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By Kwesi Atta Sakyi 22nd December 2014
Oil is a big money spinner, yet it is a commodity with many socio-politico-economic ramifications. It is one rare commodity with many derivatives and complex composite demand. The volatility of the oil market is proverbial and well-documented.
Petroleum Economics must be one very interesting field to study. I presume it comes with a multiplicity of knowledge fields and affinity to such fields as geopolitics/international relations, geophysics, geography, geology, understanding the politics and psychological behaviour of cartels, oligopolies, indeterminate and imperfect markets, oil syndicates such as OPEC, Game Theory and Monte Carlo simulations, Prisoners’ Dilemma, von Neuman’s Probabilities, information asymmetry, among other variables.
(I myself, having studied Economics, Geography, Public Administration, Statistics, Psychology, History, Government, Business Management, OrganisationBehaviour, Business Strategy,among others, I understand some of these challenges. Besides, I have friends who are professionals and academics in Geophysics, Geology, Chemical Engineering,and Stevedoring on oil rigs, among others).
In this article, I will adopt as usual an eclectic and overarching approach of weaving a backdrop of pertinent issues before zeroing in on the specifics of the title as regards the economic effects of the fall in oil price on the economy of Ghana. The analysis is multi-disciplinary in approach, and it can be applied universally.
Socially, oil has created wealth for some small class of entrepreneurs; while on the other hand, majority of people in communities have experienced economic alienation and social fragmentation from the negative social costs of oil extraction, in the form of disruption to their traditional communal life in the rural areas. Some communities have had their farmlands taken over by mining giants, and others have been forcibly ejected from their original settlements, and have been relocated, of course with some form of compensation relative to their bargaining power and negotiation skills.
Where oil wealth has not been evenly distributed in the nation, some poor communities have agitated for the relocation of oil facilities, away from their traditional land, and some opposition political parties have cashed in on such situations to gain political mileage, by championing the cause of such marginalized communities. In the Western Region of Ghana for example, some traditional rulers have expressed their wish to the Ghanaian government to be considered for receiving special oil royalties.
Oil exploration in Ghana was intensified in the 70s under late Col. Ignatius KutuAcheampong’s time as head of state. Of course, decades before that, the Ghana/Gold Coast Geological Survey Department had not been sleeping on their oars, as geological maps of mineral deposits in Ghana were always produced and constantly updated. They had a department in Saltpond, with their headquarters in Accra.
It started with the Saltpond offshore pond which did not prove to have substantial hydrocarbon geosyncline formations. Then in 2010, under former President, John AgyekumKufuor’s reign, oil was found in commercial quantities at Cape Three Points at the western extremity of Ghana, near Axim. We are grateful to ex-President Kufuor for his adroitness, tenacity of purpose, and industry for bringing off that exceptional feat during his reign. Whether circumstantial or not, the fact remains that the first gush of oil from the wells occurred under his watch.
Geologists and Geophysicists believe that among the various rock formations in Ghana such as the Birimian, Tarkwaian, and Voltaian series, the latter holds great prospect as the Afram plains bordering the Akwapim-Kwahu-Kintampo-Atewa Escarpment on the west, and the Djebobo-Togo-Afajato-Attakora Mountains on the east, and the Northern Ghana Plateau on the north, we should expect some geosyncline of hydrocarbons onshore, on the Great Volta and Afram Basin.
It is believed that the complex fault lines on the edges of this vast basin will make oil extraction very difficult indeed because of geophysical considerations of isostasy, and diastrophism. A Ghanaian friend of mine, who is a geophysicist, now living in the UK, took part in most of the early surveys to locate oil in Ghana, and Ghana owes a huge debt of gratitude to such gallant patriots who spent years in the wild doing their work. He is now a global consultant in geophysics.
Petroleum Economics also involves understanding the many derivatives of oil and their demand implications and interrelationships, and understanding the demand and supply mechanisms in a free market. It also involves using Herfindahl’s Index on a scale of 0 to 10,000 to determine market structure and dominance by the top 4 or 5 firms, knowing about composite and derived demand, understanding the externalities created by the oil industry, inter alia.
Furthermore, it involves getting to grips with sophisticated statistical and mathematical forecasting models, knowing the science and technology as well as the cost structure of oil extraction in the geosynclines under the seabed on the one hand, and on the other hand, getting to understand onshore drilling in difficult terrain such as the deserts, under the polar ice-cap in Alaska, Siberia, Canada, the use of advanced computer simulation to map underground layers containing trapped oil, inter alia.
Dr Philip Emeagwali, a Nigerian-born scientist resident in the USA, did the fastest calculation in history with his interconnected computer project for his Master’s project in the USA at Michigan University, and he contributed immensely to optimization of oil mining, with his contribution even impacting heavily on satellite imaging and telecommunications, among other applications.
In the early days of oil exploration in the Wild Wide West in California, and in south central USA in Texas in the 19th century, there was massive land speculation, wildcatting, turf wars, wheeling and dealing, amidst cowboy-style gun fights among the oil moguls and tycoons. Many were the boardroom deals and sharecropping for prime oil land. The technology then was crude and basic. Those who struck oil after long marches and exhaustive exploration on horseback and in wild track caravan wagons, celebrated it in the most unusual and dramatic ways, amidst long days of celebration in drinking sprees and sex orgies, inter alia.
Oil extraction calls for big business investment in capital outlay, insurance coverage, risk management; financial analysis and market hedging, efficient capital markets, forward and spot markets, buffer stock inventory management, logistics and purchasing and supply management, human resource management, inter alia. The oil industry employs millions of workers around the globe, and some of the giant MNCs include BP, ExxonMobil, Shell, Gazprom, Agip, Texaco, Petrobras, Chevron, Total, among others. Many of these are household names in Ghana.
Oil is a fossil fuel and a wasting or diminishing asset. This is why we in Ghana should be prudent in managing our oil revenues, and desist from having high expectations which make us seek gargantuan loans with oil collateralization. Oil is as dirty a fuel as coal, in terms of environmental pollution from gas flares, oil spillages, among others. This is why our government in Ghana has to pay attention to the people in the Western Region where oil is drilled offshore. The oil drilling companies there have to do their due diligence, corporate social responsibility, environmental impact assessment, among others.
This is why proceeds from oil should be well managed on the Norwegian model for example, to benefit future generations, and to avoid contracting and leaving a legacy of generational or deadweight debt, among other unnecessary unintended consequences. For example, experience elsewhere shows that disruption of livelihood of residents in oil-producing areas can cause untold hardships and effects on activities such as fishing and farming. This can have political and social repercussions. The residents in such areas may need quality infrastructure, and some form of mineral royalty compensation.
Oil extraction is a highly complex and capital-intensive venture with high risks, so much so that it is an industry which has high entry barriers, and only a few heavyweights engage in its many facets across the supply chain from exploration, extraction, to transportation of crude to the refineries, and petro-chemical industries for the fractionating process in the downstream end, to the distributors who stock and supply the many derivatives. The oil and gas industry is a multi-billion dollar value adding and supply chain industry, which employs millions of people across the globe. Thus its multiplier effects are incalculable.
Will it be right to paraphrase and state that when the oil industry sneezes, the whole world catches a cold? Sure it does. This is because the whole world economy runs on oil and gas. For example, oil and gas produce energy for electricity in power plants such as the thermal electricity plant at Aboadze near Takoradi. Many Ghanaian homes and businesses now have stand-by generator sets because of the unreliable supply of electricity from the national grid. Thus the prices of petrol, diesel, gas and other petroleum products should be costly because of high demand on the one hand, and cheaper on the other hand because of the current oversupply by the producers, notably Saudi Arabia, USA, Canada, Russia, Iran, Kuwait, Indonesia, Malaysia, Iraq, Sudan, Angola, Libya, Mexico, Venezuela, Nigeria, UAE, among others. Other non-OPEC producers skirt the North Sea in North Atlantic.
The current glut, surfeit and over-production of oil and its derivatives has been put down to several factors such as vast improvement in extraction technology; discovery of new fields in Ghana, Uganda, Kenya, Sudan, Liberia, among others. Other analysts have made the assumption that the fall in oil price could either be partly due to a strategy of quantitative easing by the US to reduce the cost of doing business, by convincing its allies to lower prices, or it is an attempt to squeeze Russia as part of the economic pressure being applied on her over the Ukraine imbroglio.
It is also believed that some OPEC member producers have released their oil reserves into the market to cool off the over-heated global economies which are reeling under slow GDP growth, massive unemployment, unbridled inflation, cash-strapped economies of the PIGS (Portugal, Ireland/Italy, Greece, Spain), among other woes. The current oil price fall is due to a welter and gestalt of factors, too complex to isolate. China and Japan are major consumers of most global commodities, but with a slowdown in their economic growth, oil demand has also slowed down behind supply.
The negative effects of oversupply of oil are absorbed by the oil-rich countries by falling on their past foreign exchange reserves. This could and would impact negatively on the money and capital markets as credit will be tight and interest rates will go up. This is because the money-bags who normally lend to the multilateral financial institutions (MFIs) will cut down on their loans to them.
This period therefore is neither a good time for the Ghanaian government to borrow from the international money markets nor for raising loans from the IMF. Rather, concessionary bilateral loans should be preferable, and sought from friendly countries. This is the time that interest rates go up and the cost of borrowing from the international markets goes through the roof. However, long term investment assets such as bonds and shares should be relatively cheaper to negotiate and access, though we should bear in mind the time value of money, and our national priorities.
The rich oil producers in the world, mostly in the Middle East, plan for such circumstances by diversifying into service industries and buying shares in many businesses abroad. Therefore this is the time for the Ghanaian authorities to court the rich oil sheikhs to come and invest in Ghana in areas such as tourism and hospitality industry, aviation, real estate, tertiary education, pharmaceuticals, energy generation or construction of electricity power stations, ICT, inter alia. The rich oil countries have over the years accumulated vast strategic foreign reserves against such variations and vicissitudes in their oil fortunes.We cannot say the same for Ghana as our oil industry is in its embryonic stage, while others have reached maturity in the industry life cycle.
In terms of Ghana, our oil fields are producing very small amounts of about 100,000 barrels a day, compared to Nigeria’s 2 million barrels a day. Oil field investors may find it uneconomical now to drill some new fields or continue working some existing ones which have complex formations and high cost structures. This is especially so for offshore fields, and operations may be scaled down for some time, until the price shoots up again to beyond the 80 dollar mark. This could take between six to nine months from now before the price stabilizes around the 80 dollar threshold. High sunk costs and the high cost of capital make oil ventures very risky business.
This will create some temporary unemployment and loss of business for some local and foreign suppliers. Thereis a burgeoning middle class in Ghana, and this is the group which has to take advantage now to expand their businesses. The burgeoning of this middle class around the globe means increased demand for cars, quality infrastructure such as roads, quality shopping malls, among others. This huge class portends a high growth in the construction and service industries in the near future; therefore a firm prospect exists for theseindustries. However, a threat could come from the hybrid cars and alternative fuels being developed as substitutes, such as ethanol, hydrogen, electric cars, but these are not going to be feasible until some 20 to 30 years to come.
The rising levels of the middle class around the globe will in the long run lead to increase in demand for fuel, thus in the near future, after equilibrium is restored in the oil market, demand will overtake supply. Prices may go up again. This spiral or cycle goes on and on in line with the oscillations in the rhythm of the global trade and business cycles. My own estimation is that this dip in oil price will not go beyond three consecutive quarters, meaning that prices should be looking up from between June and September 2015, going forward. We could use lagged, coincident, and lead indicators to forecast the trends in demand and supply, not forgetting the PESTLE factors.
With this favourable drop in oil price for consumers, the government of Ghana should exploit the opportunity to be proactive, by buying a lot of oil to store as strategic reserves against future rise in price. This is the time to build underground storage tanks in the regions of Ghana. Perhaps, the Ghana National Petroleum Company (GNPC) will rise to the challenge by taking a cue from some countries such as the USA where they have strategic oil reserves.
Since June 2014, the price of crude oil has been on a roller-coaster downward slide which has seen a fall from 120 dollars a barrel to about 61 dollars, about 50% decline in price. This has caused monumental repercussions and ripples around the world, affecting every human being for good or for worse. Some economies such as those of investors in oil-related businesses, and oil producers are affected adversely on the one hand, and favourably on the other hand because it reduces considerably the cost overall in non-oil producing countries, hence helping to grow the economies which are recovering from the global economic crunch of 2007 to 2010. This dip in oil price is a fleeting window of opportunity for emerging countries to grab, and be on the mend economically.
It is now a buyers’ market as consumers of oil and gas should experience considerable savings on their oil and gas bills. This will boost car sales, increase demand for non-oil and gas goods, and relieve pressures on the budgets of poor countries. After all said and done, oil has inelastic demand, and we cannot run away from it.
Major consumers of oil such as China and Europe have experienced some slow growth in the past three to four years, and as measures are being taken to turn round the decline, we expect a surge in demand in the near future, especially in Japan, India, and China. Also with increasing global warming and freak winters in the advanced countries, demand should bulge, with prices going to go up again no sooner than later. On balance, Ghanaian consumers stand to gain from the drop in oil price, despite the government’s reluctance to restore fuel subsidy and reduce the fuel levy.
Macro-speaking, our new oil industry will face hiccups in terms of continued investment in petro-chemical infrastructure via FDI. Hopefully, the slump in oil price should be ridden out in no less than nine months from now. Inflation of 16.8 % should come down, all things being equal, hoping also that transport fares will fall, and prices of farm inputs like chemicals and fertilizers should fall, theoretically speaking.
What we in Ghana should seriously guard against is contracting the Dutch disease or abandoning our mainstay, agriculture, and not diversifying our economy because of our oil find. I remember that in the 60s in our geography textbooks, we used to see pictures of groundnut, cocoa, and palm kernel pyramids in Nigeria, but when the oil boom occurred in Nigeria in the 70s, many people abandoned their farms and trooped to the cities to chase the mirage of acquiring oil contracts and deals.
We need to guard against such in Ghana. Our government in Ghana should streamline our energy sector, and cash in on this low oil price to make life bearable for Ghanaians. They also need more doses of fiscal and monetary discipline in this auspicious time. The NDC economy-minders should tweak the 2015 budget to give some respite to SMEs in Ghana so that they have some economic space to manoeuvre and grow. This could be in the form of giving tax concessions, government grants, and reducing overall the cost of doing business in Ghana.
In conclusion, the global oil price fall should provide a breather and catalyst to the Ghanaian government to put its house in order, and we should avoid catching the Dutch disease whereby we tie all our fortunes to oil revenue. There is need for diversification into agriculture and lucrative service industries such as finance, education, transport, tourism, and ICT. We should exploit current fleeting opportunities by building reserves, and striking the iron while it is hot. The chance is ours to exploit, by riding on the crest of this tsunami-like wave and the chink in the geopolitical and economic curtain.
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