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Continued Plunge in Oil Prices – A geopolitical win for the US a total loss for Nigeria, Angola, Gabon etc

28 October 2015
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From 2009 to mid-2014, times were pretty good for African oil exporting countries, like Nigeria, Angola, Algeria, Libya and others. The price of oil surged $130.

Then oil prices crashed. The price of oil is now down 57% from its June 2014 peak. Last week, the price of oil fell 3.4% to $45.17 per barrel. It’s now close to lows we haven’t seen since March 2009, during the worst of the financial crisis.
The government in Nigeria, which relies for 90 of its foreign exchange earnings from the sale of crude oil, has seen its growth forecast slashed to 4.8%, from 7.3% last October, forcing the government to cut spending in many areas. For now the new President of Nigeria says he will continue to stick with costly fuel subsidies. According to the International Monetary Fund, this subsidy accounted for an average of 2.5 percent of Nigeria's gross domestic product from 2006-2012. Obviously an unwise move.
Angola, the second largest crude producer after Nigeria, used to generate about 70 percent of taxes and over 90% of its export income from oil. Since the plunge in oil prices, the government slashed this year’s budget by a quarter, cutting fuel subsidies and freezing hiring. The state crude company separately announced 1 billion of cost reduction by the end of 2015. Will that be enough?
With a continued plunge of oil prices and the glutting of the market with shale oil, (don’t forget Iran will likely begin exporting more oil soon, and the US could end its self imposed ban to export) one dimensional economies built on crude oil will face a reduction in foreign exchange and government revenue. From a macro economic perspective, the government will be forced to find other areas to make up for the apparent short fall in available resources and also consider reducing overlapping public agencies and workforce.
Meanwhile, US oil production is still near an all-time high. The US Energy Information Administration (EIA) reports that US oil companies are producing 9.4 million barrels per day (bpd). That’s near the peak US production reached in the early 1970s.
Shale oil is the reason for this huge spike in production. New drilling techniques have allowed oil drillers to cheaply extract oil they couldn’t before. This caused the oil supply to explode and the price to crash.
US oil companies are trying to fight lower oil prices by selling more oil. With the price of oil down 57% since June 2014, oil companies must sell more than twice as much oil to earn the same amount of revenue.
US companies aren’t the only ones pumping a lot of oil, the Organization of Petroleum Exporting Countries (OPEC), a cartel of 12 oil-producing countries in the Middle East, is producing more oil than it has since 1982.
All these development leave Africa in the dust. From a microeconomic perspective, Nigeria and Angola are import dependent economies. With very little of anything produced to a significant degree domestically, the countries must rely on importation for a majority of their economic goods, including food.
The horizon is clear to see: Shale oil has come to stay and will keep crude price low. In single source economies like Nigeria, Angola and many others dependent on just one commodity for their foreign exchange, the shortage of forex will create inflation and economic hardship for the average citizen. To cushion these harsh economic storms, Nigeria and Angola can invest in agriculture, in which they have a bright future.
At its peak in February 2006, the US imported 1.3m b/d from Nigeria – equal to roughly one super-tanker the size of the Exxon Valdez every day. By 2012, Nigeria was already selling just 0.5m b/d, but was still one of the top-5 suppliers to the US, alongside Saudi Arabia, Canada, Mexico and Venezuela. Earlier this year sales dropped to a trickle of about 100,000 b/d. And in July 2014, they completely stopped.

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