At the wake of the coronavirus disease, countries adopted preventive measures that affected their economies, which consequently crashed the value of the black gold. But OPEC intervened with oil cuts. RAHEEMAH AROGUNDADE writes on the effect the organisation’s policy has on African countries
Enter COVID-19
The coronavirus disease, which emanated from Wuhan, a Chinese city, in December 2019, hit all major sectors of every country, including the previously booming oil sector. It negatively impacted the global stock market and reversed the favourable boost in oil prices since January. Earlier in the year, oil price recorded a record low in years, falling to almost $45 per barrel, with major oil and gas companies losing billions of their stock prices.
The lockdown and subsequent closure of companies mean take oil consumption to the base.
OPEC wades in
However, to control the dipping oil market in the face of the pandemic, the Organisation of the Petroleum Exporting Countries has been driving rules intended to ensure the stability of the global oil market. More recently, OPEC set a new limit for oil producing nations to balance production. It suggested that production should be adjusted to 10 barrels per day from May 1 to June 30 and reduced production to eight million barrels per day this year. This suggestion has been accepted and supported by the African Petroleum Producer’s Association, the umbrella body for oil-producing countries in Africa..
“OPEC’s decision to lower oil production was triggered by COVID-19-induced shock to global oil demand. The imposition of lockdown by most countries to curtail the spread of the virus significantly weakened economic activities across the globe, thus driving a collapse in energy consumption.
“For the sake of context, the International Energy Agency reported that global oil demand plunged by 29m barrels (around 30 per cent of demand) in April 2020, relative to the preceding year. This, together with increased oil supply, occasioned by a short price war between Saudi Arabia and Russia, had driven a significant drop in oil prices by the end of March 2020. Hence, OPEC’s decision to reduce production is aimed at limiting the supply glut in the oil market and by extension shore up prices,” explained Mr. Olubajo Olukoyejo, a financial analyst in a chat with Africana Entrepreneur.
He, however, asserted that the OPEC deal should have a positive effect on most member countries.
“The net effect of this decision should be positive for OPEC countries, as potentially higher oil prices should more than compensate for lost volumes. Prior to the OPEC deal, most countries were selling their crude at a huge discount to production cost. So, higher volumes weren’t necessarily good for these countries. However, with prices now moderately higher, the finances of OPEC members should be in better shape,” said he.
In Africa
The leading oil producers in Africa, including Nigeria, Angola, South Sudan and Gabon, whose economy depend largely on the revenue generated from petroleum products, have to review their national budgets to align with the current unfavourable oil price. The naira, which is usually in tandem with oil prices, was recently adjusted by the Central Bank of Nigeria from N361 to N380 per dollar in March 2020.
For financial consultant, Ayinde Ayuba, “In Nigeria, there is need to review existent plans. The 2020 budget was premised on $57 per barrel benchmark with oil production of between 2.1m and 2.2m barrels per day. The government has revised its budget oil benchmark to $30, while oil price has dropped to about $25 per barrel. Actual production has also gone down because there is no demand for oil. This implies that half of government’s expected revenue has gone.
“The point here is, for Nigeria or any other country, getting back on track will not be easy. As a result of the budget deficit, most of the 2020 budget implementation will come from loans.”
Angolan economist, Carlos Rosado de Carvalho, explained in an interview with Xinhua that “oil is the biggest source of revenue for the Angolan state, and if the state is going to have less revenue, it means that it will invest less; that way the economy ends up suffering.”
Olukoyejo affirms that the cut will negatively affect economies of oil-dependent countries.
“Because oil represents a significant portion of export proceeds and government revenue, lower oil sales would likely translate to weaker government spending and by extension a slower economy.
“African oil-producers will likely also witness currency devaluation, as dollar inflow contracts in tandem with lower oil exports. But that said, without the OPEC deal, many African countries would likely voluntarily cut back on oil production, given that it cost them more to produce a barrel of oil than to sell it,” he explained.
Ayuba also believes that the limits set by OPEC for oil-producing countries directly affects the economy of oil-rich countries whose major source of revenue is from petroleum products.
His words, “The recent cut will affect inflow in the country’s foreign exchange, which is much needed in executing capital development projects. A country like Angola whose revenue is 95 per cent reliant on oil will be grossly affected, especially based on the fact that China is its major buyer. With the realities facing us, will there be room for any export to China at this time that most of their refineries are shut down?
“In October 2019, Bloomberg reported that Angola’s Gross Domestic Product was expected to shrink by 0.2 per cent, but projected its growth in 2020. Of all the countries in Africa, Angola could be the worst hit by this development. The fate of the oil-producing African countries lies not in continuing reliance on oil, but an urgent economic focus towards diversifying her economy,” he said.
Rebound optimism
Although the situation of the global economy points otherwise, there is still chance for the affected countries to rebound from the effect of the fall in oil prices. Once the pandemic is contained, with lockdowns eased and business activities continued, the oil and stock markets are likely going to recuperate.
“The current decline in oil prices is likely to be short-lived. Once countries begin to ease lockdown measures and economic activities begin to pick up, increased demand for oil will drive an uptrend to prices.
“Also worthy of note is the temporary nature of the production cut by OPEC. Overall, oil proceeds to OPEC countries should be significantly higher in 2021. For now, many countries might be forced to support oil income by raising the debt. These borrowings, save for concessionary loans from the International Monetary Fund or World Bank, will however likely come at steep costs, as investors evaluate the poor financial position of African governments,” Olukoyejo said.
Need for diversification, others
International bodies such as the IMF, over the years, have advised African nations to diversify their sources of revenue generation, as it is more advantageous in dire times like this. Ayuba agrees.
“The government needs to look at other revenue sources, far beyond the expectation of revenue from oil, to sustain the economy, to promote economic growth and enhance the citizens’ standard of living.
“Other opportunities in agriculture could be explored. A lot of the rice consumed in Nigeria is grown in-country. It would have been terrible if it is not so. Our consumption pattern as a country is oriented towards import. We imported about 80 per cent of our rice in the past. Other imported items include sugar, which took a good part of our foreign exchange. Today, we have gone far in terms of rice production and this cuts across every part of Nigeria.
“This is just an aspect of the economy. The governments, not only in Nigeria but across Africa, will have to look into those untapped revenue generating resources or potential to stimulate the economy,” he said.
Olukoyejo corroborates this view with the belief that diversification boosts a country’s economy.
“It is always good for an economy to have many sources of income because it becomes better insulated from the vagaries of the crude oil market and can better manage its finances and plan ahead.
“More importantly, there appears to be a general downtrend in crude oil prices in the wake of shale-induced rise in supply and fall in demand, as oil importing countries increasingly focus on alternatives in such renewables. Hence, to plan, it is important for African countries to urgently focus on diversifying their revenue base.
“Other sources of revenue generation that could be explored include sale of burdensome government’s assets and implementation of investor-friendly reforms that would attract foreign investment such as privatisation among others,” he added.
