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Crude Economics
Price Plunge Stunts African Oil Output

Cheap crude is great if you’re a buyer, but if you’re an oil company or petrostate it’s a nightmare. With oil trading below $50 per barrel, down from $110+ a year and a half ago, oil companies are busy cutting capital expenditures and shelving higher-cost, higher-risk projects to stop the bleeding. That’s hitting Africa especially hard. Until prices took a nose dive, the continent appeared to be heading towards a mini hydrocarbon boom. Bloomberg reports:

“Capital markets are effectively closed to the oil and gas industry” in Africa, Tony Hayward, former head of BP Plc and now chairman of Genel Energy Plc, said at a conference in Cape Town last month. “A decade of exploration, with billions of dollars invested and only limited commercial success.”

When six of the 10 biggest global oil discoveries in 2013 were made in Africa, it underlined the potential of the energy riches that had lured companies from Royal Dutch Shell Plc to Exxon Mobil Corp. Governments have been slow to react as the slump in crude makes the royalties charged from Libya to Angola look punitive. African production, already 19 percent below its 2008 peak of 10.2 million barrels a day, is set to drop for a third year.

There’s a temptation to call this a bust, just as there was a temptation to overhype Africa’s oil fortunes before the price plunge. Our own Walter Russell Mead has discussed the tendency to view the continent in one of two ways: either as one of the 21st century’s emerging giants poised for a development breakthrough, or as a part of the world plagued by poverty and bad governance. It would be a mistake to embrace one of these perspectives exclusively, as both ultimately contain truth.

Dimming oil prospects in today’s bearish market aren’t welcome news for Africa, but neither do they doom it. Again, we’re reminded of the far-reaching effects of an oversupplied oil market.

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  • Jim__L

    Oil in the ground is money in the bank. It’s not that hard to come up with ways to use energy profitably, and once more of these come online things will pick up again.

    If there are fire-sale prices to be had, this sounds like a good opportunity… as long as rule of law is respected.

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