The price dilemma: while there are a few African winners from the current high prices of oil, there are many more losers--those countries that import oil to fuel their economies.

Author:Ford, Neil
Position:Oil and Gas
 
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The current high oil price is something of a mixed blessing for Africa. The major producers will be rubbing their hands in glee at the extra oil revenues flowing into government coffers, while the bulk of the continent that is forced to import its fuel needs will be counting the cost of a higher fuel import bill.

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The Opec quota changes announced on June 3 will provide a modicum of comfort for the net importers but will, in reality, have relatively little impact on Africa's three Opec members, as almost every member of the cartel is already producing far above its official quota.

Although Opec has yet to confirm that the pre-June quotas will be raised in line with the existing division of total Opec production, it is likely that Nigeria's 1,936,000 barrels a day (b/d), Algeria's 750,000 b/d and Libya's 1,258,000 b/d quotas will all be increased in line with those of other member states. Broadly in line with market expectations, the Opec members agreed to increase quotas by 2m b/d from July 1, plus a further 500,000 b/d from August 1, taking the total quota to 26m b/d.

Other Opec members had little option but to increase production after Saudi Arabia unilaterally stated that it would raise production first by 800,000 b/d and possibly by as much as 2m b/d if an Opec agreement was not reached. Riyadh also intimated that it could utilise all its production capacity of 10.5m b/d if necessary. While Saudi Arabia is as keen as any other producer to maximise its oil revenues, it does not want prices so high that they will encourage investment in non-oil energy technology. The country is built on oil and so the development of an alternative fuel for motor vehicles, such as hydrogen, would undermine the basis of the entire nation.

The Saudi decision prompted an immediate fall in the oil price. Saudi oil minister Ali al-Naimi said: "Today's prices have nothing to do with the fundamentals of the oil market. Increasing production will not necessarily solve the problem, but we need to reverse the perception [of low supply], and this is what we will work for."

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However, the increase merely seems to be legitimising already high production by the cartel. According to a survey by oil and gas specialists Platts, the 10 members are already producing around 26m b/d. Yet with the culture of quota-breaking now firmly entrenched, the recent quota increase should encourage many members to make use of any excess production...

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