Africa’s record using non-renewable oil and gas resources to trigger economic and social development is poor – and plummeting prices may portend more instability to come.

Persistent Inequality, Instability

Poverty and income inequality have remained high in the largest and oldest petroleum producers on the continent. A 2008-09 household survey in Angola revealed income distribution among the most unequal in sub-Saharan Africa, with the top 10 percent of earners accounting for one third of total income. In the case of Nigeria, while income per capita has more than quadrupled since 1990, the proportion of people living in acute poverty has stayed stable at more than 60 percent. Politically, most established African oil states are characterized by weak or absent democracy and either long-standing leaders or violent internal conflict.

2015 will present additional challenges. In early January 2014, crude oil averaged more than $100 a barrel; a year later it has fallen to $50. Gas prices typically follow the same trend. There is an emerging consensus that prices will stay low at least through the next year. If U.S. oil and gas output proves highly sensitive to price and drops sharply, if OPEC cuts output, and if China – the world’s largest market – somehow solves its water supply issues, then low oil prices could be short lived. But absent these developments, low prices could be around for several years.

Austerity for National Budgets

Economic consequences for states dependent on oil and gas could be a sharp decline in government income and foreign reserves alongside a reduced ability to borrow against future revenues. Africa’s two largest oil producers, Nigeria and Angola, are in worse financial shape now than in 2009, when prices last dropped sharply. Compared to 2009, Nigeria has far thinner savings and foreign exchange reserves. Angola’s new sovereign wealth fund, launched in 2014, is equivalent to just one month’s import bill. A new lower national budget is already being prepared.

The austerity that falling revenues will induce in oil dependent states is likely to further weaken already-fragile social safety nets. The pace of new investment in oil and gas will also slow. This is particularly likely to affect expensive offshore oil and gas drilling as well as onshore projects that require costly pipelines.

Challenges to Authoritarianism?

Political fallout from economic problems is likely to follow in some states. One possible scenario is that authoritarians will falter in the most established regimes. If currency devaluation makes imported basic foods more expensive and challenges from the privileged elite mix with popular protests in large cities, then countries such as Angola, Chad and Gabon could face their equivalent of the Arab Spring.

In already-unstable states the end to the oil bonanza will reduce the financial prize that oilfields or stolen oil represent and could reduce the resources available for weapons and ammunition. For South Sudan this could help take some of the heat out of the on-going civil war. In Nigeria, however, while lower prices could reduce incentives for large-scale oil thefts, they may also reduce funds available for security forces, exacerbating the government’s problems with Boko Haram.

In East Africa, where oil and gas development is still in the nascent stages, there’s potential for positive repercussions. The fall in prices will likely slow decisions by companies on when and how to develop these resources until they have a better sense of the long-term returns from their multi-billion dollar investments.

In Tanzania, a mix of unrealizable public expectations for rapid benefits from gas plus distrust between companies, government, and citizens will likely lead to fevered debate in this year’s elections. But by creating a broad recognition that oil and gas are an unstable basis for the economy and creating the space for more attention to be paid to other sectors, falling prices could actually be productive. It also affords more time for resolution of the complex issues around how future hydrocarbon wealth will be used.

For international organizations active in Africa’s non-petro states, falling prices may be beneficial as resources previously used for oil imports become available for development spending. But those states that depend on exports of oil and gas are likely to experience increased instability and political risk alongside new demands from governments and civil society for financial support and assistance in delivering basic services.

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