How Petroleum Prices Impact African Countries
Written by: Elegbeleye Paul
The impact of petroleum prices on African countries has significantly influenced their economic growth or stagnation since the inception of the Organization of the Petroleum Exporting Countries (OPEC) in 1960. Over the years, the price trends of petroleum have been shaped by global events, market demands, and technological advancements. This article provides an overview of petroleum price trends over the decades and examines their impact on African nations.
OPEC was established in 1960 by five founding members: Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela, with the aim of coordinating oil policies and stabilizing prices. Throughout the 1960s, oil prices remained relatively stable at around $2.90 per barrel due to low demand and ample supply. Libya was the first African nation to join OPEC in 1962, followed by Nigeria in 1971. Other African nations, including Angola (2007), Gabon (1975; rejoined in 2016), Equatorial Guinea (2017), and Congo (2018), have since joined, each playing a unique role within OPEC and contributing to global oil production.
Oil price stability was disrupted during the 1973 Oil Crisis, when Arab OPEC members imposed an oil embargo on the U.S. and other countries supporting Israel during the Yom Kippur War. This led to a dramatic increase in oil prices, rising from about $3 per barrel to over $12 by 1974. In 1979, the Iranian Revolution further reduced oil supply, causing prices to spike to $39 per barrel by 1980. The oil shocks of the 1970s negatively affected the global economy, contributing to a recession. In the early 1980s, rising oil prices reduced demand, making it challenging for OPEC to maintain price control. Consequently, oil prices dropped sharply to around $10 per barrel due to oversupply, leading to economic challenges for oil-dependent African nations and prompting OPEC to reevaluate its production strategies.
During the 1990s, oil prices remained relatively stable, ranging between $15 and $25 per barrel. However, in July 2008, oil prices surged to an all-time high of $147 per barrel due to high demand and geopolitical tensions. Currently, oil prices fluctuate between $70 and $80 as a result of increased production and lower demand growth forecasts.
The fluctuations in petroleum prices have significantly impacted African countries, both as producers and consumers. Nations like Nigeria, Angola, Libya, and Algeria rely heavily on oil revenues, experiencing both economic booms and downturns in response to global oil price trends. The effects of shifts in petroleum prices on African countries can be observed primarily through economic dependency and exchange rate and inflationary pressures.
For many oil-producing nations in Africa, petroleum exports serve as a major source of government revenue and foreign exchange. When prices are high, these countries experience substantial economic growth, increased government revenues, and enhanced infrastructure investments. For instance, Nigeria relies on oil for about 90% of its export revenue; during periods of high oil prices, Nigeria has experienced rapid economic growth. However, during periods of low oil prices, these countries often face reduced foreign reserves, fiscal challenges, and economic instability. Angola, in particular, has experienced severe economic recessions during periods of oil price collapse.
Petroleum price fluctuations also influence exchange rates, especially in oil-exporting nations. When oil prices rise, foreign currency inflows strengthen local currencies, increasing purchasing power and reducing import costs. However, when prices drop, the currencies of oil-exporting nations often weaken, leading to imported inflation, higher consumer goods costs, and greater economic instability. For non-oil-producing African countries, rising petroleum prices directly increase fuel import costs, straining foreign reserves and raising inflation. This results in higher transportation and manufacturing costs that impact daily life and business operations.
Oil-producing nations face the challenge of balancing immediate revenue from petroleum exports with the need to diversify their economies and reduce dependence on oil. As the world increasingly shifts toward sustainable energy, African countries must adapt by investing in renewable energy sources to alleviate the burden of oil reliance. Places like Kano, Kaduna, and the trans-Saharan region could harness the potential of their favorable weather conditions for power generation, reducing dependency on fossil fuels for electricity.
With the world evolving, each African nation must strengthen its research and development centers to provide timely and adequate responses to the negative effects petroleum prices have on their economies.