Crude prices jumped on Wednesday after the European Union proposed a ban on oil imports of Russia and also offered to remove the country’s largest bank, Sberbank, from the SWIFT international payments network as part of a new round of sanctions targeting the country. The details of the new sanctions are still being worked out, but have already faced stiff opposition from Hungary, Slovakia and the Czech Republic, who are calling for a longer transition period.
Rising oil and gas prices triggered by the conflict in Ukraine have raised the threat of the worst stagflationary shock to hit Europe since the 1970s.
A sample of experts have warned that Europe would be plunged into a deep recession if the region quickly cut off Russian oil and gas. The EU has drawn up plans to reduce its dependence on Russian gas by two-thirds before the end of this year and end imports completely by 2030. The euro zone produces a quarter of its energy from natural gas, with Russia accounting for around a third of the bloc’s imports. Goldman Sachs has warned that any further disruption in gas imports could have significant repercussions for eurozone economic output and inflation.
Ironically, Moscow may come out unscathed, at least in the short term: Norwegian energy consultant Rystad Energy estimates that Russia will collect more than $180 billion in energy tax revenues this year, a big increase 45% year-on-year despite strong exports. less thanks to a 40% spike in oil prices.
Unfortunately, it is the poorer regions like the African continent that are likely to bear the brunt of the war in Ukraine.
A new International Monetary Fund report says countries in sub-Saharan Africa are already facing another severe, exogenous shock, thanks to soaring food, fuel and commodity prices.
For decades, sub-Saharan Africa has faced chronic food and energy insecurity, with the war in Ukraine poised to turn the situation into a full-fledged crisis.
Severe economic shocks
According to the IMF, food accounts for around 40% of consumer spending in the region, far more than 17% of consumer spending in advanced economies, with around 85% of the region’s wheat supply imported. Although this region is heavily dependent on wheat imports, grain constitutes only a minor part of the total caloric requirement.
There is another much more insidious catalyst fueling high food prices and driving food insecurity in Africa: soaring fertilizer prices.
Sanctions imposed on Russia and Belarus, the world’s second and third largest producers of potash, sent prices of the key nutrient fertilizer soaring to levels not seen during the 2008 food crisis. already soaring last year due to limited supply after international sanctions against Belarusian state producer Belaruskali in response to President Alexander Lukashenko’s crackdown on political opponents. Related: America’s Shale Patch Faces a Plethora of Problems
However, events in Ukraine have pushed prices to new heights, with Russia being a major supplier of potash and other crop nutrients such as nitrogen, phosphate, urea and ammonia.
According to the International Fertilizer Development Center, a non-profit food security group, the decline in fertilizer use in Africa cut this year’s rice and maize harvest by a third.
Even in the least disruptive scenario, soaring synthetic nutrient prices will cause crop yields to drop and grocery store prices to rise for everything from milk to beef to packaged foods for months or even years. in the developed world. For developing economies already facing high levels of food insecurity, reduced use of fertilizers risks worsening malnutrition, worsening political unrest and, ultimately, otherwise avoidable loss of life.
But it is not just soaring food prices that sub-Saharan Africa has to contend with.
The IMF has warned that higher oil prices will increase the import bill of oil importers in the region by about $19 billion, worsening trade imbalances and raising transportation and other related consumer costs. Fragile oil-importing states are expected to be hardest hit, with fiscal balances expected to deteriorate by about 0.8 percent of gross domestic product relative to Forecast October 2021–twice that of other oil-importing countries.
On a more positive note, all eight oil exporters in the region are expected to benefit from higher crude prices.
Overall, rising fuel and fertilizer prices are very likely to negatively affect national food production and disproportionately harm the poor, especially in urban areas by increasing food insecurity.
Africa to the rescue of Europe
Ironically, Africa could be the answer to Europe’s energy crisis.
Vijaya Ramachandran, director of energy and development at the Breakthrough Institute in Berlin, says Europe should turn to Africa if it is serious about achieving energy security. Ramachandran notes that the continent is blessed with significant natural gas production, reserves and new discoveries being exploited. Very little African gas has been exploited, either for domestic consumption or export.
Algeria is already a major established gas producer with significant untapped reserves and is connected to Spain by several undersea gas pipelines. Germany and the EU are already working on expanding the capacity of the gas pipeline linking Spain to France, from where more Algerian gas could flow to Germany and elsewhere. The Libyan gas fields are connected by gas pipeline to Italy. In both Algeria and Libya, Europe should urgently help to exploit new fields and increase gas production. New pipelines under discussion currently focus on the proposed Eastern Mediterranean Pipeline, which would bring gas from Israel’s offshore gas fields to Europe.
But Africa’s biggest sources are south of the Sahara, including Nigeria, which has about a third of the continent’s reserves, and Tanzania. Senegal recently discovered large offshore deposits.
Ramachandra says Germany shouldn’t ignore these opportunities. For example, the proposal Trans-Saharan pipeline will transport gas from Nigeria to Algeria via Niger. If the project is completed, the new pipeline will connect to the current one Trans-Mediterranean, Maghreb-Europe, Medgasand galsi gas pipelines that supply Europe from transport hubs on the Algerian Mediterranean coast. The Trans-Saharan Gas Pipeline would be over 2,500 miles long and could provide up to 30 billion cubic meters of Nigerian gas to Europe per year, which is equivalent to approximately two-thirds of Imports from Germany in 2021 from Russia (for comparison, the Yamal-Europe pipeline, one of the main routes for Russian gas to Europe, is 2,607 miles long). On his side, Nigeria is enthusiastic on exporting some of its 200 trillion cubic feet of gas reserves, with Nigerian Vice President Yemi Osinbajo arguing in favor of the essential role of natural gas, both as a relatively clean transition fuel and as an engine of economic development and a source of foreign exchange.
Unfortunately, the Trans-Saharan pipeline will likely take a decade or more to complete, and LNG shipments to Germany would bring quicker relief.
By Alex Kimani for Oilprice.com
More reading on Oilprice.com: