What a war against Iraq will mean to Africa

OIL AND GAS

What impact will a war against Iraq have on the African oil sector? Who will be the winners and who will lose out? How will this affect African economies? Here are some answers.

With the barrel price of oil substantially above the $30 level, there are undoubtedly many more losers than winners on the continent. Only 10 or so countries are net exporters, with the remaining 40 or so states importing more oil than they export. While major producers such as Nigeria, Angola and Algeria are benefiting from rocketing revenues, net importers such as Kenya and Ghana are suffering from an ever growing fuel import bill.

The question is what impact will a war against Iraq have on African producers and importers. There might be rich pickings for some. Taking Nigeria as an example, a sustained period of high prices could save the Nigerian economy from a major downturn. Government spending has increased markedly over the past year, while oil revenue growth has been weak as the result of Opec quota restrictions and lower than anticipated prices over the past two years. Yet the current crisis in the Middle East has not only allowed speculators to boost the price of crude oil but it could enable Opec to loosen the strings a little more and increase quotas for all member states.

A high oil price for the first six months of this year would reduce or eliminate the Nigerian budget deficit, at least for this year. This would put the Obasanjo government in a relatively healthy position should it enter its second term of office following the April elections - or provide a new government with a sizeable legacy.

In the longer term, the budget deficit needs to be corrected, although with oil production expected to rise to 3m barrels a day (b/d) over the next 18 months, rising revenues may rule out the need for spending cuts. How this will fit in with Opec quota plans, however, remains to be seen.

The high oil price has also come at a good time for the Angolan government. With peace gradually taking a hold in the country, increased revenues are desperately needed for investment in reconstruction projects from road building to power and water sector schemes and even the overhaul of the country's main railway line.

As a non-Opec member, Angola is lucky that it is able to make the most of production capacity which has now topped Im bld and which should reach 1.5m bid by 2005. Rising production coupled with a $30-35 per barrel will enable substantial investment in civilian projects, if the government chooses to utilise its bounty for the benefit of the bulk of the population.

Algeria and Libya will benefit from higher revenues at a time when they are pursuing similar strategies, albeit from a very different starting point. Both hope to use hydrocarbon revenues to diversify their economies and both hope to make the most of a liberalised European Union gas and power market. Although Opec quotas prevent crude oil production from rising too steeply, multibillion dollar gas export projects have encouraged rapid gas sector expansion.

Other African oil producers such as Gabon, Congo-Brazzaville and Cameroon will also welcome the higher revenues in their efforts to balance the books and support diversification, while the high oil price should ensure that Equatorial Guinea's succession of staggering economic growth rates is maintained. Rising production and revenues are providing the government of that country with higher incomes than many ever dreamed was possible. Again, it will be interesting to see how the money is spent.

WHEN THE BOMBS START TO FALL

All these producers will be keeping a keen eye on movements in the oil price if war in Iraq does begin, as the markets may breathe a collective sigh of relief once the bombs start to fall. The oil price has been fuelled over the past year by ignorance as much as anything else, as nothing is guaranteed to boost prices as much as uncertainty. Once war has broken out, that uncertainty will be removed and oil traders can begin to assess the impact.

There is likely to be a halt in Iraqi oil exports for a short time but much depends on whether the retreating Iraqi forces are able to put oil wells out of action in the same way as they did during the invasion of Kuwait. If Iraqi exports are greatly reduced for an extended period, then the oil price is likely to remain high, while all producers will have an added incentive to increase output.

FOR EVERY WINNER, FIVE LOSERS

For every African winner, however, there are five losers, as oil imports comprise a major slice of most African countries' expenditure. Oil and refined petroleum products are imported to fuel vehicles but also as a power plant feed-stock. Many African states rely heavily upon oil fired power generation and the difference between an $18 and $35 barrel price can translate into the difference between a balanced budget and crippling debts. Many national debts grew markedly the last time the oil price remained stubbornly above $30.