There is no doubt that the natural resource sector is an engine of Africa’s growth. Resource prices have more than doubled since 2000 and, over the past decade, about three quarters of foreign direct investment to sub-Saharan Africa (SSA) ended up in resource-rich countries such as Angola and Nigeria and largely in extractive industries.
As exploration and production increase thanks to technological innovation and new players, SSA will become even more reliant on its natural resource wealth. Resource-rich countries will increase their production and countries from East Africa with newly discovered oil deposits, such as Kenya, Uganda and Tanzania, will join the club. In addition to oil, production of gold (such as in Burkina Faso and Tanzania), coal and gas (in Mozambique) are set to increase. Non-oil producers are also encouraging exploration, such as Ethiopia in the Ogaden Basin and Rwanda in Lake Kivu.
An important debate is taking place on how to avoid the curse of Africa’s oil boom, and the economic literature has a large body of research on the resource curse and on how to harness the power of natural resource wealth for the benefit of current and future generations. The challenges are enormous: How will SSA countries diversify their reliance on commodity exports? How can their corporate sector benefit from a transfer of knowledge and technology and join the value chain of extractive industries? How sustainable will the social contract for managing the resource rents be? These questions and others will have to be addressed, but it is also crucial to identify global trends that will affect SSA resource-rich countries in order to design more adequate policies. The following four trends come to mind:
1. Slowing growth in China
A slowdown of growth in China and more generally in emerging markets is an important driver of commodity price declines. A recent IMF simulation studies the impact on other countries of a slowdown in Chinese growth from an average of 10 percent during the previous decade to an average of 7.5 percent over the coming decade. The result for Nigeria is that its GDP level in 2025 would be about 1.5 percent lower because of the lower Chinese demand for oil. This is much less than the 7 percent for Mongolia, which is dependent on export of coal, iron ore and copper to China, but still not trivial
“Financialization” of commodities
What happens in the stock and bond markets can have the same impact on different commodities from cotton and soybeans to oil and copper. The co-movement between financial assets such as stock prices and commodities seem to have been important in explaining the commodity “super cycle,” the large increase in different commodity prices since 2000. The Institute of International Finance estimates that between 2005 and 2011, the value of commodity-related assets under management increased almost ninefold to $450 billion. Commodities have become a new asset class as huge investments have flowed into commodity-index related instruments after the dot.com equity market collapse. One rationale is that commodities offer a diversification benefit to portfolios of stocks and bonds. Some researchers like Tang and Xiong argue that, as index investors focus on their strategic asset allocation across different asset classes such as stocks, bonds and commodities, they tend to move in and out all commodities in a chosen commodity index at the same time. Their trading can thus cause prices of different commodities in the index to move together.
3. U.S. energy boom
The U.S. is in the midst of an energy boom and will import less oil and gas from SSA. Nigeria’s crude oil exports to the U.S. have been falling according to the U.S. Energy Information Administration (EIA) from a peak of 425 million barrels in 2005 to a low of 162 million in 2012. The 2013 figures will likely represent a continuation of that downward trend. The culprit is the energy boom in the U.S. where natural gas output increased 25 percent, and crude oil and other liquids increased 30 percent during the past five years, reducing net oil imports by nearly 40 percent. The EIA shows U.S. production of tight oil increasing until 2020 before falling off during the next two decades. The baseline also shows U.S. shale gas production increasing steadily until 2040, and the U.S. is expected to be a net exporter of natural gas in the 2020s.
Africa’s use of renewable energy
SSA has so far relied heavily on nonrenewable energy to fuel its rapid growth but it should also consider investing in renewable energy. SSA’s demand for energy is set to increase if it wants to sustain its current rapid growth rate. SSA imports a lot of refined oil to meet its energy demand and some countries, such as Uganda, are considering building new refineries. But beyond the important question of whether it is preferable to continue importing refined oil or refine it yourself, it is important to discuss whether SSA countries should turn to renewable energy technology. This choice would not just be about addressing global warming and climate change. It would also be about diversifying energy sources, improving energy efficiency and importing new technologies. Ethiopia, no doubt because it is so far less endowed in nonrenewable energy, has made the choice to invest in renewable energy technology such as the Ashegoda wind farm, the Grand Renaissance Dam on the Nile and geothermal projects. Kenya has also a wind power project on Lake Turkana and also is involved in plans for geothermal energy production. Further northeast, Morocco is investing heavily in solar power plants. In terms of global warming and climate change, the Growth Commission argues that it makes economic sense for developed countries to bear some of the costs of developing-country investments that would cut carbon emissions to safe levels. Interestingly, renewable energy is also part of President Obama’s Power Africa initiative.
In short, SSA resource-rich and soon-to-be-rich countries should (1) anticipate China’s economic performance carefully as slowing growth in China will lead to slower growth in SSA resource-rich countries; (2) study how global stock and bond prices co-move with commodity prices as the “financialization” of commodities indicates that financial assets can be linked to commodity prices; (3) prepare to redirect oil exports to the U.S. to other regions as the U.S. energy boom strengthens; and (4) invest in renewable energy sources to meet part of their growing own demand of energy.