An announcement by OPEC+ to cut production targets by 2 million barrels a day will be “extremely negative” for African economies, says Rita Babihuga-Nsanze, chief economist and head of research and strategy at the Africa Finance Corporation.
“Even countries that typically pass much of the oil price increase to their consumers will have to limit this, given the high rate of inflation and the cost of living crisis,” says Babihuga-Nsanze.
This will mean that some African countries may be forced to increase subsidies in order to decrease the burden on the population. “These countries will have to take a much bigger hit to their fiscus at a time when they are already under major stress,” says Babihuga-Nsanze. “It is an extremely negative situation.”
Fed interest rate hikes in the last few months have had a knock-on effect in Africa, forcing a number of central banks across the continent to hike interest rates to tame spiralling inflation.
On 22 September, the South African Reserve Bank (SARB) raised its repurchase rate by 75 bps to 6.25%, while in Nigeria, the central bank raised interest rates to 15.5%, up by 150bps to contain inflation.
The announcement by OPEC+ to cut production at a time of rising import costs for Africa may limit inflation control, as the reduction of global oil stock pushes up prices for oil importers.
According to data collected by Statista, Nigeria is one of the largest importers of oil in Africa and imported an average of 465,900 barrels of oil each day in 2020. Morocco imported – on average – 240,000 barrels, Egypt 149,000 barrels and Angola 134,000 barrels.
However, reducing output by 2 million barrels a day – the equivalent of around 2% of global production – may not have such a devastating impact on African oil importers, explains Razia Khan, chief economist and head of research for Africa at Standard Chartered Bank.
“We know that a whole range of OPEC producers, including most of the African producers, were not able to produce to the level of their production quota,” she says. “De facto, this means that OPEC is cutting much less than the stated 2 million barrels a day.”
In Nigeria, for instance, the country’s output allocation as laid out by OPEC is 1.8 million barrels a day. Historically, production has fallen short of this, with OPEC recording output for September 2022 at 972,000 barrels a day.
What happens in China and its oil demand is a central part of the debate
“[…] I don’t think we can say that OPEC is cutting big, and I think it’s even less probable that we can say with any kind of certainty that this will drive oil prices significantly higher, given the broad dynamic of a slowing global economy and global oil demand,” says Khan.
Demand for oil in China – the world’s second-largest oil consumer – is estimated to fall by 420,000 barrels a day (2.7%) this year, according to a report in September by Bloomberg, which cited the International Energy Agency, as a new wave of Covid-19 lockdowns stifles growth.
“What happens in China and its oil demand is a central part of the debate,” says Khan.
The Africa Report
