June 30, 2016     Adella Agaba     Economics
Oil production is set to begin in 2017 and this has generated anxiety and expectations which are already a threat to peace in the country, not only to humankind but to the environment, economy and ecology.
The discovery of oil and gas in any country worldwide causes impeccable excitement because it is associated with greatness, power, success, economic growth, development and riches, especially to the country and citizens. However, Studies worldwide have discovered that owning natural resources like oil and gas, diamonds or gold does not necessitate economic development as is perceived by majority population. In most countries, natural resources have been discovered but the quality of life is still alarming. Some countries that highly depend on oil as a resource are economically troubled and this is a fact Uganda should not ignore as production gets closer.
The oil industry, with its history of booms and busts, is in its deepest downturn since the 1990s. Earnings are down for companies that have made record profits over the years, leading to early decommissioning and sharply cutting of investments in exploration and production stages. More than 200,000 oil workers have lost their jobs, and manufacturing of drilling and production equipment has fallen a trend that is yet to continue with the drop in oil prices which has drastically gone down and from the observations it will be long before oil returns to over $100 a barrel which is an indicator of tough times ahead. Companies like Royal Dutch and Chevron recently announced cuts on their payrolls as a saving mechanism and this shows the impact on smaller oil producers who must slash their dividends and sell assets because of the losses incurred.
Nigeria one of the largest oil-producer in sub-Saharan Africa, with about 32% and 34.2% of Africa’s oil and gas reserves respectively, with the economy largely dependent on its hydro carbon, like many oil-producing countries, the nation has not been spared the agony the drop as one of the major oil exporters. Saudi Arabia, Norway, Russia and Algerian oil that once was sold in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices. Among these net exporters their GDP growth is dampening as export revenues are falling. This is because countries exporting oil are generally more dependent on the price of oil than countries importing the resource.
One wonders what will happen in Nigeria considering her recurring violent conflicts associated with the management of her oil resource. In early 1967 oil-related disputes motivated an insurrection by a major ethnic group in the Niger Delta. Less than a year after, the nation experienced a civil war (the Biafra war of 1967-70), which was not unconnected with disagreements over the sharing of oil revenues. Nigeria now faces growing fiscal challenges as oil accounts for more than 70% of the country’s revenue and in this case it would need $123 per barrel to balance its budget which is not the case with the plunge.
In Ghana with average production of 100,000 barrels a day, oil has become a major source of revenue for the Government with annual oil revenues rising from $709 million in 2013 to $780 million in 2014 and was projected to drop to $215 million in 2015 and could get worse due to the low oil prices.
With Oil Prices now below $32 a barrel, and the fall being attributed to the increased supply of oil, there are many lessons for the yet to be oil producing country Uganda.
If the trend of the plunge continues, lower oil prices will weaken fiscal and external positions and reduce economic activity in a few oil-exporting countries and this will have an adverse effect on the developing countries like Uganda. With a decline in economic growth and development in oil producing countries: poverty, low quality of life, unemployment and devastating environmental damage are some of the foreseen consequences. This can also be explained basing on the level of competitiveness on the world markets and poor policies in countries on issues of revenue management and increased corruption scandals in institutions responsible for oil revenues.
It is not predictable when these prices will stabilize, but Uganda has to start preparing for this plunge before the resource becomes a curse for the nation. This drop will also compel most oil companies to cut their budgets for exploration and production of this finite resource.
However, one can choose to look at the drop in a different light as a means of calming down often inflated expectations by African governments over the future oil and gas wealth and unrealistic expectations by local authorities which are often said to be a key road block to progressing projects in the sector.
Whichever way you look at it; this plunge is an alarm that can’t be ignored by the Government of Uganda.
The writer works with Uganda Debt Network and she has been a member of this think-tank since its inception in 2011.