The price of oil is falling fast and may continue doing so. What is Uganda's way forward? by A.B.K. Kasozi

The price of oil is falling fast and may continue doing so. What is Uganda's way forward?

By A.B.K. Kasozi

On November 24, on a cold day in New York, I watched a reporter on BBC America ask the Uganda minister of Energy whether Uganda had not lost out on earning good money by refusing to export crude early when the prices were good.

The minister replied it would have been wrong to sell oil before the legal structures to manage oil resources were in place. She added that a number of countries which rushed into the market without the said structures were in place are regretting.

I was pleased with her answer, for the reporter expected Uganda to sell her resources in a legal jungle, without adding value. Yes, the prices are falling and they may continue to do so, given global changes happening in the oil industry.

But not only can oil prices rise again, but also oil can be used at home and save the more than $500m we spend for importing oil products each year.

The triple strategy of adding value to the oil by building a refinery, supplying refined petroleum products to the region and exporting some of it overseas in its crude form, is a credit to the government’s oil policy — and this came out well in the interview.

Borrow a leaf from other countries

Whether oil prices rise or fall, the policy of adding value to Uganda’s black gold should stay. If anything, falling prices in the market means that it is expensive to build facilities such as pipelines for exporting oil because the black gold will fetch less money than the cost of building these structures.

Uganda should learn from examples like that of Chad, which has built pipelines that not only took out the black gold without adding value to it or creating local employment, but also stand as white elephants whose purposes end with the exhaustion of oil.

Yes, the price of oil is falling fast. Since the June peak of $107.48, Brent crude has fallen about 30% to around $65.00 to $70.00 a barrel. Oil is measured in “barrels”.

When commercial oil was discovered at Oil Creek near Titusville, Pennsylvania (by Col. Edwin Drake), it was measured like whisky and wine in barrels. As a result, the “barrel” has remained the “default” volume measure for markets. One oil barrel is 159 litres.

Predictions are that the decline in prices of oil is likely to continue as global supply of oil increases and demand decreasing.

The US, which was the major single consumer of oil (accounting for 25% of global consumption in 2009), has not only diversified its energy sources, but also turned to domestic oil supplies to satisfy its energy needs.

The US, using new oil extraction technologies (such as hydraulic fracturing and shale drilling) now produces 8.7 million barrels a day, about one million barrels more than a year ago. In fact, industry experts predict that the US may overtake Saudi Arabia in oil production.

US’s export of refined oil has, since 2010, increased as the country exploits its shale resources. Saudi Arabia increased production by an estimated 100,000 barrels a day. Libya has increased production by an estimated 500,000 barrels a day.

To add to the problem of oversupply, OPEC in its November meeting failed to set production levels. Each member state was, therefore, left to flood the global market with oil.

Consequences of drop in oil demand

On the other hand, there has been a global drop in the demand for oil. Experts predict demand to drop from 93.55 in 2014 to 92.64 million barrels a day in the first quarter of 2015.

The factors responsible for this drop include the US’s reduction of oil imports, the slowing of China’s economic growth, the sluggish state of the Euro zone economies and the emerging recessions in Japan and Brazil.

Further, the instability in Ukraine and the difficult-to-implement sanctions on Russia have reduced economic activities in a vital area of the globe that ordinarily consumes a lot of oil. If oil prices continue to slide and remain below $60.00 a barrel, there will be global consequences, some of which will impact on Uganda.

First, the US economy will be energised.

Second, the market will retake the pricing role of oil from OPEC as the latter’s ability to set prices by production strategies will be undermined by competition for markets by individual OPEC members.

Third, the oil firms will still make good profits, talk with authority to OPEC nations and remain the major custodians of oil technology. In November 2014, shares of a number of oil majors dropped by 1.5% to 2.0% in response to falling prices.

Fourth, the autocrats that rule petro states with iron fists will have less funds to suppress opponents in their countries. As a consequence, we may see not only changes in governance in the Middle East and Africa oil-producing nations, but also in the nature of “international terrorism”.

The latter is partly caused by the petro-funded states’ autocratic governance. Lastly, those countries whose income is over 80% dependent on oil (such as Nigeria, Angola and Equatorial Guinea), could, if they planned their budgets and spent on the basis of expectations of oil revenues, go bankrupt.

This happened in the 1980s and 1990s. We may see the World Bank/IMF called again to “structurally adjust” their economies.

Oil is different from agriculture

The minister ended her interview with a smile. I was happy for rarely have I seen African offi cials handle western journalists so well. Ugandans are losing nothing as a result of falling oil prices.

Oil is not like agricultural products that can be replanted each year. Once lost through selling it badly, oil capital is lost forever.

The country cannot afford to give away its wealth unless it has all the rules, regulations and institutional structures to manage the sale of oil and the subsequent oil economy. Otherwise Uganda could go the way of many African countries — rich in resources but poor in the quality of the lives of their people.

Further, and vital, oil prices fluctuate, just like the weather. Ugandans should be patient. Oil prices will rise again. Oil prices are affected by political events, conflict (like the current ISIS crisis in the Middle East), rumours, changes of governments and market behaviour.

In the past, oil prices have gone up (1973) and tumbled (after the 1973 War and the 1980s). The current sliding down of the market might go on for two years, but the price will come back one day as the global middle class expands.

For now, we should think through our oil strategies. Is there any good reason to invest in infrastructure for exporting oil when the prices are low? On the other hand, the need of oil products in Uganda is increasing, hence the need for value addition and, therefore, the building of a refinery.

Do not shed a tear for falling prices. You have not lost your capital. Your stock is intact.

Way forward

Uganda cannot afford to give away its wealth unless it has all the rules, regulations and institutional structures to manage the sale of oil and the subsequent oil economy. Otherwise the country could go the way of many African countries — rich in resources but poor in the quality of the lives of their people.

 

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