Figure of the week: Oil price projections help shape African economic diversification efforts

Figure 1. Commodity Price Indices 2012-2020* Update to Figure 6. Commodity Price Indices of the July AGI Markets Monitor. 

Overall, commodity price levels remain far below the March 2012 peak preceding the price slump of 2014-2015—although commodity markets have experienced a slight rebound since March 2016. The International Monetary Fund projects that all commodity and energy price indices will remain relatively stable over the next five years, with a minor climb hardly reapproaching peak levels. For these reasons, some African countries are continuing to diversify their economic activities away from commodities such as oil. Others are opting to take advantage of the recent small, but not insignificant climb in commodity prices.

Veteran oil exporter aims to address dependency

Lower commodity prices, and more specifically, depressed fuel prices, have had a powerful effect on countries that depend on oil for their fiscal revenues. Gabon, for instance, whose oil sector accounted for 70 percent of exports and 40 percent of budget revenue in 2015, has seen its revenues and GDP drop dramatically from the falling oil prices (see figure below). Gabon continues to have one of the highest GDP per capita values in Africa, however, this is largely due to its relatively small population of just over 1.6 million people. Although poverty statistics are sparse, according to a 2016 report by the IMF, approximately a third of Gabon’s citizens live below the poverty line, and unemployment rates currently stand at just under 30 percent.

Figure 2. Gabon Economic Indicators

The decline in oil revenue has had negative effects on the ordinary citizens, with total unemployment rates rising approximately 10 percent post commodity slump. In response, Gabon is advocating for palm oil production and the end of the country’s dependence on oil. Ali Bongo, president of Gabon, recently signed three deals worth $4.5 billion with several Asian companies, utilizing the foreign capital to establish new factories and plantations. Among the initiatives to employ Gabonese workers are the development of 100,000 hectares of palm oil trees by the Singapore-based company Olam, as well as banning the export of raw logs (one of the country’s main exports) to make sure the materials are transformed in country.

New oil-exporting nations consider path ahead

By 2017, both Kenya and Uganda will begin exporting oil in an attempt to diversify their respective economies. Kenya seeks to lower its dependence on agriculture and tourism, as President Uhuru Kenyatta and the cabinet approved an oil commercialization plan by the Ministry of Energy. Kenya will begin by exporting 2,000-4,000 barrels a day by road and rail to Mombasa for refining until a pipeline projected to pump 100,000 barrels per day is completed between Lokichar and Lamu (estimated completion in 2021). Petroleum is Kenya’s current single biggest import commodity—at 14 percent of the import bill—and the hope is that reducing this expenditure will translate into more robust foreign currency reserves, and therefore a stronger Kenyan shilling. Although doubts have been raised around the high cost of logistics and the economic viability of the export plan, Kenya has confirmed crude oil reserves of 750 million barrels, enough to keep the pipeline in use for 2 years before exploration firms must discover new oil reserves.

Meanwhile Uganda is planning to export oil to the Indian Ocean using a pipeline that runs through Tanzania. Uganda has more than double the confirmed reserves of Kenya, with 1.7 billion barrels of recoverable reserves in the Lake Albert Basin. Although initial talks of a joint oil pipeline project with Kenya fell through, Uganda and Kenya still plan to work together on other regional projects including a railway from Uganda to Kenya’s coastal city of Mombasa.

Tor Syvrud contributed to this post.