Thursday January 28 2016

Lessons from fall in oil prices

By Samuel Okulony

Recently, the media reported yet another fall in global crude oil prices to less than $30 a barrel. The fall in oil prices, which has been on the downward trend since 2010, has come 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, it is estimated to be between $50 and $60 per barrel. If prices remain at current levels, investors’ interest in Ugandan oil could be jeopardised and will affect the production timeline and hence impact on local communities and youth who anticipated employment opportunities in the sector.

With Uganda’s oil production expected to commence around 2019, a lot of investment needs to be done, especially with government-planned construction of both the oil refinery 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, many lessons can be drawn, especially if the trend of the plunge continues as lower oil prices can reduce economic activity in a few oil-exporting countries, which will have an adverse effect on developing countries such as Uganda.

With a decline in economic growth and development, poverty, unemployment and devastating environmental damage are some of the consequences that may arise. This is based on the level of competitiveness on the world markets and policies in countries on issues of revenue management and corruption in institutions responsible for oil revenues.

Since oil prices are not dictated locally, there is need to 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.
In addition, Uganda has yet to sign up to the Extractive Industries Transparency Initiative, publish its oil and mining contracts, or join the Open Government Partnership; this can give citizens an open platform to advise government on how best the rich potential oil industry can be managed.