study demonstrated that increasing oil prices gave Nigeria a perceived credit rating far higher than its domestic and macroeconomic fundamentals would have otherwise justified during 1973-1985. In other words, Nigeria was not growing fast enough (creating sufficient debt-servicing capacity) to justify the amounts the government borrowed.

The majority of Nigeria’s external public debt was accumulated in the 1980-86 period, during the civilian Shehu Shagari and military Ibrahim Babangida administrations, when the debt stock (driven by interest accumulations and penalties) increased five-fold from $5 billion to $25 billion.

But with oil revenues falling in the 1980s, Nigeria was unable to keep up on its debt payments. Nigeria’s interest-to-export ratio rose rapidly throughout the 1980s so that by 1988, the government was spending 21% of its export earnings solely on interest payments on its external debtors – not even touching the principal.

The result was a severe downturn in the Nigerian economy, with the Gross Domestic Product contracting an astonishing 68.2% between 1980 and 1986.

The economic collapse contributed to substantial discontent and conflict between ethnic communities and nationalities, adding to the political pressure to expel more than 2 million illegal workers (mostly from Ghana, Niger, Cameroon, and Chad) in early 1983 and May 1985 – with the government saying they had overstayed their visas and were taking jobs from Nigerians. The move was condemned abroad but proved popular in Nigeria.

But there were no jobs for Nigerians to have, as the overdependence on oil had sucked the life out of other sectors – industry shrank by -3.2% and manufacturing by -2.9% between 1980 and 1988, export-oriented agriculture declined from 42% of the total export in 1970 to less than 3% in 1985.

The decade would also see acute political instability, with three successive governments in power – Shagari’s civilian regime was ousted in a coup led by Muhammad Buhari in 1983 (a leading contender for the February 2015 election), who was in turn overthrown by Ibrahim Babangida in 1985.

The Algerian eruption

The same trend can be seen in Algeria. In 1986, rising inflation and unemployment, exacerbated by the collapse in oil and gas prices would lead to a wave of strikes and violent demonstrations, sowing the seeds of a conflict that would last a decade.

In 1989, continued unrest and pressure for political pluralism led to  a change in the electoral law which allowed opposition parties to contest future elections, and the Islamic Salvation Front (FIS) was founded that year.

In 1990, the FIS won 55% of the vote in local elections, and in 1991, the FIS won 188 seats outright in the first round of general elections, and seemed certain to obtain an absolute majority in the second round.

But in January 1992, Parliament was dissolved by presidential decree, sparking violent clashes all around the country, and a declaration of a state of emergency. The Armed Islamic Group (GIA) emerged as the main group behind the insurgency, waging a decade-long campaign of violence. Rights groups say up to 150,000 people were killed, and an official government report would indicate security forces were responsible for 6,000 civilian disappearances.

The Egyptian case

Egypt’s story is a little different. The 1973-74 oil spike was a direct consequence of the invasion of Israel by Egypt and Syria, in what was called the Yom Kippur War. In retaliation, OPEC led by Saudi Arabia cut oil production dramatically, leading to a quadrupling in oil prices from $3 a barrel to $12 a barrel.

Buoyed by high prices through the 1970s, Egypt’s economy grew at an annual rate of more than 11% between 1975 and 1980. About half of Egypt’s oil came from the Gulf of Suez and the Sinai Peninsula, but Israel had seized the Sinai Peninsula during the war.

Anwar al-Sadat, president of Egypt at the time, was eager to get Egypt’s oil flowing again to take advantage of the favourable prices, and so reached out for lasting peace with Israel, leading to a peace treaty in 1979.

Though reaction to the treaty—which resulted in the return of oil-rich Sinai to Egypt—was generally favorable among Egyptians, it alienated the Muslim Brotherhood and other radical groups, Sadat was assassinated by members of the Egyptian Islamic Jihad in 1981.

So lessons from history can teach us a few things: oil slumps and poor economic performance can spark political instability and social unrest, particularly if debt servicing becomes unsustainable as in Nigeria in the 1980s.

Staring into the oil crystal ball

But even high oil prices can still result in strengthening of radical groups in society if a leader is seen to be cutting deals with the “wrong” people to have a share in oil fortunes, as in Sadat’s case.

So we won’t attempt to predict what slumping oil prices will bring to Nigeria, Angola, Algeria, Egypt, and other oil-producing African nations (that are not at war like Libya and South Sudan).

The only coincidence we will point out is that Nigeria’s opposition candidate Buhari is running for president at a time when oil prices are plummeting – just as they were in the 1980s when they hit an all-time low, around the time he was president (1983-1985).

If he wins, and oil prices slide even more – perhaps even collapse – then Buhari would be the unluckiest man in Nigeria’s history, presiding over two oil recessions.

You may also like

Leave a Comment


ATQnews.com® a member of Travel Media Group is the online platform for African Travel Quarterly (ATQ), the first travel magazine in West Africa which solely focuses on travel and tourism issues. 


Latest News

ATQNEWS @2024 – All Right Reserved.

Are you sure want to unlock this post?
Unlock left : 0
Are you sure want to cancel subscription?
Update Required Flash plugin