Where Cheap Oil Is Seriously Bad News

Where Cheap Oil Is Seriously Bad News
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Crude oil has hit rock-bottom prices, and several African countries are getting the worst of it. Algeria, Libya, Nigeria, Chad, Angola and South Sudan are among the most oil-dependent economies in the world.

At the same time, these countries are facing some of the world’s most intractable security problems, and are relying on their petroleum-funded militaries to an extraordinary degree.

Nigeria and Chad are battling the Boko Haram insurgency and various other internal and external security threats.

Algeria and Angola are veritable dictatorships run by their military establishments. And Libya and South Sudan are embroiled in civil wars in which access to income from oil rents plays an important role.

“Oil prices are going to remain depressed for at least the better part of 2016,”Oladiran Bello, an African resources expert at the South African Institute for International Affairs, told War Is Boring. “That has serious implications for the existing economic model in all of those countries.”


Because of this, Bello argued, some of Africa’s oil-dependent countries face an increased risk of social unrest and internal instability. Nigeria, he says, “is the basket case.”


Local businessmen with political connections dominate much of Nigeria’s domestic oil industry. These men have huge economic stakes in—and are terribly vulnerable to—fluctuations in oil prices.


The local oil barons, “are those who fund elections in Nigeria and they make the political decisions,” Bello said. “So if the trough is drying out, expect some trouble. I see this as having a potentially cataclysmic effect.”


Nigeria is a special case, because the government and its military are currently preoccupied with fighting Boko Haram in the country’s northeast. The Islamist insurgency has killed thousands of civilians in indiscriminate massacres.


The oil-producing regions of southern Nigeria, which have their own history of violent insurrection, could also become more volatile. That’s increasingly a possibility if irregularities mar the country’s upcoming presidential election. Incumbent Pres. Goodluck Jonathan, a southerner, is running against northern candidate and former military dictator Muhammadu Buhari.


The Nigerian government is already slashing its budget left, right and center. As is Angola. Both countries have cut their oil price benchmarks, on which they base their government budgets, from close to $100 a barrel to $52 and $40, respectively.


As a result, the Angolan government has ordered most departments to cut expenditures by 50 percent, while government-owned companies have to reduce running costs by 30 percent and investments by half.


But the oil price shock hasn’t only thrown existing oil economies into disarray. Some countries, such as Ghana, have only recently begun exploiting their reserves, which recently became economical because of near-constant high prices.


Ghana, which has grossly overestimated its reserves, embarked on a spending spree which the government justified by future—and perceived—high oil prices. As in Angola, the Ghanaian government now has to cut back social spending, which could possibly lead to political unrest.


But while political stability in a range of African countries might suffer as a result of low oil prices, Bello said, military spending is the last thing these governments want to cut.


“In countries like Nigeria, Angola and Algeria, in a lot of the oil autocracies, the military is the first priority and has the first call on the public purse. The military budgets will likely see some trimming, but it will not be slashed as much as the other sectors.”


With well-equipped and well-paid security forces at their disposal, these governments will likely be able to suppress public demonstrations arising because of spending cuts. But if oil prices remain depressed over the long term, this model will become unsustainable.


Some observers see falling prices as an opportunity to democratize Africa’s oil autocracies. But Bello is skeptical.


“In theory, an economy that is less dependent on rents expands the space for democratic accountability. But the immediate impact of the current oil prices is to create austerity in a way that makes a lot of people unhappy.”


To be sure, there’s a real need to diversify economies like Nigeria and Angola. For one, a government that derives the majority of its budget from oil doesn’t have to be responsive to public pressure.


In a highly oil-based economy, drilling rights—like the arms trade—is often concentrated in few hands, which makes it easy for corruption to control the process and determine who gets what.


But diversifying an oil-based rentier economy is easier when oil prices are high—not low—according to Bello.


With more money to go around, economic reform is less likely to threaten entrenched elites, such as a crooked military establishment—that could resort to violent conflict to protect its financial interests.

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