South Sudan is among major Africa’s oil-producing states expected to lose at least 30% revenue in oil exports, a new report reveals.
This comes as the price of oil is expected to halve to $35 a barrel by the 2030s. At this price point, the report projects, a country like South Sudan that relies solely on oil export, loses more than half of its entire government revenue.
The report obtained by The Continent says the impact is similarly dramatic for Angola, where aging offshore oil rigs bring in 75% of government revenues and make up 90% of exports.
For Egypt, oil is 10% of government revenue with the number climbing to 78% in South Sudan and 80% in Equatorial Guinea.
A collapse in the oil price will be catastrophic – and it is going to happen. The International Energy Agency, once seen as a lobby for fossil fuels, now says the price of oil will halve from $70 a barrel. This will drop the income per person from oil in petrostates from $1,800 to $450.
Number crunching by Carbon Brief, which specializes in energy and climate forecasts, says $40 a barrel would cost petro states a combined $9-trillion in lost income. The Gulf States, like Qatar, are planning for this by diversifying their economies and building up massive cash reserves.
Even Saudi Arabia, where it costs just $6 to get each barrel out of the ground, has had to make cuts: VAT was tripled to 15% last year to increase government revenue.
Half of Africa’s states sell some sort of petrochemical. And the Covid-19 pandemic has given a taste of what is to come.
A year ago, oil prices briefly collapsed to $25 and less a barrel. In Angola, the finance minister was forced to cut some department budgets by a third.
The country’s sovereign wealth fund, meant to invest oil income to ensure stability in the future, handed over $1.5-billion to plug immediate gaps. Nigeria, reeling from a 2015 oil crash that kicked off its first recession in 25 years, further cut spending.
History holds similar lessons. The oil shocks of the 1970s collapsed the economies of newly independent African states. Instead of investing in social services – hospitals, schools, and public spaces – they were forced by the International Monetary Fund to adopt the now-infamous structural adjustment programs.
Young democracies gave way to monocultures and dictatorships. Now the World Bank talks about countries like Nigeria and Angola by saying they need to “reduce dependency and diversify their economy”.
But oil and gas are still seen as a quick-fix for countries with resources. That income is also critical to leaders who need to lubricate their patronage networks to stay in office.
In Mozambique, the allure of natural gas profits saw the government bet everything on income from new gas fields in its north.
In ignoring the people who lived near that natural resource, the decision kicked off an insurgency that has become so dangerous that French oil giant Total was recently forced to halt operations.
Further north, Total and its Chinese counterpart Cnooc Ltd. has signed an agreement with Uganda and Tanzania to drill oil in the former and ship it from the latter, through a 1,440-kilometre pipeline.
Outside Lagos, Africa’s richest man, Aliko Dangote, is investing over $12-billion in what would be Africa’s largest refinery. Its stated goal is to meet all of the country’s demand for refined petrochemical products – a big change in a country so used to shipping crude oil overseas and paying more to import back the refined product.
Projects like these are becoming increasingly difficult to fund, which is one of the reasons that oil demand is projected to collapse.
Dangote’s refinery is getting over $3-billion from a consortium of banks. This is funding that was wrapped up before the move away from the financing of fossil fuels.
Now, big banks are moving away from investing in fossil fuels. The threat of so-called “stranded assets”, where a bank invests in a project that can then not pay back that debt, is increasing.
This has also influenced the world’s biggest stock markets. And last month a Dutch court ruled that Shell must cut its emissions by 45% in nine years. The court ruled on the basis that global heating causes natural disasters and generally degrades the human rights of people.
Companies and governments that push that warming are therefore committing human rights abuses. The shell can appeal but the order is immediately enforceable.
The ruling is not unusual and comes amid a flurry of similar judgments in the last few years, particularly in countries where big corporate polluters are based.
Another sign of the trend away from fossil fuels is that this week, three seats on the ExxonMobil board were taken over by climate activists. And all major polluting countries have now committed to reducing carbon emissions to net-zero by 2050, with big drops by 2030.
Reducing coal and oil use is the quickest way for all these groups to reduce their emissions. Although this is a clear win for people in the long term, it spells disaster for the budgets of Africa’s petrostates – and, unless something changes quickly, for the short term for people who live there.