trump

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.

Figure 1

Figure 1 – US crude oil production versus imports

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 (see Figure 2).

 Figure 2

Figure 2 – Percentage of crude oil imports from sub-Saharan Africa to the US

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.

Figure 3

Figure 3 – US crude oil imports from sub-Sahara African countries

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.

Another path to a similar scenario was initiated end of November, when the Organisation of Oil Exporting Countries (OPEC) finally reached a conjoint agreement on an oil production cut. After roughly two years of unsuccessful meetings, the cartel managed to reach a common ground as the oil prices did not show prospects of increasing anytime soon without intervention on the global oil supply. The group agreed on a cut of 1.2 million barrels per day, starting in January 2017 and with an initial time length of six months. This was a major compromise among oil producers as the last time OPEC implemented an oil production cut was eight years ago. The market promptly reacted and the price of the oil barrel jumped by 9%. An additional 600,000 barrels per day reduction, a result of natural production decline and direct production cuts implemented by non-OPEC oil exporter countries, will also weigh in during the same period.

However, countries are presently locked in a prisoners’ dilemma, each looking for their own best interest, which is to produce more oil while expecting that others will cut production. Hence, trusting that all parties will comply and cut their oil output is an ongoing discussion. In the 1980s, Saudi Arabia fell in this trap and cut domestic production while expecting other members of OPEC to follow suite. This did not happen. The Arab country saw its global market share of oil exports drop sharply, which resulted in 16 years of budget deficit.

Another point that affects the long-term prospect of an OPEC oil cut is that once crude oil prices start rising, oil fields that have higher costs of production and had to be shut down, could come back online. This is what happened in the past year in the US. The drop in oil prices made shale oil production unprofitable and many companies had to halt their oil pumping. Once oil prices rise to more than $60/barrel, these wells become profitable again. A scenario where oil prices become fairly stable above this threshold, will likely create conditions for the US shale producers to come back online, increasing global oil supply. OPEC, sensing an increase in US production, can decide to cancel the production cut accord on fears of losing global market share. In this scenario, oil prices could see another sharp fall.

The most likely scenario: low oil prices in 2017

Now back to the US, the nomination of Donald Trump to presidency was not the only important outcome of the recent elections. The Republicans also gained control of the Senate and the House of Representatives. For the first time since 2007, Republicans will control both the executive and legislative branches of government. This far reach of Republican power makes it very likely that Trump will be able to appoint a conservative Supreme Court Justice to occupy the vacant seat previously held by Antonin Scalia. This position of control will make it possible to have a majority ruling against the Clean Power Plan, which is being fought in federal courts and is expected to make its way to the Supreme Court in 2017.

A reversal of this plan means there are less incentives for clean energy and more relaxed regulations towards coal, oil and gas production in the US. However, with the environmental protection regulations lifted, coal becomes cheaper to produce than its counterparts. What appears at first as a stimulus to the oil and gas industry, is likely to do the reverse.

Another view that can be taken on the pro-drilling and less environmentally-friendly policies a Trump administration might pursue, is that oil companies will soon be able to explore areas in the US considered protected or off-limits during the Obama presidency. Some offshore fields, federal lands and possibly areas of the Arctic could be open season for oil hunting. Trump can also make it easier to obtain approval for pipeline construction. Any of these scenarios will make room for more oil supply, which is the key reason why oil prices are still low.

In the longer run, Trump’s plan to begin infrastructural projects in the US, if materialised, will certainly increase demand for oil. Having pro-oil policies in the US will open the door for a production increase. Nigeria, which once had the US as main customer for oil exports, may find new opportunities to reignite its upstream sector as past oil selling agreements between the two countries become attractive once again. Angola, on the other hand, has built stronger ties with China and has had the Asian power as its main crude oil buyer in the recent years. Hence, Nigeria is more likely to benefit from a hypothetical unmet growing oil demand from the US than Angola.

However, in the short run the international oil markets are still regimented by the most basic of the rules: supply versus demand. As long as supply is plenty, oil prices will remain low. Even in a scenario of growing demand for oil in the US, the past two years of low oil prices provided room for record levels of oil stocks in the main oil consumer countries. Exhausting these stocks will certainly come before the need of investing in new large oil production projects. Nigeria and Angola should focus on diversifying their economies and become less reliant on oil export revenues. That seems to be the most certain way to keep these countries from falling deeper into a serious economic recession.

This article was first published in How we made it in Africa on 9 January 2017.

Published:12 January 2017

 

 

 

NTU-SBF Centre for African Studies

 

50 Nanyang Avenue
Singapore 639798

 

(65) 6513 8089