The Coming “African Boom”

With the wars in Iraq and Afghanistan winding down, the Horn of Africa has emerged as the new base for global terrorism uprooted 12 years ago in Afghanistan.

As American politicians depict a future of peace to their war weary population, European leaders have taken a decidedly more militaristic tone towards extremism in the region. Only one day prior to Obama’s Inaugural address, Britain’s David Cameron, in response to French military intervention in Mali and the subsequent Algerian hostage crisis, described the Africa’s Islamists as a “large and existential threat” that would require a response “that is about years, even decades, rather than months”.

As Western leaders pivot their military might onto a region mired in radicalism and political instability, this blog is largely concerned about the implications for African development and the future of oil security and energy growth in the region. Such instability threatens what many have referred to as the coming “African boom,” economic growth fueled in large part by the rise of oil exports and revenue.

“Each year, in the oil sector alone, a major new discovery is heralded, from Ghana to Uganda and most recently Kenya, pushing Africa’s share of world oil reserves to 10 percent. African oil production growth has already been the fastest in the world over the past 10 years, all of it in sub-Saharan Africa (SSA). Africa now produces 10m barrels a day, as much as Russia or Saudi Arabia, with the 6m barrels of SSA alone worth $235 billion of oil revenue annually or 20% of 2011 GDP. Renaissance expects volume increases to ensure this tops $300 billion even with no change in oil prices by 2019….Nearly a trillion dollars of oil revenue every three years means unprecedented inflows of foreign exchange to fund imports of investment and consumption goods. Rapid economic growth means growing African demand for resources.”

Will energy companies continue to invest in oil production in the face of instability and security concerns after Mali, Algeria, and the continued deterioration in Libya? The most recent attack on Algerian oil fields and the ensuing hostage crisis was grand in scale, but not unique to the area or oil companies. It is said that where there is oil, there is conflict. In fact, militants have a long history of targeting oil installations because they represent high profile targets symbolic of political and economic might. In 2004, Bin Laden specifically citied oil installations as a legitimate target of war, because their damage would result in both economic pain and higher oil prices to U.S. and European markets.

This tragedy is not unprecedented, as there has always been a bit of high risk/high return for investors in the region. The question is how markets and potential investors will react to the North African upheaval. History and recent indicators suggest acts of terrorism will result in heightened security over key oil installations, rather than a reduction of foreign capital and reduced investment into the region. The promise of African oil provides incentive for companies to safeguard and continue to invest in the region’s future.

The importance of securing energy production in a developing country cannot be overstated in terms of future growth.  Talks regarding Algeria at Davos provided a clear look at how world leaders are looking once again at issues of security and investment in Africa. The World Economic Forum’s focus on sustainable development, energy infrastructure, and security lead European leaders to conclude:

“The energy sector constitutes a relatively modest share of GDP in most countries, except for those in which oil and gas income loom large. However, the energy sector’s impact on the economy is greater than the sum of its parts. Most importantly, almost none of the economy’s goods and services could be provided without it. Thus, stable and reasonable energy prices are needed to reignite, sustain and expand economic growth.”

How energy markets and foreign investors react to the threat posed to economic growth through radicalism will determine the future growth of Africa, and produce either an economic or a literal ‘boom.’ The immediate reaction to the Algerian crisis has produced a wait and see attitude on the part of investors, which has been perceived as a hopeful sign for continued development in the region.  This response suggests companies may not walk away from the region as the perceived risks of investing in future projects fail to outweigh the promise of development and economic growth. How energy markets respond to the challenges of continued economic growth in “an arc of instability” will reverberate across the international development field.

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