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Is Africa more vulnerable to oil price increases?

Shanta Devarajan's picture

As world oil prices rise to near the levels of 2008, and growth on the continent resumes to pre-crisis levels (as reported on Africa’s Pulse), a natural question to ask is whether Africa’s oil importers are becoming more vulnerable to oil price increases. 

A partial answer is given by a recent briefing note by my colleague Masami Kojima.

Vulnerability is determined by how much of a country's income is spent on oil imports. Looking at the period 2003-2008 (the latest for which comparable data are available), the study found that vulnerability rose in all oil importers (except Mauritania) and even in some oil exporters such as Equatorial Guinea and Republic of Congo. Also, 15% of the income of Seychelles, Liberia and Sierra Leone is used to import oil. This is among the highest in the world.

Interestingly, despite a significant increase in the price of oil during that period, the rise in vulnerability happened because energy became more oil-driven in 24 out of 42 countries.

This indicates that by changing sources of fuel these countries could reduce their vulnerability, something easier to do than reducing the energy intensity of GDP, which can be challenging in low-income countries.

"Energy intensity of GDP" is how much energy is used to produce a unit of GDP.  For instance, if most of your GDP is agriculture, you probably don't use much energy in its production.  But if you also produce manufacturing and services, then you probably use more energy per unit of GDP.

Table 1: Vulnerability to oil Prices in Africa

Comments

Submitted by mwakarama on
Hi Shanta, I doubt that you will get much responce from Africa on this topic, for one thing... it is a tricky issue. Most African countries that are land locked, might at best have to trade between each-other in Oil; the producers supplying the non producers and or exporting to countries like Seyselles, Mauritius etcetera on very long term contracts and fairly cheaply if agreeable... The biggest handicap for landlocked countries is not how much energy is used to generate GDP. Yes, certainly for countries with no Hydro Electricity generation alternatives. And run their industries on Oil energy full time, that premise would apply. Otherwise for countries with adequate Hydro power generating capacity - the usage on lighting and low capacity production industries (as alternately timed at defering rates for peaks and lows...) would be small perhaps in comparison to cost of inland trucking logistics. Ever since Independence I doubt that Uganda ever has import oil stock in a 30 day reserve... this means that should anything happen beyond sevendays the thing reserve would run out - and ironically between Uganda and Kenya it has been over 40 years of high cost trucking... there is now a justification for Uganda becoming a producer. Fuel costs don't fluctuate downwards... it keeps going-up.

Submitted by Rui Manuel on
I am not an economist but I follow this blog (almost) religiously. I enjoyed this post in particular because I am from an oil producing country (the first one the list above :-). I must confess, however, that I found this post and the associated briefing note (by Masami Kojima) to be somewhat "confusing". For instance, if vulnerability is defined as "the share of GDP spent on net oil imports" then shouldn't that be a number equal or greater than zero (I mean I can't fathom how u can spend "negative" money on something...but, again, I am not an economist). The other aspect I would like to understand is how ΔV correlates to the other common KPIs of socio-economic development. For instance, the study mentions that Angola and Mauritania were the only 2 countries where the consumption effect was negative in 2003–2008 period. Now, from a mathematical perspective, that simply means that they're producing more domestically than consuming, right? What are the other economic implications? e.g. did the average Angolan and Mauritanian become more economically-empowered over that 5-year period? Did inequality drop as a their countries' economies gradually became more "immune" or resilient to higher oil prices? Were more jobs created as more GDP was "freed" (in principle) to bolster other sectors of the economy? Perhaps the challenge here is to explain how all those ΔV, ΔP, ΔC figures translate in very practical terms... Finally, is high vulnerability always a bad thing? Is it possible that in some cases it represents an improvement in manufacturing technology via, for instance, increased investments in certain industrial processes that will bring net positive effects and overall economic benefits in the long(er) run?

Rui: Thanks for your questions, and for reading this blog "almost religiously". On the first, a negative vulnerability indicates that the country, such as Angola, benefits from an increase in oil prices because it produces more than it consumes. On the correlaion of vulnerability and other KPIs, it's complicated. For low income countries, with economic growth, there is usually an increase in vulnerability as the economy becomes more diversified. However, at higher incomes, countries reduce their vulnerability with income growth as they switch to less oil-intensive technologies. Similarly, your last question is a good one. High vulnerability is not necessarily a bad thing, because it signals the economy has evolved. On the other hand, it does leave the country susceptible to a sudden increase in oil prices. Shanta

Submitted by Anonymous on
The comparisons of this blogs net oil importers are very striking. Oil vulnerability was lower in both periods than in the developing countries and it increased creased sharply between, due almost entirely to a very large reduction in energy intensity, since both oil import dependence and oil fuel dependence remained unchanged. Oil fuel dependency, which does not rely on natural endowments, can also be presumed low, indicated that relatively speaking that most countries was less dependent on oil as a primary fuel than the other regions.

Submitted by Dezio Banda on
Africa, most of which has economies which are agro-based, looks at oil as a crucial commodity. The use of oils in various day to day economic lives, coupled with its ever increasing demands for transport ( most countries has registered increased household car ownership for the past ten years) as human populations keeps on increasing mostly in southern Africa, calls for the need to reflect a while. Are some the policy makers in Africa aware that population projections for the coming ten years coupled by the project oil demands are likely to ofset resource allocations to csome of the critically needed areas such as child health and care, HIV/AIDS scourge, and even martenal mortality? Lets plan and strategise for the future as we consider this impending challenge!!!

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