After the surge in black gold prices in 2022, in the wake of the outbreak of the Russia-Ukraine war, the decline in oil prices is expected to continue in the months and years to come, according to projections from institutions such as the World Bank, but also commercial banks like Morgan Stanley, Goldman Sachs, Citigroup…
Having reached 119.47 dollars on May 30, 2022 due to the Russia-Ukraine war, the price of a barrel of Brent from the North Sea, a global benchmark, fell on Wednesday October 30, 2024 to 69.10 dollars. This decline is expected to continue according to projections from many development and financial institutions.
On October 29, the World Bank published its “Commodity Markets Outlook” report, highlighting that global commodity prices in 2025 are expected to fall to their lowest level in five years. “Over the past year, the conflict in the Middle East has led to high volatility in oil prices, particularly due to fears of damage to the oil and gas infrastructure of major producers if the conflict were to intensify. Assuming this does not happen, the annual average price of Brent is expected to fall to $73 a barrel in 2025, a four-year low, from $80 a barrel this year.», Underlines the World Bank.
Thus, the projected barrel price should oscillate around $75/barrel for the remainder of 2024, with an average of $80/barrel for the whole year before falling to $73/barrel on average in 2025 and 72 dollars/barrel in 2026. Clearly, the average annual prices of a barrel of oil are expected to fall for four consecutive years until 2026.
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Going in the same direction, the American bank Morgan Stanley published its scenario according to which the price of Brent will not exceed 80 dollars throughout the year 2024.
For its part, Goldman Sachs forecasts that the price of oil would average $76 in 2025. For the bank’s analysts, “the risks for the range of 70 to 85 dollars per barrel in the medium term are balanced, but slightly tilted to the downside.»
Less optimistic, Citigroup expects that the price of a barrel of oil will continue to fall to reach an average of 60 dollars in 2025, if OPEC+ never makes a more significant reduction in its production.
In unison, all projections point to a fall in the price of a barrel of oil in the months and years to come. Several factors contribute to this decline. First, there is excess supply which leads to an imbalance between supply and demand at the market level. Thus, for the World Bank, “next year, global oil supply is expected to exceed demand by about 1.2 million barrels per day on average», explaining that such a surplus had only been observed twice before, in 1998 and in 2020.
In addition to the production surplus caused by the arrival of new players and investments in the oil industry, this imbalance can also be explained by the slowdown in the global economy, particularly in China. However, the latter is until now one of the locomotives of demand for black gold in the world. Then, this imbalance will increase due to energy transition policies. The installation of clean energy production plants (solar, wind, etc.) and the development of the electric car market should help curb the increase in demand for oil around the world.
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Likewise, many OPEC+ member countries no longer wish to be subject to quotas. A situation which had pushed the group to consider an increase in quotas. However, faced with the current situation, OPEC+ postponed by one month the increase in oil production planned for December 2024.
However, geopolitical tensions could influence price fluctuations. Thus, the Israeli attack against Iran caused prices to slip, which are distributed upwards. The price of a barrel, which had fallen slightly below the 70 dollar mark on September 11, has risen to 75.60 dollars currently due to fears of an escalation in the Middle East between Israel and Iran which would be likely to lead to a disruption in the supply of oil in the world. However, according to the World Bank, the oil surplus is such that it “should limit the price effects of an even wider conflict in the Middle East.”
In all cases, the downward trend in oil prices will impact African economies. First, the downward trend, if it continues, will have negative impacts on African oil-producing countries, almost all of which are rentier countries that have not really known how to diversify their economies. This is the case of Algeria, Nigeria, Angola, Gabon, Equatorial Guinea… which are still states which depend enormously on hydrocarbons.
Nigeria: Africa's leading oil producer, black gold represents 90% of the country's export revenues and 40% of the federal budget. . DR
In Algeria, for example, the authorities built the 2025 finance law on the basis of the fiscal price of a barrel of oil at $60 and $70 on the market over the entire period 2025-2027. Based on these assumptions, the country should garner 3,454 billion Algerian dinars, or approximately $26 billion, in tax revenue, representing 40.52% of total budget revenue (8,523 billion dinars). With this hypothesis, the budget deficit should stand at $8,271.55 billion in 2025, or 21% of GDP.
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Knowing that revenues from oil and derivatives represent more than 95% of the country's export revenues, we understand the extent of the impact of the decline in the price of a barrel on the Algerian economy. This impact will be all the more significant as oil prices are generally correlated to those of gas, of which the country is the leading African exporter. These drops in hydrocarbon prices will thus impact the country's current account and foreign currency reserves, reducing the government's room for maneuver.
This is also the case for Nigeria, Africa's leading oil producer. The fall in oil prices is synonymous with a fall in export revenues and budgetary revenues, with oil representing 90% of the country's export revenues and 40% of the federal budget. This means that the drop in oil prices will have negative impacts on the budget deficit and the current account balance. It will also lead to a drop in foreign exchange reserves with harmful consequences on the naira, the Nigerian currency, which could depreciate further.
However, for Nigeria, the fall in the price of crude oil may push the authorities to further encourage local refining of crude oil for more added value, the country now having a unit capable of refining 650,000 barrels per day, or more than half of the country's current production. This is also the case for Angola, which accounts for 93% of the country's exports and 58% of tax revenues.
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One thing is certain, all the African oil countries which have not managed to diversify their economies will be severely impacted by the announced reductions. A situation which illustrates the imperative need for these countries to move away from their dependence on hydrocarbons and to engage in diversification processes and to free themselves from the volatility of hydrocarbon prices. In addition, the drop in black gold prices could in the medium and long term affect the budgets and public investments of these countries and negatively impact their future growth.
However, this drop in oil prices will also have positive impacts on many African countries. First of all, there are hydrocarbon importers who will see their energy bills drop with positive impacts on their trade balances, their foreign exchange reserves and therefore on their balances of payments. Then, the drop in prices will reduce fuel subsidy bills and relieve state budgets.
In addition, as hydrocarbons have an impact on the rest of the economy, the drop in prices will result in a disinflationary effect on other products and transport. Thus, the fall in fuel prices was observed in a number of countries importing petroleum products. This should therefore accentuate the decline in inflation observed in recent months and have a positive impact on the purchasing power of the population.
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