Circular Flow of Investment to Leverage Africa’s Potential for Oil Trade
The Russia-Ukraine crisis has opened up the floor for discussions regarding Africa’s trade potential for oil and can use this opportunity to expand it. Majorly there are two views about it, first is the opinion that these nations can do it by exploring more options of facilitation, and the second opinion is that they would not be able to make it. This article delves into the challenges identified by second opinions and also, the first opinion by suggesting circular flow investment to reach the potential of the oil trade.
Due to the crisis, the world’s or Europe’s dependence on Russia’s oil is adversely affected, giving an incentive to Africa to explore its potential. Russia is the world’s third-largest oil producer behind the United States and Saudi Arabia, and it’s the world’s largest exporter of oil to global markets and the second-largest crude oil exporter behind Saudi Arabia. At least 8% to 10% of the global oil supply is catered by Russia. Europe relies on Russia for nearly 40% of its natural gas—this proves the deterrent nature of conflicts.
According to African Business, since the Russia-Ukraine war began, the price of Brent crude oil has spiked US$ 110 per barrel, which points towards an over 80 per cent jump in 12 months and the highest level in eight years.
Oil Production Potential of Africa
Africa has its fair share of extensive oil reserves available in Libya (48.4 bn barrels); Nigeria (36.9 bn barrels); Algeria (12.2 bn barrels); Angola (7.8 bn barrels); and Sudan (5 bn barrels), according to information from Statista.
Africa’s oil output reached almost 8.4 million barrels per day in 2019. In the same year, Nigeria led crude oil exports in the region with more than two million barrels of oil sold in the international market every day.
In 2020, North Africa exported crude oil worth 51 million metric tons and 25.4 million metric tons of oil products. West Africa exported crude oil worth 203.7 million metric tons and 7.9 million metric tons of oil products; and West Africa exported crude oil worth 3.8 million metric tons and 2.7 million metric tons of oil products.
Africa currently produces less than a tenth of global crude oil output, of which Nigeria has the most crude oil with an estimated production of 1,398,407 barrels a day. Africa can turn the Russia-Ukraine war oil price chaos into an opportunity for competitive oil producers such as Niger, Algeria, Libya, and Angola to cash in with more crude oil exports.
Challenges
Even with the availability of oil wells, African nations are pushed to import oil and petroleum products due to a lack of refineries. In 2020, Nigeria, one of Africa’s oil producers, championed oil importation, striking more than 466 thousand barrels per day, followed by Morocco with 240 thousand barrels per day.
Africa’s import of petroleum products accumulated a volume of over 1.7 billion barrels per day. “Petroleum imports accounted for 17 to 20 percent of imports in Nigeria, Kenya, Egypt, and Ghana in 2019. This ratio tends to increase as the oil price rises. We expect current account deficits to come under pressure and widen in oil-importing countries,” according to African Business.
There are multiple challenges that require attention to leverage Africa’s trade potential for oil. Improvement of Africa’s oil production infrastructure is essential for the region’s target of becoming a powerhouse. Lack of government funding, pipeline vandalism, and corruption in big producers are some of the issues.
There is a huge capacity in African nations to produce and sell oil and natural gas, but top producers lack the infrastructure that can quickly plug the gap. The largest challenge is financing. In this context, Nigeria, the continent’s biggest oil producer, is pushing for local investors, such as the African Export-Import Bank, to provide alternative funding sources.
The European Union also announced a financial backing of the Eastern Mediterranean pipeline that will connect the region to gas fields in Egypt, but it has run into geopolitical problems with the United States, which pulled out of the project in January citing a decision to no longer back projects that are not green.
Some of Africa’s biggest production sites are in areas with major security challenges. Mozambique holds the third-largest natural gas reserves in Africa. But the ongoing armed conflict in the northern province of Cabo Delgado has delayed $50 billion in gas projects. Libyan gas and oil fields are connected by pipelines to Italy but they suffer frequent blockades.
Because of all these challenges, for years African oil producers including Nigeria have been struggling to meet the required daily output levels. Experts with second opinions support this point of view and hence are of the opinion that Africa would not be able to manage the global demand pressures.
Exploring Options for a Way Forward
Last week Nigeria’s minister of state for petroleum said authorities were not comfortable with the surge in prices of crude oil. But this week, the Algerian state-owned oil and gas giant said it would supply Europe if Russian exports dwindled as a result of the crisis. Botti says it’s a good example for other African nations to explore their trade potential for oil. “We need to develop our capacity to produce locally, we need to look at various trade agreements that are existing,” he said.
Calling out to the African Export-Import Bank for financial support is an appropriate way of having internal investments. These local investments will create the base structure necessitated for foreign investment. The equal contribution of local and foreign investment would pave the way for cooperation and minimize the risk of exploitation.
Africa must liberalize the energy sector to address the infrastructural crisis. The current oligopoly would be insufficient, as the Nigerian National Petroleum Corporation lacks cash necessary to construct the required infrastructure. Investment to set up refineries can provide people jobs and income security, which to a certain degree reduces levels of poverty and addresses societal conflicts.
Due to the Russia-Ukraine crisis, African nations are likely to face food shortages. While looking into the trade agreements, African countries can specifically look for the exchange with nations of food with oil. Other countries would benefit from having an alternative choice to import oil at competitive prices. So that dual issues get addressed.
Internal and local investment in people, cooperation, and infrastructure would be required to encourage external investment coming into the nations and Africa attaining its potential for oil trade. Hence the circular flow of investment from local to international would be completed leading to benefits for all.
Vaibhavi Pingale
Ms. Vaibhavi Pingale is a Visiting Faculty of Economics at Gokhale Institute of Politics and Economics, Pune & at Savitribai Phule Pune University. She is pursuing her PhD. She has been actively writing media articles other than academic research.
