Trump effect on African oil

Trump effect on African oil
OtavioVeras is a Research Associate at the NTU-SBF Centre for African Studies in Singapore

After the shock post November 8th with the results of the American presidential election, the world started studying what a Trump presidency in the US would mean to the international markets and geopolitical environment. Africa is one of the largest exporters of raw commodities to the US and will certainly experience changes in the trading dynamics with the world power once Donald Trump assumes his place in the White House, on 20 January 2017.

Among the raw products Africa exports, crude oil has a prominent place. The continent’s oil exporters had the US as its largest buyer of the product until quite recently. In 2005, the US imported 1.8m barrels per day of crude oil from sub-Saharan African countries. This figure remained fairly constant until 2010 when the US’s domestic production of the commodity reached historically high levels.

By 2015, the US was importing only 274,000 barrels per day from sub-Saharan Africa. The high revenues countries such as Nigeria and Angola extracted from oil, started to dry up. Could a Trump administration possibly revert this trend and propel the US to buy more of the African crude oil once again?

The African share in US oil imports

The oil price is regulated by a global balance between supply and demand. The drop in the price of oil from pre-2014 levels had oversupply as its main cause, fuelled by a large number of oil exploration projects undertaken on the idea that high oil prices would be sustainable indefinitely. New technologies allowed increasing rates of oil recovery, while fields that previously were deemed uneconomic, could finally become profitable.

The shale revolution in the US occupied a centre role in this stage. A combination of horizontal drilling, hydraulic fracturing and high oil prices created the right conditions for a boom in oil production one decade ago (see Figure 1). Since then, the market got swamped with new players. The oil industry became more attractive than ever and the US experienced a steady growth in oil production and an increasing independence from oil imports. In 2014, the US started producing more crude oil than it was importing, a scenario not seen since 1993.

Sub-Saharan Africa has typically contributed to a large share of the US crude oil imports. Until 2010, the oil exporter countries in the region accounted for more than 16% of the US total oil imports. However, growing domestic oil production in the US resulted in a continuous decline of the share of imports from sub-Saharan Africa. By 2015, only 3.7% of the total crude oil imports to the US originated from the region.

Nigeria and Angola have always had the US as a recurrent buyer of a large share of their oil production. In 2010, Nigeria exported over 950,000 barrels per day of crude oil to the US, accounting for over 10% of total US crude oil imports. By 2012, Nigeria was the largest seller of crude oil to the US. However, by 2015, Nigerian exports to the US plummeted to an average of a mere 57,000 barrels per day; now the country accounts for less than 1% of total US crude oil imports.

As US imports of Nigerian oil decreased, the share of Nigerian crude exports to Europe and Asia got larger. European imports of Nigerian crude oil and condensate increased year-over-year by more than 40% in 2011 and by 30% in 2012, making Europe the largest regional importer of Nigerian oil.

Although Nigeria’s oil revenue contributes only 10% of its GDP, it counts for over 80% of exports, making it the most important source of foreign exchange. Nigeria’s revenue is at its lowest level in more than five years as taxes and oil earnings dropped, making it more difficult for the government of Africa’s largest economy to pay public workers. Over the past decade, the large revenues originating from oil discouraged investments in other sectors. Agriculture is a key sector that got neglected. Currently, Nigeria spends over US$6.5bn per year on food imports.

Angola was the second largest exporter of crude oil to the US in sub-Saharan Africa. The country accounted for 5% of the US’s total crude oil imports between 2005 and 2009, supplying it with an annual average of 484,000 barrels per day during that period. Similar to Nigeria, Angola saw its volume of oil exports to the US steadily decrease. In 2015, the US imported 124,000 barrels per day of crude oil from Angola (see Figure 3), accounting for less than 2% of total American imports.

In Angola, crude oil alone accounted for around 95% of foreign exchange revenues in 2014, bringing $60.2bn in earnings to the country. In 2015, foreign currency inflow generated by oil exports was at $33.4bn, a 44.5% decline. Angola also became a net importer of food as it chose to develop its oil and gas industry to the detriment of investing in agriculture. Now the country imports 90% of its food at a cost of $5bn a year.

Both Nigeria and Angola face a tipping point in their history. Without a broader reform of their economies and diversification of investments to sectors other than oil and gas, these major sub-Saharan countries have already started to experience economic difficulties. While internal restructurings are under way, the change on who controls the most powerful country in the world is closely observed. Trading between the US and African countries may be affected. For Nigeria and Angola, where crude oil exports are the main source of revenue, understanding the impact a Trump administration in the US can have in the oil markets certainly becomes a question of great importance.

Understanding the drop in oil prices

At the same time the shale revolution was unfolding in the US, increasing the country’s domestic crude oil production, at the other side of the globe China was also experiencing a transformation. That nation, which for the past decades became the growth engine of the world, heavily importing raw materials to build major infrastructure projects, started shifting towards an economy more focused on services. Imports of iron ore, steel, crude oil and other basic materials stagnated as the building spree faded. For a world that used to rely on an ever-growing Chinese demand for these raw materials, stagnation meant recession. The oil price started sinking.

The final hit came in January 2016: sanctions against Iran were lifted and the country could sell oil in the international market. The oil price reached its lowest level since 2003. By middle 2016, Iran flooded the markets with an additional half a million barrels per day and drowned any hope that the price of the dark gold would make a great recovery any time soon.

Donald Trump impact

During his campaign, Donald Trump had repeatedly criticised the Iranian nuclear deal. In simple terms, the agreement stipulates that Iran would stop pursuing a nuclear programme with military objectives in exchange of having freed up tens of billions of dollars in oil revenue and frozen assets. The “disastrous deal”, in Trump’s words, “rewards the world’s leading state sponsor of terror with $150bn and we received absolutely nothing in return”. Trump said that correcting it would be his “number one priority”. That said, he had put several matters as number one during his campaign and since then, he has changed his mind on subjects considered “core” to his voters: his immigration policy of deporting 11 million illegal immigrants, which has now been reduced to a maximum of 3 million and only the ones with criminal records; and his shutdown on any Muslim immigration, which later in the campaign was moderated to the vague strategy of “extreme vetting”, to name but two examples.

Donald Trump may or may not try to dismantle the Iran nuclear deal. He certainly will have strong support at home as most Republicans were against the accord and now they occupy not only the White House, but also have the majority in the Senate and in the House of Representatives. Furthermore, the deal was not a US–Iran bilateral agreement. It involved the UK, Russia, France and China as well. Hence, an American withdrawal will not necessarily ruin the whole arrangement. However, the US could make demands such as insisting on tougher inspections in Iran and making them more frequent, which could, eventually, force Iran to pull out of the deal.

In this scenario of a broken nuclear deal and the resurgence of international sanctions in Iran, the world could see a stop in investments in oil exploration in that country, curbing its oil output and drying the oil glut the world has been living in since 2014. With less oil on the market, the price of the barrel would climb up again, benefitting all other oil exporters. http://www.howwemadeitinafrica.com/trump-effect-african-oil/

OtavioVeras is a Research Associate at the NTU-SBF Centre for African Studies in Singapore. He holds a bachelor’s degree in Civil Engineering from InstitutoMilitar de Engenharia (IME) in Brazil. Otavio also has a post-graduate degree in Oil and Gas Offshore Systems from Universidade Federal do Rio de Janeiro (UFRJ) and an MBA degree from INSEAD.

Otavio has 8 years’ experience in O&G and 3 years in Mining. Within the Oil and Gas industry, he held roles ranging from Structural Subsea Engineer and Project Manager to Business Intelligence Analyst. In Mining he worked as a Commercial and Logistics Analyst

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