Permanent High Oil Prices and Their Impact on North Africa

Back in my undergrad time when I took oil economics in the late 1980s, the prevailing theory was that oil prices followed an up-and-down cycle. The cycle was the result of several factors, and apart from the geopolitical ones, of equal importance was when prices were high enough, they created an incentive to invest on oil fields that were generally too expensive to develop in other times. Once the market has enough oil, prices are supposed to decline in a sort of an ebb and flow cycle. This is a simplistic explanation, which certainly should include the development of alternative sources of energy as well.

Although I have not practiced oil economics for years and theories may have been refined since then, I cannot help myself but believe that the current state of oil pricing is not a transient one anymore and the cycle we knew in the past may not occur again. If that is the case, if prices remain above the $50 level, there are going to be significant implications for North Africa going forward, some bad, some good.

First, here is why I believe prices are likely to remain high and if an ebb-and-flow phenomenon is to happen again, then we may be at the low end of the range in that cycle. Much has been said about China, India, Brazil and other emerging giants. Indeed China and India, to name just these two, have been scouring the world in search of sources of oil, buying licenses and companies around the globe. Their economies are now competing head-to-head with the mature economies of Europe, Japan and the United States because they need fuel and a lot of it. Then, not only oil fields have been pumping oil at maximum capacity, the world’s refining capacity is reported to be insufficient to handle the massive demand for finished products. Although a spike in oil consumption in these countries could partly explain the reason why prices went up, it is not the only explanation why prices may no longer go down. The second most important factor that will contribute to keeping oil prices at above the $50 mark is the American consumer. With low unemployment and inflation under control, the American consumer has had limited reasons to complain these days. He expressed his anxiety over high gasoline prices in summer only for a short time. Now, in the middle of winter, I don’t hear much about how high gasoline or heating oil prices that could further deteriorate household finances. As long as American consumers don’t complain, you can bet oil companies will keep those prices high.

Now what are the implications on North Africa? There are several important implications with often-opposite impacts depending on which country one analyzes. For oil producing countries it is all good news. For the ones that are forced to import it, adjustments on how to calculate the state budget and forcing some changes among consumers are necessary, although unpopular.

North Africa Journal