The price of oil halved between June 2014 and March 2015. This was mainly due to increased oil supply – particularly in the US, which last year saw the highest volume increase since records began in 1900. An overall slowdown in global demand has contributed to the price drop as well.
Low oil prices are bad news for Africa’s major oil exporters. But, as ODI’s latest shock bulletin reveals, this is not the whole story. In fact, lower prices and lower inflation will be a boon for African oil importers and consumers, improving growth prospects for many African countries. If governments pursue smart policies, they can translate these opportunities into sustained benefits to their economies.
Nigeria and Sudan among oil exporters who will lose out
An oil price drop directly hurts exporters. If prices fall by around 30% between 2015 and 2014, as predicted by the International Monetary Fund and World Bank), we estimate that sub-Saharan Africa will lose $63 billion – around 5% of the region’s gross domestic product (GDP). Oil exporters like Nigeria, Angola, Equatorial Guinea, Republic of Congo, Gabon and Sudan will bear the brunt.
We are already seeing this starting to happen. The value of African oil exports to the European Union, US, Japan and China fell by $25 billion, or 13%, last year. Exports to the US account for much of that, where fracking has helped reduced its demand for oil imports by 44%, but exports to the EU also declined substantially, by 10%. And the drop in the value of sub-Saharan African oil exports to these countries was most noticeable in the last quarter of 2014, when they fell by 17% year-on-year. Exports from Nigeria fell by 14% ($11 billion, or 2.1% of GDP).
But oil importers and consumers stand to gain
At the same time, the sub-Saharan African countries that rely on importing oil will be the biggest winners. We estimate that the 30% oil price drop would reduce imports by around $15 billion, with the major gainers including South Africa, Tanzania, Kenya and Ethiopia. The value of Tanzania’s oil imports have already dropped by 20% ($800 million, or 2.5% of GDP) over the 12 months to January 2015.
There is a further group that will benefit: consumers. Between June 2014 and February 2015, inflation fell by 2% in Tanzania, South Africa and Kenya. If inflation remains low, real disposable incomes will rise correspondingly, which could increase consumer spending by around $10 billion across sub-Saharan Africa.
And this is good news for growth prospects in these countries. The World Bank’s forecast for growth in Kenya in 2015, for example, was recently revised up from 4.7% to 6%, citing lower oil prices. So even as we face a period of slow global growth, Africa’s oil importers stand to gain. Generally, African countries also gain indirectly when low oil prices boost world growth.
How African economies can mitigate shocks – and sustain the benefits
So how can the oil exporters minimise their exports losses? In the short term, they can put in place macro financial instruments such as introducing less monetary tightening than would have been the case without the oil price decline. They also need to reduce fiscal deficits and lower oil benchmark prices in budgeting processes.
Ultimately however, Nigeria and other oil exporters need to reduce their economies’ dependence on volatile oil prices, by increasing energy efficiency and diversifying trade and production. If the oil price drop can be a catalyst for economic transformation, it could bring sustained benefits.
As for the oil importers, the long-term benefits of falling oil prices are by no means guaranteed. Kenya, South Africa and others need to take advantage of this opportunity to invest in skills, infrastructure and technology for the long-term.
There are further measures that all countries can take to enhance the positive effects of oil price declines on lower inflation, for example, ensuring that consumers quickly see the benefits of falling oil prices on cheaper food and other goods. This is also an opportunity for governments to reduce oil price subsidies or increase taxes – an obvious strategy that is not just sound economics but sound environmental policy too.
Finally, this is a moment for all countries to recognise the need to foster cooperation between the winners and losers of the recent oil price changes. Whether at the global, G20 or national level, we need common facilities for managing future oil shocks.