OIl industry, the challenging business landscape in Africa

OIl industry, the challenging business landscape in Africa

The global oil industry is facing its biggest ever drop in demand. The price of oil plummeted to below $20 a barrel on Sunday, its lowest level for 18 years, as traders responded to the widespread lockdowns in place across the world, and the expectation that production will have to shut as global oil storage reaches capacity.

Oil prices have now dropped more than two thirds this year alone and the financial markets have not fallen by the same magnitude since the dot.com crisis, though this time the fall happened in a matter of weeks rather than years. At the time of writing, three of the G7’s leaders are running their countries from quarantine, airlines are grounded, offices are shut, and commuters are staying at home.

For Africa’s biggest economies, the news is devastating. African oil producers are expecting multi-billion-dollar losses in state revenues this year alone and lost market share that may never be regained. For Africa’s people, it will mean an immediate reduction of state budgets and public spending, which will be a desperate blow to the macro-economic stability of the continent.

This situation is being further compounded by the Saudi Arabia and Russia price war, as Africa’s producers cannot compete with the low production costs of those nations. While non-OPEC nations such as the UK and the USA also have high production costs, their economies are diversified in a way that means they are not reliant on oil to the same extent. If you look at Nigeria, the continent’s biggest producer, the country depends on oil for 70% of its government’s income and at least 90% of its foreign currency earnings. For some African nations, the security of the state is deeply intertwined with the global oil markets.

Nigeria, alongside other largest oil producing countries Angola, Algeria, Egypt, and Libya dominates Africa’s oil production, and collectively they account for over 85% of the continent’s oil production. In Angola, for example, oil accounts for approximately 90% of exports and nearly 80% of the state budget. Angola, along with Nigeria, both OPEC members, are now selling oil with high production costs at hugely discounted prices.

Importantly for African economies, this will hinder the ability of their governments to tackle impending coronavirus outbreaks. With currencies rapidly losing value against the dollar, imports are becoming more expensive, while international investors are retreating to focus on problems at home. Despite this fall in revenue, African nations will need to increase in spending on both public health measures and to counter the huge economic impact of lockdown measures. The recovery begins now.