BY: DENG LUETH YUANG, Canada, DEC/08/2014, SSN;
Faced with US shale oil boom and lower global oil demand, oil cartel, OPEC met on 27 Nov, in Switzerland to discuss a way forward for the plunging oil prices. That meeting ended with no tangible breakthrough, in that its members failed to cut production to boost oil prices, and therefore decided to allow free hand of the market to reign.
However, with such dim prospects of falling revenues from oil, South Sudan economy is in tatters. It would be hard for the government to keep operations and projects afloat in such a dicey environment where its expenditures outweigh revenues. And yet there are two wars to fight – Dec. 15, 2013 Crisis and Nation Building.
With oil now selling at 65 dollars a barrel and production dropping to 160,000 from 350,000 barrels a day pre-Heglig and current wars, it is therefore unsustainable for the economy which is 95% dependent on oil revenues.
Rather than relying on expanded tax base, the South Sudan government has no any concrete source of revenues to back up the flailing economy. It is a gloomy and doom situation, not only for the government but also the rebels who wanted to form or be part of the government.
You cannot run a government without a healthy and sound economy!
For instance, when oil was discovered in the Sudan around 1978, successive regimes in Khartoum had used it as a ‘tool of war’. They appropriated it as a collateral to borrow money and vital materials from other world powers especially China, USSR and the Gulf countries.
It became a derivative by which future contracts were tied upon. Obligations such as new weapons, loans, aids, and others were supplied on the basis that the oil resources would one day suffice to compensate the creditors.
Besides, numerous wars e.g. the Southern Sudan and Darfour’s were fought on the premise that the regime was extracting these resources and marginalizing the host regions. That however prolonged these wars and regime of the day did everything it could to frustrate and defeat their arch enemies.
Similarly, the rebels were auctioning the oil resources to fund their war engagements with the government.
It is therefore imperative that when cash-starved government can no longer afford loans and advance payments from friendly international community and oil companies operating in South Sudan such as Chinese, Malaysians and Indians, and under-resourced rebels could no longer bargain and convince their friendly international community that they will be offered future oil concessions, the end is near for South Sudan to agree permanent peace.
However, without that, the worst case scenarios could be:
– Expensive for south Sudan’s oil companies to produce oil below their marginal cost
– South Sudan with no domestic refineries will have to embrace for higher oil imports and local prices or lack thereof;
– Oil executives will harden up on providing more loans and advance payments to South Sudan government ;
– Rebels’ international supporters will have to soften up on agreements they wish to sign with in order to supply them with weapons and other vital assistance for future oil concessions;
– Becomes expensive for South Sudan government and rebels to keep on prolonging war for lack of hard currency to maintain their negotiators, and bulging armies;
– With no foreign direct investment and lack of hard currency coming into government coffers, South Sudan whose economy heavily relies on imports, is more likely to fall into abyss – imports more expensive than they were before this civil war;
– Higher inflation – prices of basic commodities and services shooting up the roof;
– Western interests fraying up in South Sudan since oil is no longer considered an important commodity for them to intervene and defend their interests.
Hence, falling oil price is a blessing in disguise for South Sudan peace to hold forever. The times when a commodity like oil was considered precious are over.
In economics, all resources are limited and hence unsatisfiable for human consumption. But once such scarce resources are depleted, there are no more to satisfy his needs.
On the other hand, when there is too much supply, the law of demand states that the prices have to dive in order for the consumer to continue enjoying. Otherwise, the supplier or producer risk running out of business.
In this case, South Sudan and most OPEC members are very likely to go out of oil production business sooner rather than later.
The end of resource war such as oil is near as the world is devising other alternative means of energy efficiency and sufficiency.
The commentator is an Economist. Follow him on Facebook at Deng Lueth Yuang