OPEC And Oil Price: Stabilization Good For African Economies

The price of oil is gradually if not rapidly increasing. The last time on world market the sweet ebony light crude was trading above $70 dollars. This might bring a soupcon of joy to OPEC members especially the African members notably Nigeria and Angola. These two African nations Nigeria and Angola are the largest producer of crude oil in Africa and are soon to be joined by Ghana, where large oil deposit was discovered by Tullow Oil PLC. Even in the troubled Sudan, oil production is rising together with other smaller oil producing nations in the continent, Africa can find solace in the rising oil price. With all the existential problems littered across the continent the last thing African oil producing nations wish for is the slumping of oil price. But strategically, the increasing high price and instability of oil price is not good for Africa.

The largest consumer of African oil is North America and perhaps the insatiable China whose thirst for oil is fueled by its rapid industrial growth and burgeoning/ gigantic population.With all the troubles in the Middle East, African oil appears to be the safest at this point in time and the supply of African oil is more secured when compared to Middle East and Russia. Africa’s oil proximity to the American market makes its very favorable. The ebony light crude coming from Nigeria is more accessible, easier to explore and refine. Almost 15% of American oil consumption comes from Africa and it is expected to rise up to 25-30% in near future. This makes Africa a strategic important to the West. Africa must built on this by making sure that price of oil is not a runaway by working assiduously to stabilize oil price in concert with its OPEC partners.

Most of these African nations planned their budgets and tied their budgets to the price of oil. With the sharp increase of oil price, they enjoyed bountiful spending and relied less on the donor nations and the reverse is the case with the nosedived of oil price. The major problem with these African nations are their total dependency on oil for their total revenue and foreign exchange. They mostly operate a mono-commodity economy and without economic diversification they become vulnerable, unsecured and weak in the globalized market economy.

With supposedly benefits of high price of oil to OPEC and African oil producing nations, there is nothing to show for that in Africa except the abysmal human development indices. But with the changing world and the charting of the new course in the energy world, a new tune is emerging. The world is talking about energy conservation and renewable energy. The days of the wasteful oil consumption are numbers. The world is moving towards green energy – solar, wind, thermo etc. Therefore the oil producing nations must devise a compromise strategy to stabilize price of oil in order to encourage the industrialized nation to aid them in this energy transformation.

The present Boom and Bust paradigm is not healthy for oil trade for it does not only discourage investments in the oil industry but also inhibits research and development in the industry. Most importantly, the introduction and application of high technology and scientific innovations in the industry will slow down and significantly declines. When the market is not steady with regard to price and productions, the marketers including the producers and buyers cannot make a long term planning and commitments to the industry. This encourages capital flight from the industry and makes it difficult for the attraction of fresh capital needed for investment and innovations.

In Africa the instabilization of price does not only affects the oil producers but it impact those non-producers in the continent. The non-oil producers in Africa will tell you outrightly that energy takes a lion chunk of their budget. These non oil producers can able to make realistic budget and economic planning if they be able to predict the market. Therefore oil price stabilization is good for all in the continent.

Circumstances beyond the pale

In some cases OPEC could not have control on certain factors and situation that ultimately influence the price of oil at the market place. Therefore this situational and conditional episode can drive the price of oil without OPEC tinkering. Paucity of quantifiable peace can cloud the judgments in the market place. For instance the problem of Niger Delta in Nigeria have affected oil production and exploration in that part of the world. The lawless gangs in the area engaged in some unspeakable violence; thus trigger the quick price rise of crude oil. The violence does disrupt oil production and do temporarily create an artificial shortage in the market. Again the instability in Middle East also drives the price of oil because the region is infested with uncertainty. The political disruption in Venezuela is not favorable for the stability of the market. Sudan, an African oil producing nation is burdened with its problem of Darfur where the waste of lives continues. All these conditions can impede the stability of the market and trigger fluctuation of oil price.

Market force supreme
OPEC cannot be compelled to fix the price nor manipulate the price of oil through production. This is not the question, the key to price stabilization is to stay away from tinkering of the market. All they can do is to give credence to the market by allowing the forces of demand and supply to take its course. The forces of market have the ultimate answer to the problem of price stabilization. When the fundamentals of the market is based on the law of demand and supply, then the outcome is realistic. Then if price of oil is high or low it is acceptable to all the parties in the market. A new paradigm shift based on mutual benefit is the key to the future stabilization of oil price.

Written by
Emeka Chiakwelu
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