Energy is often credited with shaping human civilisation. In the second instalment of our series on the Russian invasion, we discuss the energy implications of the conflict in an energy reliant globe and how it has shaped Africa’s response to same.
Our ancestors’ discovery of a means to control fire several millennia ago was inarguably one of the more momentous occasions in the history of our species. The discovery of fire marked the recognition of mankind that we could manipulate elements which existed in nature to serve as a supplementary source of energy to the food which activated our manpower and girded the foundations of civilisation.
Since then, coal’s powering of the industrial revolution has cemented the marriage between energy use and economic growth and the status of energy as the “only [truly] universal currency” in an increasingly globalised financial system.
Now, whiles efforts are rife to decouple energy consumption from economic growth (a rather imprecise description for a push to use less energy in production), these efforts are a work in progress in developed countries and largely an afterthought in Africa where the priority remains ensuring continent-wide access to affordable energy. In this context of an energy reliant globe, it is important to note the countries that produce the dominant types of energy used i.e. fossil fuels, where the fossil fuels produced are used and the extent to which these fuels are used elsewhere.
The answers to these questions are crucial as they provide insight into the economic situation of these countries and importantly the impact of their fuels to other economies as this has enormous political consequences for the countries involved and to a broader extent, the international order. It just so happens that the Russian Federation is one of the largest producers and exporters of oil and gas and the Kremlin has been eager to cash in on every ounce of political leverage their position offers them.
As the third largest producer of petroleum (behind the United States and Saudi Arabia) and the second largest producer of natural gas (behind the United States), Russia has been long identified as an “energy superpower”. However, unlike the United States where a majority of fuels produced goes to domestic consumption, Russia exports energy in very large quantities. To wit, of the 9.9 million barrels of crude oil produced per day in 2020 by Russian companies, almost 5 million b/d was exported to other economies notably in Europe (48%) and Asia/Oceania (42%).
Similarly, over 7 trillion cubic feet (Tcf) of the 22.5 Tcf dry natural gas Russia produced was used largely in Europe (72%). As a result, the economy of the European Union depends on Russia for 40% of its natural gas and over 25% of its crude oil.
Whereas Russia’s annexation of Crimea in 2014 stressed the need for the EU to reduce its dependence on Russian energy, the Union failed to sufficiently wean itself off Russian oil and gas before Russia’s invasion of Ukraine. The European Union has therefore been placed in an uncomfortable situation, having to on the one hand, unequivocally condemn the actions of the Kremlin and on the other hand, continue to use Russian energy to power their factories and warm their homes.
Unfortunately, whiles rising oil energy prices have provided a boon to oil exporting economies, Sub-Saharan Africa has largely been unable to capitalise on the spike
In effect, the EU has joined forces with the United States and other G7 countries to collectively revoke Russia’s Most Favoured Nation status which exposes Russia to higher tariffs and severe quantitative restrictions on imports in those countries. The EU has further imposed no less than five rounds of sanctions against the Russian state, virtually all sectors of the Russian economy and targeted individual sanctions on prominent members of the government including President Putin and Foreign Minister Sergei Lavrov.
In addition to the aforementioned Temporary Protection Directive, The Union has additionally entertained calls for “a new special procedure” to accelerate Ukraine’s accession to the EU and has since sent the EU membership questionnaire to Ukraine which in turn submitted the final part of same to the EU Commission on 9th May, 2022. Even Germany, a recipient of 16% of Russia’s petroleum exports and 11% of its dry natural gas, has indefinitely suspended the certification of the Nord Stream II pipeline, a second pipeline which directly connects Russian gas to Germany without recourse to transit pipelines in Ukraine and Belarus.
Nonetheless, the Union continues to buy Russia’s energy and has sent contradictory messages on its short-term intentions for same. The EU currently faces strong internal opposition from countries like Hungary over a proposal to place a total embargo on Russian oil within six months. Moreover, after a two-month standoff, the EU has acquiesced on its position barring European companies from buying Russian gas in roubles thereby undermining its own sanctions on Russian banks. In effect, Europe is propping up the value of the Russian rouble and providing a daily 1billion USD to fund the Kremlin’s war effort in Ukraine, the same war Africa is said to have been mute about.
This has played out against the backdrop of an international energy crisis which has seen a dizzying surge in the price of crude oil all over the world. Even before the invasion, strong demand for oil occasioned by a strong economic rebound from the pandemic caused inflation in the price of crude oil, stoking fears that will brent will exceed the $100/b threshold during the first quarter of 2022, well beyond the US Energy Information Administration’s projection of $66.64/b for the year.
Within days of the invasion, this fear was realised and by March 8, the price of brent had spiked to $133/b, the highest since before the 2014 oil price crash. The impact of these spikes has been so massive that it has catapulted the Saudi Arabian state-owned energy giants, Saudi Aramco, over Apple as the world’s most valuable company with a market cap of about $2.4 Trillion.
Unfortunately, whiles rising oil energy prices have provided a boon to oil-exporting economies, Sub-Saharan Africa has largely been unable to capitalise on the spike, despite being a historical exporter of fossil fuels which accounts for 48.5% of total exports from the region between 1995 and 2018. This has been due to a myriad of factors including an inability on the part of African energy producers to scale up production to fill the vacuum, despite producing almost exclusively for exports, due to deficits in their production capacity.
Additionally, owing to substantial foreign ownership of energy sources in the region, this boon has neither ramped up the revenue of regional governments. The effect has been importers spending a considerable expense on fuel imports, a cost which has been passed on to consumers. Expectedly, the high cost of fuel has reflected in a corresponding increase in the price of food and utility costs spurring a cost-of-living crisis in the region.
Ghana has been hit particularly hard in this respect. Despite recording a rebound of 5.4% in GDP growth in 2021 from the meagre 0.4% in 2020, the Nana Akufo-Addo led government contends with a cost of living crisis triggered by a spike in fuel prices which stands at GHS 9.8 in May 2022 from GHS 6.1 at the same time last year. With inflation standing at an 18-year high of 23.6%, the Cedi has heavily depreciated against the US Dollar reflecting the bloated cost of everyday items. This, coupled with a recently implemented Electronic Levy on all electronic transactions has caused substantial unease to the Ghanaian populace.
Similarly, the Nigerian government has been forced to inject over 4 trillion Naira in fuel subsidies. In April, President Muhammadu Buhari announced that the cost of the petrol subsidy, which was projected to cost 443 billion naira, was to be increased ten-fold to maintain the pump price of 162.5 naira. Whiles this has, to some extent, allayed the sharp increase in the cost of living seen elsewhere within the region, it calls into question the administration’s plans for fiscal consolidation given the budget deficit is projected to amount to some 4% of GDP and the country expects a drop in government revenue following a projected lower crude output this year.
The above mirrors the continental response to the cost-of-living crisis with some governments adopting austerity measures to bring inflation under control and others taking on additional debt to provide some respite to their citizens in an already heavily indebted continent. Whichever strategy these countries opt for, their responses cannot be sustained in the face of a drawn-out conflict. For African economies ravaged by the twin catastrophes of Covid and conflict, the best chance at returning to a semblance of normalcy appears to be to stay out of the way and let the conflict take its course, whichever way that is.
You can read our first part here
Sam Kwadwo Owusu-Ansah | Lead Research Analyst, Transnational Policy | email@example.com
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