Falling global oil prices

Implications on Uganda’s economy due to low economic activity and COVID-19 related worldwide challenges

COMMENT | SAMUEL OKULONY | The outbreak of COVID 19 in China in December last year and its spread across the world has resulted in unprecedented events and stressed both highly developed and low developing countries.

The outbreak described by the World Health Organization (WHO) as a global pandemic has forced countries to impose strict measures ranging from restricted movements to suspending business and forcing thousands of people to work from home.

As the countries are now focused on saving the lives of infected people and intensifying research to find the vaccine, the oil industry which contributes an estimated $86 trillion to the global economy has been hit hard by the recent fall in oil prices. The oil-producing countries, among whom Uganda is a prospect, are left uncertain of what will come of the sector should the price plunge continue for long.

For weeks, the U.S. has been reporting the worst oil crash in world’s history that reached negative as demand dried up amid the corona virus crisis. The cost for a barrel of US crude that was set to be delivered in May dropped to negative $37.63. The drop occurred because contracts that were set to be delivered in May expired and traders were not sure of where to store the oil which resulted in them paying buyers to take the oil off their stores.

The fall in oil prices, which has been on the downward trend since 2010 has been massively accelerated by the outbreak of COVID 19 which comes as a bottleneck for yet to be oil-producing countries such as Uganda. The current crude oil prices are dangerously below the break-even point for Ugandan oil fields. The break-even is the minimum price of oil at which a given project is economically viable.

In Uganda, due to the waxy nature of its oil, it is estimated that the production cost per barrel is between $50 and $60 which is way higher than the current prices. If prices remain at current levels for a long time, investors’ interest in Ugandan oil could be jeopardised and will affect the production timeline hence impact on local communities, the youth and government’s projected revenues from the sector.

Uganda’s oil production was expected to commence around 2023, but with the outbreak of COVID-19 and the subsequent fall in global oil prices, these timelines are unlikely to be met; especially because a lot of investment needs to be done first before commercial oil can be produced. These investments include government-planned construction of an oil refinery, international airport, and the oil pipeline, which require huge amounts of money and can only be facilitated by foreign investors.

With oil prices now below the break-even point for Uganda and if the plunge continues due to low demand and reduced economic activity in a few oil-exporting countries, it will have an adverse effect on developing countries such as Uganda which may raise a number of challenges ranging from poverty, unemployment, devastating environmental damage, and corruption.

Many youth had acquired skills with hope of getting employed in the oil sector but they will not be absorbed while others who acquired loans to open up businesses in anticipation of supply services to the sector will be affected. Many of them have to service these loans even with low or no activity.

In addition, the land acquisition process for infrastructural developments was ongoing but this was halted due to low economic activity and COVID 19. If this continues, it could lead to the rise of land speculators and incidences of corruption such as land grabbing, non-compensation and others that will find desperate individuals hoping for survival amidst the crisis.

Since oil prices are not dictated locally but rather based on the level of competitiveness on the world markets, there is a need to ensure that policies in countries on issues of Transparency, revenue management, and corruption are operational and functioning to deliver on their mandate.

Uganda is already in advanced stages of joining the Extractive Industries Transparency Initiative (EITI). Once completed and adhered to, it will enable the government to publish its oil and mining contracts, or join the Open Government Partnership; this can give citizens and other responsible bodies an open platform to advise the government on how best the rich potential oil industry can be managed amidst the outbreaks of uncertainties like the COVID 19 pandemic.

In addition, there is need for oil-producing and prospecting countries not to neglect other revenue-generating sectors of the economy; including tourism, agriculture, fishing, among others, as this can help Uganda avoid the resource curse syndrome which could crash economies.

Furthermore, during this time, the government must develop a post-COVID 19 recovery strategy that will help the failing and struggling economies, manage the youthful population, and those who acquired loans to open up a business. This will ensure the continuity of the oil sector without harming the economy.

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Samuel Okulony is Program Officer, Natural Resources Governance at Transparency International Uganda

sokulony@tiuganda.org

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