Oil and Africa: A Volatile Relationship

Oil and Africa: A Volatile Relationship

As oil prices continue to climb, quiet optimism returns to Africa's hardest hit countries.

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The crash in global oil prices has caused turmoil in markets across the world. Oil prices are so fundamentally interwoven into the global economy that the effects of such a crash are profound. For some countries, the slump in crude has been a boon: decreased energy prices have freed up capital and driven consumer spending. For other nations, the ramifications have ranged from middling to catastrophic.

Africa’s woes

As a whole, Africa has suffered more harshly than any other region on the planet, and the recent rally of crude prices could not have come sooner. Many oil exporting countries have been trapped in an economic tailspin by the crash, which has subsequently jeopardized the region’s growth potential. Growth projections for Africa have been slashed to 3% in 2016, a 1.3% decrease on prior estimates.

Angola has potentially been the most affected nation; the country is heavily dependent on oil for its revenues, with as much as 90% of its exports being oil related. The slump caused the country’s currency, the kwanza, to plummet to record lows against the dollar. Whilst the recent increase in oil prices hasn’t triggered a recovery yet, it is a necessary precursor for a rally later down the line.

Nigeria, Algeria, South Sudan, Gabon, Equatorial Guinea and the Republic of the Congo have all suffered similar fallouts from the global slump. For these nations, the direct effects of the slump have included lost revenues and currency devaluations. A further worry has been the increasing unemployment in the sector, coupled with the postponement or cancellation of further investment and exploration, which is critical for regional growth.

An end in sight

Global benchmarks Brent Crude and West Texas Intermediate have both achieved yearly highs twice in the month of May, indicating that prices may continue to rally at a steady pace. For the embattled African nations that are dependent on oil exports, there is a feeling that the economic siege is being lifted. If the price continues to rise, revenues will increase, currencies will stabilize and investment will return.

Ultimately, how far the rally will go remains uncertain. Some forecasts do not envisage Brent Crude achieving more than $50 a barrel in 2016, so the recovery for Africa’s oil exporters may drag on longer than many would hope. A point of further concern is that oil (and other commodities) may have reached the end of the global commodity super-cycle. For oil, this would mean that prices most likely won’t reach the peaks of the 2010-2014 periods for many years to come. For Africa’s oil exporters, this could actually be a positive in the long run. It could compel much needed economic diversification and lead to more balanced and less vulnerable economies.

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